Strategically Positioned

Packaged Food: Thinking for a minute about what would matter most if investors removed themselves from the rapidly changing, near-term issues coloring the Packaged Food landscape (deflation, potential loss of pricing power, consumer weakness, etc.) and considered the industry in a more normalized environment, we cannot help but focus on the improving quality of earnings in the group.

In our view, this has been brought on by an evolving approach to productivity, with companies going from large restructuring waves (and associated one-time charges) to more consistent reinvestment against cost savings projects that is fully imbedded in their ongoing profits and losses.

By our estimation, we would expect non-recurring restructuring charges for the Packaged Food industry to correspond to approximately 1% of industry operating profits in 2010. This would put these one-time charges at the lowest level struck since 2003 and would represent a dramatic reversal from the double-digit levels of the late 1990s and early 2000s. Importantly, we think this phenomenon could be somewhat more sustainable for the group going forward, and therefore has positive implications for group-wide returns and associated stock performance.

From a company-specific perspective, we believe this thought process could be most impactful and positive for those food companies having only more recently made the transition to this approach, such as Kraft and Heinz.

Kota Yuzawa

Goldman Sachs

+81-3-6437-9863

[email protected]

Autos: A rash of larger-than-expected guidance hikes were announced with first-half results on better-than-expected production volume, cost cuts, and sales finance earnings growth. However, we think the market’s focus is already shifting to a decline following the end of government support. We think Japanese automakers will post 5 percent volume growth in the fiscal year of March 2011 on growth in North America and Asia.

In response to first-half results, we have revised our coverage preference ranking based on regional and cost differences. We are most bullish on Honda among the Japanese Big Three, as Honda’s operating margin improved to 3.2% in 2Q3/10 on relatively high capacity utilization and aggressive cost cutting.

The automakers in our coverage raised consolidated sales volume guidance by 830,000 units when they announced first-half results. They raised guidance by 160,000 units in Japan, 160,000 in North America, and 520,000 in Asia and other regions, while cutting volume guidance in Europe by 10,000 units. Inventory had been substantially reduced by end-March 2009, and a recovery in sales volume driven by government assistance measures meant retail inventory shortages in some regions. We think sales momentum will remain strong at least until March 2010.

Toyota: The positive catalysts we anticipated–an upward revision to FY3/10 consolidated sales volume guidance to 7.05 million units from 6.6 million, sharp earnings improvement in the sales financing business, and a return to quarterly operating profits in 2Q–appear to have all played out in 1H results.

With FY3/10-FY3/11 consensus estimates still 20%-30% below our forecasts, we think the overshoot in sales volumes has not been priced into the shares. We estimate one-off expenses in FY3/10, including the F1 withdrawal and NUMMI plant closure, will come to around ?100 billion. With these costs disappearing in FY3/11, we see strong prospects for an earnings recovery.

Toyota raised volume guidance significantly to 7.03 million units from 6.60 million units, close to our forecast of 7 million units. The company assumes a second-half U.S. seasonally adjusted annual rate of 9 million units, and we think it will raise guidance by another 200,000 units or so. Similarly, we think other automakers could raise sales guidance further, mainly for the United States.

Tom Gallucci

Lazard Capital Markets

212-632-1515

[email protected]

Pharmacy Benefit Managers (or PBMs) remain in the sweet spot of secular trends. We view the pharmacy benefit management business as the strongest in our coverage universe, with the group well positioned to take advantage of key secular trends. Visibility on long-term earnings growth in the high-teens range or better remains very high due to a combination of factors, including rising generic penetration, robust growth of specialty drugs, and the continued motivation of payors to use the tools that PBMs have to offer in an effort to control drug spend.

Together, the positive underlying fundamental trends should drive high-teens long-term EPS growth, on average. That said, the group should drive even better growth in some years (i.e., 2011-2013) depending on market dynamics, with the single greatest variable being branded-drug patent expirations. From a stock standpoint positive fundamental drivers are well recognized, fostering the premium at which PBMs trade on certain valuation metrics relative to other healthcare services names.

However, the group currently trades near its historical low relative to the market multiple, not to mention well below its average P/E, P/E/G, and EV/EBITDA multiple over the past five years. In our view PBMs enjoy solid overall earnings visibility on growth that is as high as it has ever been and which is materially better than the market, suggesting the opportunity for shares to outperform over the next year.

CVS: While the 2010 earnings outlook is disappointing, the relative valuation of shares offers a positive risk-reward opportunity over the next year. We are adjusting our to $37 based on shares trading at 12 times 2011 estimated EPS over the next 12 months. Perhaps the number one issue for the stock over the next year will be how next year’s selling season turns out, i.e., CVS’ execution in the coming quarters. ?