US Equities Consumer Discretionary

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1 Wealth Management Research 18 February US Equities Consumer Discretionary Carnival - downgrade to Marketperform We are downgrading Carnival Corporation (CCL) from the Consumer Discretionary Outperform list to the Marketperform list. The change comes after some inflection points occurred as the current price leaves little room for mistakes. Carnival trades at a P/E of 12.8x based on 2012E consensus earnings per share. Because CCL is not a sector bellwether, it no longer requires a price target while it is on the Monitor list. WMR S&P Consumer Discretionary Sector Allocation Underweight CCL weathered the storm, but valuation reflects momentum Carnival survived the downturn by combing through its costs and making operations as lean as possible. Next, the company conserved its cash by halting all ship building and suspending its dividend. Carnival never lost sight of its customer, however. The company continued to advertise and leaned heavily on its travel agent network to drum up demand. Since the recession, the company s recovery has been significant. Sales growth returned in the form of higher bookings and ticket prices. On-board spending, known to lag ticket demand, even returned. The company, also, reinstated its dividend - current yield 2.1%. Alexandra Mahoney, analyst, UBS FS alexandra-a.mahoney@ubs.com, Carnival (CCL) Marketperform Carnival is a global cruise and vacation company operating in the United Kingdom, North America, Europe, Australia and New Zealand. Its portfolio of cruise brands includes Carnival Cruise Lines, Holland America Line, Princess Cruises and Seabourn Cruise Line in North America; P&O Cruises, Cunard Line and Ocean Village in the United Kingdom; AIDA in Germany; Costa Cruises in southern Europe; Iberocruceros in Spain; and P&O Cruises in Australia. It was founded in 1971 and is headquartered in Miami, FL. 52 Week 52 Week Price (USD) High Low Key Metrics Dividend Yield (%) Enterprise Value ($M) Total Assets ($M) Market Value ($M) , , ,936.3 Consensus Forecasts (Fiscal Year End) 11/ /E 11/2012E Sales ($M) 14, , ,645.8 Net Income ($M) 1, , ,865.8 EPS ($) Book Value per share ($) P/E (x) ROE (%) Consensus Rating Distribution Buy Hold Sell Source: UBS WMR, FactSet, prices as of 18 February This report was republished on March 17, to supply all required disclosures; the views expressed herein may no longer be current as of the republished date. With the recovery in swing, valuation, in our opinion, reflects a balanced risk versus reward profile given some important inflection points occurred and some risks loom in the future. Growth in operating profits pushed valuation higherthe crux to our thesis has been on the.7 correlation between one-year lagged operating profit per available berth (bed) per day (ALBD) and EV/EBITDA. From this correlation, we forecast CCL s EV/EBITDA anticipates the next year s change in operating profit per ALBD. With sales stable, the company started to see operating profit margins expand. The operating profit per ALBD finally turned positive in CCL s F3Q10 and was positive again in F4Q10. And, CCL s EV/EBITDA expanded in anticipation of the rebound in profits. (Fig. 1) This report has been prepared by UBS Financial Services Inc. (UBS FS). Analyst certification and required disclosures begin on page 4. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Estimates have caught up with our expectations Next, our CCL thesis also included a belief that consensus estimates for the company were too low. We believed that investors were underestimating the cyclical recovery in CCL s sales and its operating profit leverage. Now, the forward two years estimates have risen to what we believe are more realistic levels. (Fig. 2) Fig. 1 CCL's valuation anticipates changes in operating profit EV/EBITDA versus next year s growth in operating profit per available berth day 30% Valuation shows a balanced risk vs. reward profile While there could be some upside to CCL s sales growth and profit leverage, we believe that CCL s valuation leaves little room for any side-steps in the company s recovery. CCL s forward year P/E (12.8X) based on consensus EPS estimates (USD 3.61) is now at its five-year average. 20% 10% 0% -10% -20% Current risk: cost inflation We recognize inflation on the horizon is a current risk. The company managed its costs well, excluding fuel costs, over the last ten years. In addition, we have great respect for CCL s management, whose track record for reducing costs is strong. But, we believe that CCL may have to deal with higher operating costs in FY11 than their FY11 guidance expects. On 21 December 2010, the company guided costs excluding fuel per ALBD to be flat y/y. Some of their costs either remained high or rose since the guidance. Food prices, for example, continues to rise (Fig. 3). As a percentage of total operating costs, labor and food expenses represent 18% and 10%, respectively. The higher labor and food costs may stifle profits if CCL cannot pass on the higher costs to the consumer with higher ticket prices. Current risk: fuel costs Fuel cost plays a large role in CCL s profitability given that it represents 18% of total operating costs. At this point, we believe that current fuel prices are reflected in estimates. Prices have even fallen some since the company last gave guidance with a negative USD.17 impact on FY11 EPS. So, there maybe upside to numbers if fuel prices fall further. But, our UBS Wealth Management Research forecast calls for fuel prices to remain at current levels or go higher by the end of the calendar year. In the past, CCL charged a fuel surcharge to tickets when fuel prices got too high, but the reception by consumers has been mixed. Conclusion and risks We believe CCL s current price reflects a cyclical recovery in fundamentals. However, the valuation messages to us that there is little room for unanticipated cost inflation or any changes in the consumer demand environment. In conclusion, we downgraded Carnival Corporation from the Consumer Discretionary Outperform list to the Marketperform list. Potential risks include, but are not exclusive to: 1) increased volatility in fuel prices that cannot be covered with hedging and surcharges; 2) an unforeseen slowdown/pick-up in leisure travel; 3) extraneous events such as terrorist attacks, severe weather, or on-board illnesses; and 4) financing. -30% Operating profit per available berth per day (lagged one year) - LEFT EV / EBITDA - RIGHT Source: Company Data, FactSet, UBS WMR, 17 February Fig. 2 EPS estimates have risen after CCL's fundamentals improved Current year consensus EPS estimate history $3.15 $3.05 $2.95 $2.85 $2.75 $2.65 $2.55 $2.45 $2.35 $2.25 $2.15 2/10 3/10 4/10 5/10 6/10 7/10 8/10 9/10 10/10 11/1 12/10 1/11 FY Consensus EPS estimates Source: FactSet, UBS WMR, 17 February Fig. 3 Rising food costs may hit CCL's variable costs We use inflation growth for 'Food At Home' as an illustration in the overall inflation of a food basket 7.0% 5.0% 3.0% 1.0% -1.0% -3.0% Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May- Sep-10 Jan-11 Food At home Source: Bureau of Labor Statistics, UBS WMR, 17 February 0.00 Wealth Management Research 18 February 2

3 Investment Thesis Summary - Retailing UBS WMR Consumer Discretionary: Consumer Services - Sector Outperform List McDonald's Starbucks Starwood Hotels & Resorts MCD SBUX HOT We are more constructive on MCD now, given our further understanding of the in-store initiatives in Europe, commitment to unit growth in emerging markets, and the near-term catalyst for better-than-expected same-store sales growth in the US. Our bullishthesis depends on the remodeling the US stores, adding beverage innovation, incremental advertising spend, the launch of Via and the Seattle's Best Coffee quick-service partnerships. These sales/operation initiatives lead us to believe that estimates are too low for the following years. We believe there has been a mentality shift among management towards focusing on profitable growth versus expanding outlets aggressively. We believe HOT's well diversified international portfolio combinedwith a goodmix of managed and owned hotels will allow the company to leverage the current RevPAR cycle. In addition,we envisionsubstantialcash-generative asset sales over time as the portfolio further evolves toward a managed model. UBS WMR Consumer Discretionary: Consumer Services - Sector Underperform List Brinker International EAT EAT is going through a multi-year transition as the company is searching for its voice in a sea of bar and grill sameness. The recent move to sell some brands is a step in the right direction. However, we worry that the main concepts may be share givers in a modest economic recovery as the competition has gotten stronger. UBS WMR Consumer Discretionary: Consumer Services - Sector Marketperform List Carnival Cheesecake Factory Choice Hotels International Darden Restaurants Hyatt Hotels Marriott Intl Yum! Brands CCL CAKE CHH DRI H MAR YUM With the recovery in swing, valuation, in our opinion, reflects a balanced risk versus reward profile given some important inflection points occurred and some risks loom in the future. The inflection points include: improving operating profit per ALBD and upward revisions EPS to what we believe are more realistic levels. The risk we see on the horizon is the threat of operating cost inflation: food and fuel particularly. We admire the CAKE brand and management's nimbleness during the recession. CAKE's brand and uniqueness provides consumers a reason to dine-out versus its peers. CAKE is developing new growth avenues through sales layers and smaller unit sizes, which may help to expend CAKE's growth outlook. We look to learn more about the profitability of the new sales initiatives and the sustainability of the consumer recovery. We believe CHH is a more defensive and late cycle play in the lodging sector. We see the shares a fairly valued given the current RevPAR cycle. Darden has one of the strongest suit of brands and management teams in the casual dining space. DRI's brands and positioning continues to enable the company to steal market share. Neither the consumer backdrop nor DRI's valuation leave us with a compelling story at this time. We recognize the quality of H's portfolio, balance sheet and operating leverage given its high level of hotel ownership (vs. contract management). However these positive attributes are offset by several factors that concern us. We see the shares as fairly valued. We believe MAR is a more of a late cycle play in the lodging sector given its heavy domestic exposure. We see the shares a fairly valued given the current international RevPAR cycle. We believe YUM is one of the best-run companies in our space. However, many of our near-term catalysts have been realized, leaving less room for missteps given current valuation (17.8x E EPS). We still believe in the long-term unit growth outlook for YUM given its head start in China and emerging markets. Source: UBS WMR, as of 18 February Note: Companies in BOLD represent High Conviction Calls. Please see the Appendix for definition. Wealth Management Research 18 February 3

4 Appendix Analyst certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Required Disclosures For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a request to UBS Wealth Management Research Business Management, 1285 Avenue of the Americas, 13th Floor, Avenue of the Americas, New York, NY Stock recommendation system: Analysts provide a relative rating, which is based on the stock s total return potential against the total estimated return of the appropriate sector benchmark over the next 12 months. Industry sector relative stock view system Outperform (OUT) Expected to outperform the sector benchmark over the next 12 months. Marketperform (MKT) Expected to perform in line with the sector benchmark over the next 12 months. Underperform (UND) Expected to underperform the sector benchmark over the next 12 months. Under review Upon special events that require further analysis, the stock rating may be flagged as Under review by the analyst. Suspended An outperform or underperform rating may be suspended when the stock's performance materially diverges from the performance of its respective benchmark. Restricted Issuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practice obligations which are normally caused by UBS Investment Bank s involvement in an investment banking transaction in regard to the concerned company. Sector Relative Stock View Outperform Expected to outperform the sector benchmark over the next 12 months.marketperform Expected to perform in line with the sector benchmark over the next 12 months.underperform Expected to underperform the sector benchmark over the next 12 months. Sector bellwethers, or stocks that are of high importance or relevance to the sector, that are not placed on either the outperform or underperform list (i.e., are not expected to either outperform or underperform the sector benchmark) will be classified as marketperform. Additionally, when stocks that are not deemed to be of high importance or relevance to the sector are not expected to outperform or underperform the sector benchmark, they will simply be removed from the lists and will not be assigned a WMR rating. High Conviction Calls Sector analysts are required to have at least one "high conviction" outperform or underperform call for each sector they cover. Analysts have discretion over the selection of a recommendation as high conviction and the grounds for selection (e.g., greatest upside/downside to price target, most/least compelling investment case, etc.). The basis for each high conviction call is set forth in any research report identifying a recommendation as such. Terms and Abbreviations Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition E, 2012E, etc. estimate, 2012 estimate, etc. A actual i.e. 2010A E expected i.e. E EBITDA Earnings before interest, taxes, depreciation and amortization EPS Earnings per share EV Enterprise value = market value of equity, preferred equity, outstanding net debt and minorities p.a. Per annum (per year) Shares o/s Shares outstanding WMR UBS Wealth Management Research y/y or YOY Year-over-year; year on year Wealth Management Research 18 February 4

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