Why We're Equal-weight and What Could Make Us Change Our Minds

Transcription

1 February 4, 2016 Online Travel Why We're Equal-weight and What Could Make Us Change Our Minds We remain on the sidelines in OTAs as we see slowing room night growth and deteriorating economics ahead. We are slightly above (PCLN) and below (EXPE) '17 Street EPS and need revisions to get more positive. For PCLN, unit economics need to improve. For EXPE, the AWAY consumer fee will be key. Still Cautious on OTAs in 2016: We took a cautious tone on OTAs in 2015 due to deteriorating industry economics and were wrong (in particular with EXPE, which outperformed the market by ~4,600bp) as room night growth trumped deteriorating fundamentals. Looking into 2016, we see slowing room night growth and continued deteriorating room night economics...which leaves us on the sidelines. PCLN and EXPE have sold off materially with the rest of tech to start 2016, (PCLN within 5% of our bear case). That said, the lack of forward upward revisions makes us question the ability for these companies to materially outperform the market (even if it rebounds). PCLN: Ad ROI Fell by 16% in Expect Continued Pressure in 2016: PCLN's cost of bookings is rising at record levels as PCLN's ratio of bookings growth to ad spend growth (a rough proxy for ad spend ROI) is set to fall 16% in X more than the 5-year average decline. We attribute this to continued investment in lower ROI mobile channels, EXPE getting more aggressive in paid search, Google changes (such as increasing the minimum bids on branded keywords), and increased offline ad spend. Given these trends, we are lowering our expected forward margins. We are also modestly reducing our forward room night growth and take rates (due to macro uncertainty in Europe and increased competitive pressure). In all, this causes us to reduce our '17 non-gaap EPS by 1% (our '16 EPS remains roughly unchanged). We find ourselves only 2% above Street 2016 and 2017 non-gaap EPS. PCLN has been a beat and raise stock (beating the consensus estimates in 34 of the past 35 quarters), and we remain on the sidelines with a new, lower $1,320 PT (previously $1,350) until we can find a source of further upward revisions. Maintain EW. MORGAN STANLEY & CO. LLC Brian Nowak, CFA Brian.Nowak@morganstanley.com Michael Costantini Michael.Costantini@morganstanley.com Owen Hyde Owen.Hyde@morganstanley.com Kevin Liu Kevin.Liu@morganstanley.com Online Travel North America IndustryView No Rating EXPE: Managing For Room Night Growth Rather than EBITDA: We believe part of PCLN's increased ad spending is due to EXPE's strategic decision to reduce its hotel take rates to get more access to inventory...which has enabled them to get more aggressive in the travel paid search market. In effect EXPE is increasingly managing its business to maximize room night growth rather than earnings power. This worked for the stock last year as room nights accelerated, but looking into 2016, we see slowing room night growth ahead (27% Y/Y growth vs. 35% in excluding AWAY). This spending strategy is impacting EXPE's economics as well, as we estimate EXPE's core OTA incremental EBITDA margins fell by ~250bp in 2015 (to Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. 1

2 ~23%). We don't see this strategy changing given EXPE's commentary that they expect to continue to reduce hotel take rates "through 2016," and we are reducing our core 2016 and 2017 incremental margin expectations. Online Travel February 4, % Below EXPE 2017 Street EBITDA...even with AWAY: We are also adding AWAY into our EXPE model. As shown in our EBITDA bridge (see Exhibit 11), we see AWAY adding $113mn of EBITDA in 2016 and $157mn in That said, we are still 5% below 2017 Street EBITDA and 14% below on EPS (as there appears to be some noise in the Street 2017 EPS estimates). We believe EXPE needs a further improvement in AWAY in order to drive upside. Our analysis of AWAY's cost structure and the still-high competitive dynamics in the vacation rental paid search market speak to how AWAY can likely only deliver upside by successfully rolling out a consumer booking fee. We think this will be difficult (there is high execution risk given the "leakage" on platform and there is risk of customer push-back to an incremental booking fee), and investor expectations are high. For perspective, our sensitivity table shows that all else held equal EXPE will need to add a ~600bp booking fee to ~16% of AWAY's bookings just to reach Street 2017 EBITDA numbers. Room night growth may give EXPE support at these levels, but we remain on the sidelines until we can find a source of upward earnings revisions. We raise our PT to $115 (from $107) as we lower core and add in AWAY. Maintain EW. 2

3 Priceline Risk Reward Why Equal-weight? The OTAs are running out of hotel room night runway, which will likely lead to slowing room night growth and rising direct competition We see top-line pressure from rising hotel take rate concessions We see EBITDA margin pressure as Google's mobile travel products drive up the cost of paid search, and PCLN increasingly spends on less measurable advertising channels like TV Valuation keeps us from going Underweight Source: Thomson Reuters, Morgan Stanley Research Price Target $1,320 Bull $1,650 20X 2017e bull case adj. EPS of $83.61 Base $1,320 17X 2017e base case adj. EPS of $79.36 Bear $1,000 14X 2017e bear case adj. EPS of $70.31 Price target is derived using a 10-year discounted cash flow (DCF) analysis. We assume a WACC of 10% (in line with Bloomberg data) and a 2% perpetual growth rate. Our bull case assumes '14-'18e gross profit growth of 15%, EBITDA margins as % of gross profit of 44% in 2018, and $83.61 in 2017 adj. EPS. This is driven by 1) higher than expected ad spend efficiency, 2) reduced dependence on Google for traffic, and 3) industry consolidation leading to opex scale benefits and higher take rates. Our base case assumes '14-'18e gross profit growth of 15%, forward EBITDA margin (as % of gross profit) compression of 435bp to 41% in 2018, and $79.36 in 2017 adj. EPS. This is driven by '14-'18 gross profit per room night growth of -2% (vs. -1% historical growth) and '14-'18e ad spend per room night growth of +1% (vs. +5% historical growth). Our bear case assumes '14-'18e gross profit growth of 13%, - 735bp of forward margin pressure (EBITDA margins as % of gross profit of 38% in 2018), and $70.31 in 2017 adj. EPS. This is driven by 1) lower than expected ad spend efficiency and increasing TV ad spend, 2) increasing dependence on Google for traffic, especially on mobile, and 3) industry consolidation leading to higher than expected competition and lower than expected take rates. Risks to Achieving Price Target Higher ad spending leads to accelerating room night growth (upside) Mobile app user bases grow larger than mobile browser user bases, reducing dependence on Google for mobile search traffic (upside) Better than expected ad spend efficiency or reduced spending on TV advertising (upside) Industry consolidation leads to scale benefits over operating cost structure, more bargaining power vs. hotel/air suppliers, and ultimately, higher profitability (upside) Increased/lower-than-expected shareholder returns (upside/downside) The cost of acquiring traffic on Google rises more than we expect, and PCLN increasingly has to spend on less-measurable and less-efficient TV advertising and mobile app install ads (downside) Online travel industry competition rises more than we expect, leading to more ad spend and lower hotel take rates than we anticipate (downside) Continued and prolonged investments/m&a in non-core businesses such as OpenTable and Booking Suite (downside) Potential Catalysts 4Q:15 results and forward guidance Evidence of lower/higher ad spending, especially on TV (upside/downside) Accelerating/slowing room night growth (upside/downside) 3

4 Expedia Risk Reward Why Equal-weight? Revenue per room night pressure is rising, but this has led to accelerating hotel room night growth. We struggle to see a company with accelerating volumes materially under-performing over the next 12 months. Source: Thomson O ne, Morgan Stanley Research Price Target $115 Bull $150 20X 2017e bull case adj. EPS of $7.56 Base $115 19X 2017e base case adj. EPS of $6.13 Bear $85 16X 2017e bear case adj. EPS of $5.37 Price target is derived using a 10-year discounted cash flow (DCF) analysis. We assume a WACC of 9.5% (in-line with Bloomberg data) and a 2% perpetual growth rate. Our bull case assumes '14-'18 gross profit growth of 20%, ~430bp of forward margin expansion (EBITDA margins of 22% in 2018), and $7.56 in 2017 adj. EPS. This is driven by 1) higher than expected ad spend efficiency, 2) reduced dependence on Google for traffic, 3) better than expected performance from recent acquisitions, and 4) industry consolidation leading to opex scale benefits and higher take rates. Our base case assumes '14-'18 gross profit growth of 18%, forward EBITDA margin expansion of ~130bp to 19% in 2018, and $6.13 in 2017 adj. EPS. This is driven by '14-'18 gross profit per room night growth of -7% (vs. 0% historical growth) and '14-'18 ad spend per room night growth of -5% (vs. +9% historical growth). Our bear case assumes '14-'18 gross profit growth of 17%, -100p of forward margin pressure (EBITDA margins of 17% in 2018), and $5.37 in 2017 adj. EPS. This is driven by 1) lower than expected ad spend efficiency and increasing TV ad spend, 2) increasing dependence on Google for traffic, especially on mobile, 3) worse than expected performance from recent acquisitions, and 4) industry consolidation leading to higher than expected competition and lower than expected take rates. Risks to Achieving Price Target Online travel industry competition rises more than we expect, leading to more ad spend and lower hotel take rates than we anticipate (downside) The cost of acquiring traffic on Google rises more than we expect, and EXPE increasingly has to spend on less-measurable and less-efficient TV advertising and mobile app install ads (downside) Greater than expected revenue per room night pressure (downside) Slowing room night growth (downside) Higher ad spending and hotel supply growth leads to accelerating room night growth (upside) Better than expected ad spend efficiency or reduced spending on TV advertising (upside) Mobile app user bases grow larger than mobile browser user bases, reducing dependence on Google for mobile search traffic (upside) Industry consolidation leads to scale benefits over operating cost structure, more bargaining power vs. hotel/air suppliers, and ultimately, higher profitability (upside) Higher than expected Orbitz synergies (upside) Increased/lower than expected shareholder returns (upside/downside) Potential Catalysts 4Q:15 results and forward guidance Higher than expected Orbitz synergies Successful implementation of HomeAway incremental consumer booking fee Evidence of lower/higher ad spending, especially on TV (upside/downside) Accelerating/slowing room night growth (upside/downside) 4

5 Priceline; EW, $1,320 PT Expecting Continued Ad ROI Pressure in 2016 Priceline's cost of incremental bookings is rising at record levels as its ratio of bookings growth to ad dollar spend growth (a rough proxy for ad spend ROI) fell and estimated 16% in X more than the 5 year average decline (see Exhibit 1). 1 We attribute this to continued investment in lower ROI mobile channels, Expedia getting more aggressive in paid search, Google changes (such as increasing the minimum bids on branded keywords), and increased offline ad spend. Exhibit 1: Priceline incremental bookings per ad dollar spent... Exhibit 2:...and Y/Y % change As a result, Priceline's ad spend as a percentage of bookings (both ex FX) has been on the rise over the past few years and is expected to reach 5.5% in 2015 (see Exhibit 3). 3 We do not see any reason why these trends should abate in the near term, and as such, we expect Priceline's ad spend as a percentage of bookings to reach 6% by Note that our 2017 numbers already imply an improvement in bookings economics (through more direct traffic, finding new and higher ROI channels like FB, etc)...so if that does not happen even these estimates could be at risk. This, in our view, speaks to the state of the industry, as its difficult to make a bullish case and find material upside. 5

6 Exhibit 3: Priceline advertising spend as a percentage of bookings (constant currency) Online Travel February 4, 2016 Given these trends, we are updating our model. We are lowering our expected forward margins and modestly reducing our forward room night growth and take rates (due to macro uncertainty in Europe and increased competitive pressure). In all, our 2016 non-gaap EPS remains unchanged and we are lowering our 2017 non- GAAP EPS by 1% (see Exhibit 4). 4 6

7 Exhibit 4: Morgan Stanley prior vs. current Priceline estimates Online Travel February 4, 2016 Source: Morgan Stanley Research We now find ourselves 2% above Street non-gaap EPS in 2016 and We maintain our Equal-weight rating on Priceline until we can find a source of further upward revisions, which we believe are necessary to drive meaningful upside in the stock. Exhibit 5: Morgan Stanley vs. Consensus Priceline estimates Source: ThomsonReuters data, Morgan Stanley Research PCLN has sold off year-to-date like most stocks in our sector and is now within 5% of our bear case. The trouble is, the lack of positive revisions on a stock that trades on positive revisions (see Exhibit 6) 6 and slowing room night growth (see Exhibit 7) 7 make us question the ability for PCLN to materially outperform. As such, we remain on the sidelines with a $1,320 DCF-driven price target (from $1,350 previously) until we can find a source of further upward revisions. 7

8 Exhibit 6: The magnitude of Priceline's EPS beats vs. the Street have been declining Exhibit 7: Priceline room night growth Online Travel February 4, 2016 Source: StreetAccount, Company data, Morgan Stanley Research Exhibit 8: Priceline DCF Valuation Source: Bloomberg, Company data, Morgan Stanley Research We note that our $1,320 Priceline price target is ~25% above its current market price, and combined with our new 2017 estimates, implies a 17X 2017 P/E multiple which is ~20% below its historical median forward multiple of 21X. That said, with growth set to slow, we think it is reasonable to assume the multiple will compress over time. We can make a valuation argument for why the stock can run to $1,320, but can't see much more than that. 8

9 Exhibit 9: Priceline historical forward consensus P/E multiple Online Travel February 4, 2016 Source: ThomsonReuters data, Morgan Stanley Research 9

10 Expedia: EW, $115 PT Playing for Room Night Growth Rather than EBITDA Growth We believe Expedia's strategic decision to reduce its hotel take rates to get more access to inventory which has enabled them to get more aggressive in the travel paid search market partially accounts for Priceline's increased ad spending (for more on this, see the Priceline section ). In effect, Expedia is increasingly managing its business to maximize room night growth rather than earnings power. But this is impacting the company's near-term economics as well, as we estimate Expedia's core OTA incremental EBITDA margins fell by ~250bp in 2015 (to ~23%). Exhibit 10: Exepdia Core OTA Incremental EBITDA margins *W e define "core EXPE" as ex Trivago, Egencia, Orbitz, HomeAw ay, and unallocated overhead/corporate costs We don't see this strategy changing given Expedia's commentary that they expect to continue to reduce hotel take rates "through 2016" (see below for full quote). As a result, w e are reducing our core Expedia 2016 and 2017 incremental margin expectations. Mark Okerstrom, Expedia Inc., CFO & EVP of Operations (3Q:15 earnings conference call; October 29, 2015): In terms of [hotel] margin reductions, we do expect them to continue through They will start to mitigate in the back part of the year. And then you have got some annualization of that. So I think we will be well into 2017 before we see ourselves in a position where that is no longer a significant headwind for us. Bridging our Way to

11 As has been the case the past few years, it is important to piece together Expedia's non-gaap EBITDA between the organic and inorganic (this year, Orbitz and HomeAway) growth drivers. For Orbitz, we estimate $253mn EBITDA in 2016 and $284mn EBITDA in 2017, which includes $105mn of synergies (cost cuts and revenue/yield upside) in We have now also integrated HomeAway into our Expedia model, and we expect HomeAway to contribute $113mn EBITDA in 2016 and $157mn EBITDA in We note that the HomeAway acquisition closed on December 15, 2015, and per purchase accounting rules, Expedia cannot recognize any revenue associated with HomeAway bookings made before the deal closed, but will recognize 100% of the costs incurred in the same period. As such, there will be a HomeAway revenue and cost mismatch in 2016 (in particular, in 1Q:16) which we have adjusted for in our model. Exhibit 11: Expedia EBITDA Breakdown Online Travel February 4, 2016 Exhibit 12: Expedia EBITDA Breakdown Despite these contributions from Orbitz and HomeAway, we are still 5% below the Street's EBITDA expectations in In effect, we believe Expedia needs a further improvement from HomeAway in order to drive upside to our estimates. 11

12 Exhibit 13: Morgan Stanley vs. Consensus Priceline estimates Source: ThomsonReuters data, Morgan Stanley Research We believe Expedia traded on room night growth more than fundamentals (EBITDA/earnings power) in 2015, but looking into 2016, we see room night growth slowing (excluding AWAY) (see Exhibit 14). As such, even as we add in AWAY, we remain on the sidelines with a new $115 PT with ~20% upside (from $107 previously) until we can find a source of material incremental earnings power. Exhibit 14: Expedia room night growth *Inorganic benefit of ~800bp in 2015 (W otif, AirAsia, Travelocity, Orbitz) and ~400bp in 2016 (Orbitz) Could HomeAway Drive Upside? In our view, Expedia's 2017 EBITDA upside will largely be predicated on AWAY s ability to outperform our numbers. By way of background, on its conference call announcing its intent to acquire HomeAway, Expedia set a target of $350mn in HomeAway EBITDA by 2018 (which is ~90% higher than our current 2018 AWAY EBITDA estimate). The trouble is, there is not much sign of potential leverage in sales & marketing...and expectations for this new consumer fee (which isn't even set to launch until 2Q:16) are already high in Street numbers. We Struggle to Believe Sales & Marketing Will be a Material Source of Upside... 12

13 First, it is important to consider AWAY's P&L structure and sources of opex. Sales & marketing is HomeAway's most material expense, at an estimated 33% of revenue in 2015 (or $167mn). Therefore, to us, sales & marketing efficiency or investment is likely to be the biggest source of opex margin leverage. Exhibit 15: Sales & marketing is HomeAway's most material expense Online Travel February 4, 2016 Expedia bulls may counter that they will get sales & marketing efficiency from being part of the Expedia family (benefiting from Expedia's paid search expertise). We disagree given that HomeAway's sales & marketing expense as a percentage of revenue is already lower than Expedia (seeexhibit 16 and Exhibit 17). Since HomeAway's sales & marketing expense as a percentage of revenue is already closer to the most efficient ad spender in the industry (PCLN), to us, it seems more likely that HomeAway's ad spending as a percentage of revenue could rise rather than fall going forward (as competition rises and they invest). Exhibit 16: OTA Sales & Marketing expense (ex SBC) as a percentage of revenue Exhibit 17: HomeAway Sales & Marketing expense (ex SBC) as a percentage of revenue To this point, HomeAway competes against Priceline, other Expedia brands, Airbnb and other players for consumers' attention on television and digital marketing channels. Further, in our view, vacation rental search keyword bidding intensity is not likely to slow. To wit, data from our paid search tracker point out 13

14 that HomeAway is already bidding on more properties than any other player (see Exhibit 18). Of the top 20 European vacation rental destinations, HomeAway bids in 93% of the keyword queries. Within the U.S., HomeAway's presence is even higher, at 95% of the top 30 domestic vacation rentals destinations. The fact that competitors are not bidding as broadly yet speaks to further potential customer acquisition cost risk as these players become more focused on using paid search to grow their businesses by bidding on more locations and bidding more dollars per click. Over time we expect to see Priceline and other players move more aggressively into the paid search market, which would put further upward pressure on costs per click and customer acquisition costs. Exhibit 18: HomeAway is bidding on more keywords than any other player, but its competitors are bidding for (and winning) the #1 ad slot more often Online Travel February 4, 2016 Source: Google search, Morgan Stanley Research In addition, when looking at the distribution of each property's Google search ad units we see that Booking.com, Villas.com, and Airbnb are all winning the #1 paid ad slot more times than HomeAway in both Europe and the U.S. In short, HomeAway is bidding on more keywords than any other player, but its competitors are bidding for (and winning) the most valuable ad slot more ofte n. The question going forward will be whether HomeAway needs to increase its investment in paid search to win the top search slot...which will drive up sales & marketing spend and customer acquisition costs. In addition, Expedia has indicated it would like to (eventually) expand HomeAway's presence and inventory into more "urban markets," which puts it in more direct competition with Airbnb and Priceline for consumer traffic. Given these trends, we anticipate higher incremental SEM going forward as HomeAway moves to increase brand awareness and drive paid traffic....which Means Upside Will be Predicated on A Successful Consumer Booking Fee In our view, these trends indicate search intensity and ad bidding are not going to slow materially (if at all) in the near term and speak to how AWAY can likely only deliver upside by successfully rolling out a consumer booking fee. We think this will be difficult given the execution risk most bookings are still performed through s and faxes, which creates leakage issues and potential customer pushback to an incremental booking fee. Investor expectations are already implicitly high too. For perspective, our sensitivity analysis shows that all else held equal EXPE will need to add a ~600bp booking fee to ~16% of AWAY's bookings just to reach Street 2017 EBITDA numbe rs. As shown in Exhibit 19, we estimate HomeAway generated $15bn in bookings in 2015 at a 3% take rate (in-line with Expedia's latest public comments), which we expect to grow to $17bn of bookings by Therefore, by our math, for our Expedia 2017 EBITDA estimates to come in-line with the Street, roughly 16% of AWAY's $17bn in 2017 bookings would need to flow through at AWAY's expected 9% take rate (the midpoint of AWAY's expected "8%-10% range" long term). 14

15 Exhibit 19: Implied HomeAway incremental 2017 EBITDA and percentage of bookings at a 9% take rate required to move our Expedia estimates in-line with Consensus 2017 EBITDA Online Travel February 4, 2016 In Exhibit 20, we outline the implied percentage of HomeAway bookings at a 9% take rate required to move our Expedia estimates in-line or above Consensus 2017 EBITDA. As shown, we estimate AWAY needs to monetize ~40% of its 2017 bookings at a 9% take rate in order to move our Expedia 2017 EBITDA estimates 10% above the Street. Again, this highlights how incremental Expedia upside not to mention the achievability of AWAY's $350mn EBITDA target is heavily dependent on HomeAway's success in implementing and executing its proposed traveller booking fee. We intend to monitor this closely. Exhibit 20: Implied percentage of HomeAway bookings at a 9% take rate required to move our Expedia estimates in-line or above Consensus 2017 EBITDA Raising PT to $115 and Remaining on Sidelines In all, after layering HomeAway into our model, our 2016 Expedia revenue and EBITDA estimates rise by 7% and 11%, respectively, but our EPS estimates only rise by 4% (primarily due to the expected issuance of ~20mn EXPE shares to fund part of the purchase price). As a result of our higher topline and EBITDA estimates, we are raising our DCF-based price target on EXPE to $115 (from $107). 15

16 Solid room night growth (we are modeling 27% in 2016, including Orbitz) may give Expedia support at current levels, but we remain on the sidelines until we can find a source of material upward earnings revisions. Exhibit 21: Expedia DCF valuation Online Travel February 4, 2016 Source: Bloomberg, Company data, Morgan Stanley Research 16

17 4Q:15 Estimates Exhibit 22: Priceline 4Q:15 Estimates 17

18 Exhibit 23: Expedia 4Q:15 Estimates 18

19 Changes to Our Estimates Exhibit 24: Priceline Prior vs. Current Estimates 19

20 Exhibit 25: Expedia Prior vs. Current Estimates 20

21 Priceline Financials 21

22 Exhibit 26: Priceline Income Statement Online Travel February 4,

23 Exhibit 27: Priceline Balance Sheet 23

24 Exhibit 28: Priceline Cash Flow Statement 24

25 Exhibit 29: Priceline Discounted Cash Flow Analysis 25

26 Expedia Financials 26

27 Exhibit 30: Expedia Income Statement Online Travel February 4,

28 Exhibit 31: Expedia Balance Sheet 28

29 Exhibit 32: Expedia Cash Flow Statement 29

30 Exhibit 33: Expedia Discounted Cash Flow Analysis 30

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Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL IBC % OF RATING CATEGORY Overweight/Buy % % 27% Equal-weight/Hold % % 23% Not-Rated/Hold 79 2% 9 1% 11% Underweight/Sell % 86 11% 13% TOTAL 3, Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings 31

32 Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index. Stock Price, Price Target and Rating History (See Rating Definitions) 32

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