Global Equity Research
June 28, 2006
Global Gambits
The Right Moves for Right Now
Autos
chapter
See jpmorganSaVanT.com for global sector valuation tools
The following is a chapter from Global Gambits — The Right Moves for Right Now, dated June 28, 2006. This chapter is presented for
convenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report is
available on MorganMarkets.
June 28, 2006
Global Equity Research
Global Gambits — The Right Moves for Right Now
See jpmorganSaVanT.com for global sector valuation tools
Autos
Go East
Key Drivers
Global Sector Coordinator
Himanshu Patel, CFA
(1-212) 622-3906
himanshu.patel@jpmorgan.com
J.P. Morgan Securities Inc.
Full sector coverage details on
page 7
• Relative value in Japan and Korea. With OEM valuations
likely to be range-bound in the US and Europe, relative value
in the global auto sector may now be in Asian OE names,
though currency may be a near-term concern. Among the
Japanese OEs, we like Toyota and Honda (above peer
profitability, growth potential). In Korea, we prefer Hyundai
(improving US sales momentum). Among US OEs, while we
prefer GM ($25.59, OW) to F, the stock’s recent run-up
suggests that better value may be in transplant-exposed
suppliers such as JCI. And in Europe, we like DCX
(restructuring potential).
• In the US, the auto sector could now be range-bound as high
interest rates/gas prices may weaken near-term new vehicle
demand, in our view. With last year’s employee pricing
programs likely to make Y/Y sales comparisons particularly
hard for the Big Three, we think supplier names with high
transplant exposure and non-auto revenues, such as
Overweight-rated JCI look better placed to outperform the
sector. Among the OEs, we prefer GM to Ford as a
strengthening product cycle and structural cost savings should
help earnings recover in 2007E, though the stock’s recent runup and the Delphi strike risk may limit further near-term gains.
• With the recent correction, European auto stocks look
fairly valued. Generally, robust balance sheets suggest limited
scope for incremental de-leveraging, indicating that upside to
equity value will be contingent on multiple expansion (i.e.,
positive earnings momentum)—arguing against a near-term
upward re-rating, in our view. We continue to prefer
Overweight-rated DCX (restructuring potential, attractive
valuation) to Underweight-rated BMW and Neutral-rated
Renault (€81.50).
• We reiterate our bullish stance on the Japanese OEM
sector based on three elements: (1) a 5%+ CAGR for the fiveyear volume growth; (2) sustainable top industry profitability,
with EBIT margins of 8-9%; and (3) a period of improving
returns on invested capital. We rate Toyota Motor and Honda
Motor Overweight, but remain cautious on Nissan Motor
(¥1,232) with a Neutral.
• In Korea, OEM valuations are beginning to look more
attractive with the recent correction. While near-term risks
remain due to the strong Won and investigation on the Hyundai
Motor Group, we believe valuations are now undemanding visà-vis global peers and the market, especially in light of
improving US sales momentum.
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Our Non-Consensus Views
• US. UAW concessions, capacity/headcount reductions and the
upcoming ’07 union contract negotiations could help the
Detroit 3 achieve a much more competitive cost structure by
the end of 2007. In the case of GM, we think cost savings and
positive mix (from the T900 launch) may see ’07 earnings (exGMAC) north of US$4 (consensus: US$3.31).
• Japan. Higher-than-expected capital expenditure may hold
back operating margins slightly, and we think that the
improvement in Japanese OEMs’ ROIC may be delayed
marginally, remaining flat at 14.0% in FY06E. However, we
envisage an improvement in returns led by Toyota, and expect
an upswing to 14.7% in FY07E, and an all-time high of 15.2%
in FY08E. The global OEMs face a tough environment with
cost inflation, product mix deterioration, and price deflation.
Nonetheless, we believe Japanese OEMs hold superior
fundamentals backed up by high secular growth and high
ability to control structural costs.
3
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Autos: Top Picks
Company
Johnson Controls Inc.
Key Financials
Rating:
Ticker:
Fiscal EPS (Local): Year-end Sept.
• We see potential for 15-20% upside to FY07/08 consensus estimates for JCI, driven by non-auto growth and York
2005
2006E
2007E acquisition synergies.
4.49
5.35
7.00
Overweight
JCI US / JCI
Rationale and Catalysts
Exchange:
NYSE
Price (Local): US$81.69
Mkt Cap (US$): 15.9 bn
P/E (Calendar)
2006E
15.3
2007E
11.7
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
9.6
2007E
7.7
Himanshu Patel, CFA
(1-212) 622-3906
himanshu.patel @jpmorgan.com
DaimlerChrysler AG
Rating:
Overweight
Ticker:
DCX GR/ DCXGn.DE
Ticker ADR:
DCX
• Four key areas of potential earnings upside: (1) the likelihood for JCI’s building efficiency business to grow sales at
roughly 10%/year through 2008 (2x global HVAC industry growth); (2) high operating leverage at York; (3) what we
sense is a growing likelihood of a sweeping European-style restructuring in JCI’s NAFTA interiors business; and (4)
the potential for roughly 130bps of cumulative margin expansion from 2006-08E in power solutions stemming purely
from the Delphi business integration and European restructuring (and possibly another 200bps from operating
leverage).
• Valuing the stock at 14.3x on our new FY07E EPS estimate yields a May 2007 US$100 price target. Risks: Interior
margins may take longer to recover if commodity costs rise higher than expected. On 2007 consensus estimates, pure
auto suppliers with high transplant exposure (BWA/ALV) trade at 12.2x, while HVAC comps trade at 15-17x,
suggesting a mid-14x P/E for JCI is reasonable.
Fiscal EPS (Local): Year-end Dec.
• With the stock trading around €40 again and the SOP benefiting from further reductions in employee liabilities (worth
2005
2006E
2007E €2.5 per share) and having crystallized value in non-core associates (EADS), we believe DaimlerChrysler offers an
4.08
4.11
4.22 attractive value opportunity. We believe management’s focus on operating performance combined with a strong
balance sheet will help close the disconnect between the company's earnings based valuation and asset values. In the
near term, however, we expect the stock to suffer from limited visibility on the truck cycle and the US volume/pricing
environment.
Exchange:
Frankfurt Electronic
Price (Local): €37.53
Mkt Cap (US$): 48.3 bn
P/E (Calendar)
Analyst:
Phone:
Email:
Philippe Houchois
(44-20) 7325-8106
philippe.houchois@jpmorgan.com
EV/EBITDA (Calendar)
2006E
4.4
Overweight
7203 JP / 7203.T
TM
Fiscal EPS (Local): Year-end Mar.
• Under its Global Master Plan (GMP) Phase II (2006–10), Toyota’s sales are likely to reach 9 million vehicles in 2008
2005
2006E
2007E (about 10 million groupwide) and approach 10 million (11 million groupwide) by 2010. The company has implemented
421.8
425.7
462.7 a strategic shift, trying to improve its cost efficiency. Whereas Toyota fell into a growth trap in the latter half of Phase I
2006E
9.1
2007E
8.9
• In our view, upside to the stock could be driven by: (1) a change of focus towards operating excellence versus value
destructive strategies; (2) corporate activity focusing on further streamlining the portfolio (EADS, Smart, etc.); and (3)
2007E improved communication with financial investors. We maintain our Overweight rating with a six-month DCF/SOP3.6 based target price of €52. Currency, limited visibility on the truck cycle and economic weakness are potential risks to
target price.
Toyota Motor
Rating:
Ticker:
Ticker ADR:
of the plan, it is reconciling strong top-line growth with improvement in returns in Phase II.
Exchange:
Tokyo Stock Exchange
Price (Local):
¥5630
Mkt Cap (US$): 183.2 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
4.8
Takaki Nakanishi
(81-3) 6736-8600
takaki.x.nakanish@jpmorgan.com
2006E
13.2
• Whereas GMP Phase I was characterized by a positive turnaround in returns for Toyota’s affiliates and suppliers rather
than that of Toyota, Phase II is characterized by an improvement in Toyota’s core earnings growth potential. Toyota
Motor should start to see a full-scale improvement in returns, outstripping the increase at affiliated companies and
suppliers.
2007E • We maintain our Overweight rating and our DCF-based share price target through June 2007 of ¥8,200 (FY06E P/E of
4.3 19x based on JPMorgan estimates). Risks to target price are changes in exchange rates and the economy.
2007E
12.2
Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.
4
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Autos: Top Picks (cont’d)
Company
Honda Motor
Rating:
Ticker:
Key Financials
Overweight
7267 JP / 7267.T
Rationale and Catalysts
Fiscal EPS (Local): Year-end Mar.
• Honda’s new long-term strategy aims to accelerate global growth in fuel-efficient cars. Our own view has been that the
2005
2006E
2007E emergence of a concrete long-term strategy would catalyze a revaluation of the stock.
652.2
319.3
341.2
• Honda plans to build three new factories in Japan and North America, looking to tap into soaring global demand for fuelefficient vehicles. Honda has its sights on automobile sales of at least 4.5 million units in 2010, giving annualized growth of
5.8%.
Exchange:
Tokyo Stock Exchange
Price (Local):
¥6900
Mkt Cap (US$): 57.0 bn
P/E (Calendar)
Analyst:
Phone:
Email:
Takaki Nakanishi
(81-3) 6736-8600
takaki.x.nakanishi@jpmorgan.com
EV/EBITDA (Calendar)
2006E
5.6
Hyundai
Rating:
Ticker:
Overweight
005380 KS / 005380.KS
Fiscal EPS (Local): Year-end Dec.
• We believe sales momentum will accelerate in the US market towards 2H06 on the back of new models such as the
2005
2006E
2007E recently launched Azera, Accent and the upcoming SUV Santa Fe.
8154
7662
9698
2006E
10.8
Exchange:
Korea Stock Exchange
Price (Local):
W76,900
Mkt Cap (US$): 17.8 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
5.9
JM Pak
(82-2) 758-5715
jm.pak@jpmorgan.com
2006E
7.4
2007E
10.1 • New factories potentially offer around a 20% improvement in productivity compared with existing sites, and a substantial
step forward in Honda’s productivity-based competitive position looks possible in our view. We believe the emergence of a
strategic push to supply diesel engines and small hybrid cars to the U.S. represents an extremely important development.
2007E
• Overweight maintained. We leave our DCF-based share price target through April 2007 unchanged at ¥9,000 (P/E of 14x
5.1
based on our FY06 estimates). Risks to our target price include yen appreciation, crude oil prices and other changes in the
economy.
• Near-term risks remain with the appreciation of the Won and the ongoing group investigation. However, we believe forex
exposure will be mitigated in the longer term with the company’s strategy of diversifying its production base.
•
2007E Valuations remain undemanding vis-à-vis global peers and the underlying Korean market. We maintain our Overweight
5.9 rating and a June 2007 price target of W100,000 (11.8x adjusted FY06E EPS). Risks to our price target are: (1) strongerthan-expected appreciation of the Won, and (2) delays in the recovery of the domestic market.
2007E
4.3
Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.
5
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Autos: Stocks to Underweight
Company
Ford Motor Company
Key Financials
Rating:
Ticker:
Fiscal EPS (Local): Year-end Dec.
• We think Ford’s top line will be challenged over the next 12-18 months as its highest margin vehicles (large SUVs and large
2005
2006E
2007E pick-ups) come under pressure from what is likely to be a well-received GM T900 platform.
1.25
0.40
0.60
Underweight
F US / F
Rationale and Catalysts
• We are reluctant to count on a surge in the rate of cost savings given Way Forward’s vagueness and Forward’s past
tendency for product cost overruns. Targeted capacity savings seem meaningful but will likely take 2-3 years to become
significant; procurement savings targets seem optimistic (~3%/year versus 1.5% at GM’s); and other savings areas (e.g.,
2007E
engineering) remain unquantified.
11.3
Exchange:
NYSE
Price (Local): US$6.78
Mkt Cap (US$): 12.7 bn
P/E (Calendar)
Analyst:
Phone:
Email:
Himanshu Patel, CFA
(1-212) 622-3906
himanshu.patel @jpmorgan.com
EV/EBITDA (Calendar)
2006E
2.9
BMW AG
Rating:
Ticker:
Underweight
BMW GR / BMWG.DE
Fiscal EPS (Local): Year-end Dec.
• Yesterday’s story to be delivered tomorrow? Having failed to deliver an earnings leverage while enjoying superior growth
2005
2006E
2007E and currency protection, BMW looks set to join the ranks of cost-driven OEMs as growth rates normalize. The decline in
3.33
3.92
3.85 capital returns highlights both excess currency benefits in the past and lower incremental returns as recent investment
2006E
17.0
Exchange:
Frankfurt Electronic
Price (Local): €37.73
Mkt Cap (US$): 32.0 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
4.2
Philippe Houchois
(44-20) 7325-8106
philippe.houchois@jpmorgan.com
2006E
9.6
• Western mass-market automotive OEM stocks typically trade between 6.5x and 12x P/E on forward EPS, with the high end
of this P/E range usually being realized during widely believed earnings troughs, and the low end being realized during
2007E widely believed earnings peaks. We think Ford’s 2006E and 2007E earnings are representative of mid-product cycle
3.9 earnings, suggesting the stock should be valued toward the middle of this historical forward P/E range. Currently, the stock
is trading at 11.3x 2007E EPS, and looks overvalued.
projects failed to deliver the optimal mix/volume returns of the 3 series. We do not see 2006 as a turning point for earnings
momentum.
2007E
• With stable earnings and superior cash flows, BMW increasingly looks like a utility company, without the cash distribution
9.8
2007E
3.8
and higher risks associated with the car industry’s demands on price (remember, Mercedes was also an “annuity”). Recent
performance is again valuing the company as a growth stock on EV multiples. For a stock whose cash generation
credentials are well established, we believe BMW’ share price performance requires more earnings momentum than what it
currently offers.
• We remain Underweight with a DCF/multiples based six-month target price of €40. Risks to target price are a better-thananticipated strength in the US market and favourable currency.
Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.
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JPMorgan Global Autos Team – Research
Equity Research
Himanshu Patel, CFA
Global Sector Coordinator
Americas
United States
EMEA
Pan Europe
Asia Pacific
China
India
Indonesia
Japan
Malaysia
South Korea
Taiwan
Himanshu Patel, CFA
Ranjit Unnithan
Philippe Houchois
Shaz Kidwai
Frank Li
Vijay Chugh
Fordyanto Widjaja, CFA
Takaki Nakanishi
Yoshiki Masaki
Chris Oh
J.M. Pak
Nick Lai
Credit Research
Americas
United States
Eric Selle, CFA (HG/HY)
Stephanie Renegar (HY)
EMEA
Pan Europe
James Banghart (HG/HY)
Asia Pacific
Japan
Mana Nakazora
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Companies Recommended in This Report (prices as of COB 19 June 2006)
Honda Motor (7267) (7267.T/¥7,170/Overweight), Hyundai Motor (005380.KS/W78,500/Overweight), Nissan Motor (7201)
(7201.T/¥1,242/Neutral), Toyota Motor (7203) (7203.T/¥5,840/Overweight)
Analyst Certification:
The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies (or in a case where multiple research
analysts are primarily responsible for this research, the research analyst named first in each group on the front cover or named within the document individually
certifies, with respect to each security or issuer that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately
reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will
be directly or indirectly related to the specific recommendations or views expressed by the research analyst in this research.
Important Disclosures
•
•
•
Client of the Firm: Honda Motor (7267) is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking
securities-related service and non-securities-related services. Hyundai Motor is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the
company non-investment banking securities-related service and non-securities-related services. Nissan Motor (7201) is or was in the past 12 months a client of JPMSI; during
the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related services. Toyota Motor (7203) is or was in the
past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related service and non-securities-related
services.
Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from
Nissan Motor (7201).
Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Honda Motor
(7267), Hyundai Motor, Nissan Motor (7201), Toyota Motor (7203). An affiliate of JPMSI has received compensation in the past 12 months for products or services other than
investment banking from Honda Motor (7267), Hyundai Motor, Nissan Motor (7201), Toyota Motor (7203).
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Honda Motor (7267) (7267.T) Price Chart
13,560
11,865
10,170
N
8,475
OW Y5,950
OW Y9,000
Date
Rating Share Price
(Y)
Price Target
(Y)
14-Jul-03
N
4890
-
4770
5950
02-Mar-04 OW
Price(Y) 6,780
5,085
3,390
1,695
0
Jun
03
Sep
03
Dec
03
Mar
04
Jun
04
Sep
04
Dec
04
Mar
05
Jun
05
Sep
05
Dec
05
Mar
06
Jun
06
Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
Break in coverage Oct 02, 2003 - Mar 02, 2004, and Aug 15, 2005 - Apr 20, 2006. This chart shows JPMorgan's continuing
coverage of this stock; the current analyst may or may not have covered it over the entire period. As of Aug. 30, 2002,
the firm discontinued price targets in all markets where they were used. They were reinstated at JPMSI as of May 19th,
2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered stocks, price targets are required for
regional FL stocks and may be set for other stocks at analysts' discretion.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Hyundai Motor (005380.KS) Price Chart
164,570
N W51,000
141,060
OW W100,000
N W45,000
OW W100,000
117,550
OW W42,400
Price(W)
OW W61,000
OW W68,000
OW W85,000
OW W96,000
OW W100,00
Jun
05
Dec
05
Date
Rating Share Price
(W)
Price Target
(W)
11-Jul-03
OW
34400
42400
12-Nov-03 N
44000
45000
05-May-04 OW
46450
61000
94,040
70,530
47,020
23,510
0
Jun
03
Sep
03
Dec
03
Mar
04
Jun
04
Sep
04
Dec
04
Mar
05
Sep
05
Mar
06
Jun
06
Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over
the entire period. As of Aug. 30, 2002, the firm discontinued price targets in all markets where they were used. They
were reinstated at JPMSI as of May 19th, 2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered
stocks, price targets are required for regional FL stocks and may be set for other stocks at analysts' discretion.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
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Nissan Motor (7201) (7201.T) Price Chart
Date
2,295
2,040
Rating Share Price
(Y)
02-Mar-04 N
1,785
N
1220
Price Target
(Y)
-
N Y1,500
1,530
Price(Y)1,275
1,020
765
510
255
0
Jun
03
Sep
03
Dec
03
Mar
04
Jun
04
Sep
04
Dec
04
Mar
05
Jun
05
Sep
05
Dec
05
Mar
06
Jun
06
Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
Break in coverage Oct 02, 2003 - Mar 02, 2004, and Aug 15, 2005 - Apr 20, 2006. This chart shows JPMorgan's continuing
coverage of this stock; the current analyst may or may not have covered it over the entire period. As of Aug. 30, 2002,
the firm discontinued price targets in all markets where they were used. They were reinstated at JPMSI as of May 19th,
2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered stocks, price targets are required for
regional FL stocks and may be set for other stocks at analysts' discretion.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Toyota Motor (7203) (7203.T) Price Chart
11,760
Date
10,290
OW Y5,000
8,820
N
7,350
OW Y8,200
Rating Share Price
(Y)
Price Target
(Y)
02-Mar-04 N
3860
-
31-May-04 OW
4000
5000
Price(Y) 5,880
4,410
2,940
1,470
0
Jun
03
Sep
03
Dec
03
Mar
04
Jun
04
Sep
04
Dec
04
Mar
05
Jun
05
Sep
05
Dec
05
Mar
06
Jun
06
Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
Break in coverage Oct 02, 2003 - Mar 02, 2004, and Aug 15, 2005 - Apr 20, 2006. This chart shows JPMorgan's continuing
coverage of this stock; the current analyst may or may not have covered it over the entire period. As of Aug. 30, 2002,
the firm discontinued price targets in all markets where they were used. They were reinstated at JPMSI as of May 19th,
2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered stocks, price targets are required for
regional FL stocks and may be set for other stocks at analysts' discretion.
JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
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Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least
one year, are available through the search function on JP Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free
number (1-800-477-0406)
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the
stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with
the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect
this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s
coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage
universe.
JPMorgan Equity Research Ratings Distribution, as of April 3, 2006
JPM Global Equity Research Coverage
IB clients*
JPMSI Equity Research Coverage
IB clients*
Overweight
(buy)
40%
45%
35%
63%
Neutral
(hold)
42%
47%
50%
57%
Underweight
(sell)
18%
39%
15%
46%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our
Underweight rating falls into a sell rating category.
Valuation and Risks: Equity Research company notes and reports include a discussion of valuation methods used, including methods used to determine a price
target (if any), and a discussion of risks to the price target.
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including
the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units,
Institutional Equities and Investment Banking.
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Global Equity Research
Global Gambits — The Right Moves for Right Now
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Revised April 3, 2006.
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June 28, 2006
Global Equity Research
Global Gambits — The Right Moves for Right Now
See jpmorganSaVanT.com for global sector valuation tools
Copyright 2006 JPMorgan Chase & Co. All rights reserved.
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