Technology Industry Review Q3-2008; McGladrey Capital Markets

Enterprise Software

M&A Activity in the Enterprise Software Industry Heats Up

• JDA Software Group Inc. announces the acquisition of i2 Technologies Inc., a provider of supply chain management software ($542 million)
• International Business Machines Corp. announces the acquisition of ILOG SA for its pre-built software components capability ($301 million)
• Microsoft Corp. announces the acquisition of DATAllegro Inc., a provider of data-warehouse appliances
• Open Text Corp. acquires a division of Spicer Corp. specializing in file format viewer solutions ($12 million)
• Oracle Corp. announces the acquisition of Global Knowledge Software LLC, a developer of self-service training automation software

Digital Media

Consolidation in the Digital Media Solutions Industry Continues Its Momentum

• Vodafone Egypt Telecommunications S.A.E. acquires Sarmady Communications, a provider of Web-based advertising services
• L-1 Identity Solutions Inc. strengthens its credentialing solutions portfolio through the acquisition of Digimarc Corp. ($306 million)
• Host.net acquires WV Fiber Inc., a global Internet transit and multiprotocol label switching transport company, for its top clientele
• The Active Network Inc. acquires T&C Products Inc., a sports-management software developer
• Intersil Corp. announces the acquisition of D2Audio Inc. for its intelligent digital audio power amplifier capabilities

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Plastics and Advanced Materials Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Concerns Regarding Bisphenol A

The use of Bisphenol A (BPA) in consumer products is generating varied opinion from industry groups. BPA is used in a variety of products such as shatter-resistant polycarbonate plastic baby bottles and epoxy resin lining in food cans for safety of food from contaminants. Scientific and government bodies around the world have reaffirmed the safety of food-contact products containing BPA. The California Assembly recently rejected a bill that targeted the use of BPA in food contact products for use by children under the age of three.

Mixed Reactions on Plastic Bags Ban

As mentioned in last quarter's review, the ban on plastic bags continues to receive increased attention from all quarters of the industry. Several cities have banned the use of plastic bags outright, whereas others have voiced their opinion against a ban. Manhattan Beach, Calif., with 35,000 residents, became the third U.S. city with a ban on plastic carryout bags. A ban in San Francisco went into effect in November 2007, and a ban in Malibu, Calif., approved in May 2008, goes into effect in two stages, beginning in December. Most recently, Westport, Conn., passed a ban on plastic bags earlier this month that will go into effect in March 2009. Although some cities are getting vocal against the use of plastic bags, legislators in California failed to pass a plastic-bag tax in the recently completed legislative session. The bill required retailers to charge at least 25 cents for plastic bags, starting in July 2011, if they do not achieve a 70 percent bag diversion rate based on use reduction and recycling rates. A series of recommendations from the Ocean Protection Council in California could lead to more bans and taxes on plastics packaging. The report calls for producer responsibility for the take-back of packaging waste, and bans or fees on commonly littered items such as plastic bags and polystyrene containers.

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Recreation & Leisure Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Consumers Face Headwinds and are Conserving Cash

A number of economic factors are conspiring to impact U.S. consumer spending in the outdoor, sports, recreation and leisure sectors. The U.S. economy continues to reel under pressure from softness in the housing market, the extended credit crisis, failure of financial markets, and a worsening labor market. The one-time effect of the government's stimulus package has fully played out and increasing inflation has eroded Americans' buying power. Faced with a 17-year high consumer price index and a decline in personal income levels, U.S. consumers are running out of ways to sustain their former spending lifestyles. Lower gasoline prices have given consumers some tangible relief, and we are seeing that relief expressed in the various consumer confidence figures. While consumer confidence was at its highest level in five months in August 2008, financial events in September will chip away or reverse the sentiment.

Value to Outperform Luxury

Historical consumer psychology and behavior in times of distress provide valuable lessons to retailers, manufacturers and others supplying the outdoor, sports, recreation and leisure markets. Research indicates that as a crisis intensifies, stress relief plays a bigger role in spending behavior. At the same time, expenditures seen as extravagant will cause consumers stress. The higher the price, the greater the justification required for a purchase. Mass retailers are expecting to see a pickup in fourth quarter performance due to a shift among shoppers toward value, while department stores are likely to be negatively impacted as middle and upper-income households become increasingly vulnerable to economic pressures.

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Media, Entertainment & Gaming Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Media, Entertainment and Gaming — Recession-Resistant?

The media, entertainment and gaming industries have historically proven to be resilient during periods of economic weakness. During past economic slowdowns, consumers have continued to seek out various forms of entertainment as a means to escape, albeit temporarily, the increased stresses of daily life. With that said, it remains to be seen whether the current economic crisis will broadly and severely impact companies operating in the media, entertainment and gaming sectors or whether the discretionary income levels of the U.S. consumer will allow certain sub-sectors of the industry to continue flourishing.

Casinos Struggling to Drive Traffic

Casinos operating in major U.S. gaming destinations such as Las Vegas and Atlantic City have reported consistent declines in gaming revenues, lower traffic volume and lower average revenue per room during the first half of 2008. Given the current low levels of consumer confidence, rising unemployment and general uncertainty regarding the future state of the economy, this decline is not entirely unexpected. In an attempt to combat this trend, major resorts are discounting room rates to attract enough gamblers to keep their roulette wheels and slot machines spinning.

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Healthcare Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Home Healthcare

Home-based healthcare spending is projected to increase 7.5 percent annually over the next 10 years, outpacing overall growth in U.S. health spending and reaching $119 billion by 2017. Higher incidences of chronic conditions, better utilization of information technology, a stable Medicare and regulatory environment, and an aging population eager for cost-effective treatment at home all support this favorable outlook.

Universal Health Coverage

Universal health coverage is available in most large, industrialized nations, and many believe it could be the key to reversing rapidly increasing healthcare costs and covering the more than 47 million uninsured in the United States. Various proposals have been introduced, including such ideas as a government voucher system for a standard benefits package, evolving the current system to allow for portable insurance via state-chartered insurance exchanges, and expanding Medicare and the State Children's Health Insurance Plan to allow everyone to enroll.

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Government Services Industry Review Q3-2008; McGladrey Capital Markets

Key Topic: U.S. Army's Future Combat System

The Future Combat System (FCS) is the cornerstone of Army modernization. FCS provides warfighters and commanders with leading-edge technologies and capabilities, enabling them to dominate in asymmetric ground warfare while allowing the Army to build a force that can sustain itself in remote areas. The FCS program consists of eight new manned ground vehicles, a family of unmanned air and ground vehicles, the non-line-of-sight launch system, and advanced tactical and urban sensors that all are connected by a state-of-the-art network. Working together, these systems will help soldiers share real-time information across the battlefield. Fielding for the first full FCS Brigade is scheduled for fiscal year 2015, but FCS technology is being accelerated to the Army's modular brigades through “Spin Outs” that allow soldiers to utilize FCS equipment and technology as it becomes available.

In the News
Boeing Expands Capabilities in Unmanned Systems through Acquisition

The Boeing Company completed the acquisition of Insitu Inc., a U.S.-based aircraft manufacturing company, on September 9, 2008, for an undisclosed consideration. Insitu is a pioneer in the unmanned air systems (UAS) market and a leader in the design, development and manufacture of high-performance, low-cost UAS used for intelligence, surveillance and reconnaissance. Insitu employs close to 360 employees and is expected to generate revenue of $150 million in 2008, a 70 percent increase over 2007. The acquisition is in line with Boeing's growth strategy to strengthen its presence in the unmanned systems market.

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Global Financial Services Industry Review Q3-2008; McGladrey Capital Markets

Sector Highlights - Wealth Management
Increasing Awareness, Accelerating Savings

401(k) Plans Plan Providers - Auto Pilot Participation Soars

Lower-cost technologies have enabled an abundance of company 401(k) plan and program administrators to offer improved features to small and middle-market companies. Once a benefit only enjoyed by employees of larger companies, neatly packaged programs are now efficiently 'rolled-out' to companies of all sizes. Critical to a successful turnkey program is the ability to deliver education, management tools and investment choices to participants.

Education is aggressively being tackled by most providers, whether through software subscriptions or outsourced administration companies. The ultimate goal is to increase employee participation. This goal has become so critical that many employers are adopting an auto-enroll feature requiring specific 'opt-outs' from employees wishing to avoid participation.

Sector Spotlight - Insurance Technology
Surfing the Globe for Process Management Improvements

According to a mid-year DataMonitor report, North American information technology insurance spending should begin to improve heading into 2009, while Asia Pacific IT spending will remain the same, which means it will continue to be a more robust technology spending marketplace than either North America or Europe. Of particular note is the emergence of smaller insurers, which have been the slowest to adopt policy administration business process outsourcing. The visible strategic shifts due to today's competitive marketplace and the availability of efficiently priced technology solutions not only reduces costs, but allows for their continued role as a nimble alternative to larger competitors by devoting greater resources to desirable value differentiating functions.

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Food & Beverage Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Growing Functional Foods Market

Consumers are increasingly interested in products, typically called nutraceuticals or functional foods, that have specific benefits beyond nutrition, such as safety, enhanced beauty, immunity, digestive health and cognitive enhancement. Therefore, sales and new-product introductions in functional foods are increasing at a rapid rate. U.S. consumers spent close to $27 billion on functional foods in 2007 and are expected to spend $36.7 billion in 2012. Consumers, who are increasingly concerned about health and wellness, are choosing products boasting healthful ingredients. (Source: Food Institute Report, July 2008)

Shifting Consumer Trends

Consumer taste is shifting from simple grains to healthier foods such as vegetables, fruits, meats and dairy. The U.S. food industry has undergone significant changes because of shifting consumer trends, particularly the growing preference for products providing health, convenience and indulgence. Increasing awareness about the link between certain foods and diseases, such as cancer and heart disease, has resulted in much greater awareness about the importance of high-fiber diets, thus encouraging consumption of wholemeal and mixed-grain breads. Additionally, new product innovations, such as omega-3 fatty acids, are being introduced and targeted to health-conscious consumers. On a long-term basis, living standards and consumer preferences are expected to change with increasing education levels globally. Variety will become increasingly important to consumers, and retailers will reward product differentiation and innovation as new products offer the best growth opportunities. As a result, manufacturers can become more competitive through innovation and new product introductions. Key consumer drivers include convenience, health/nutrition, affordability, taste/freshness, functionality and availability. (Source: “An Appetite for Change- Food and Beverage 2012,” Deloitte and Foodbusinessnews.net)

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Energy Services Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Service Sector Drives Industry Consolidation

In the third quarter of 2008, strategic players strived to diversify their portfolios and obtain global scale. As demonstrated by the acquisitions of Expro International, Saxon Energy Services and W-H Energy Services, activity in the service sector fueled transaction levels in the third quarter of 2008. The primary drivers of M&A in the service sector were the growth in demand for oilfield services, utilization rates for rigs, and the need for service companies to scale-up globally in a consolidating market. The share of service-sector M&A in total energy transactions increased from 4 percent in 2005 to 9 percent in 2006 and to 23 percent in 2007. For the first three quarters of 2008, energy service transactions accounted for 35 percent of total transaction volume. The average value of energy service transactions nearly tripled from $162 million in 2006 to $451 million in 2007 and remained at that level throughout the first three quarters of 2008.

Energy Plays Attract Private Equity Buyers

Although energy plays have not historically appealed to financial buyers, private equity groups have shown an increasing interest in participating in the ongoing industry consolidation. Attracted by strong cash flows and reasonable multiples, private equity groups have moved past their concerns about commodity price volatility and operating costs to become active players in the space.

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Engineering, Construction and Building Materials Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Since 2006, the new-home construction and home improvement industries have suffered from declining asset values exacerbated by rising mortgage interest rates. Even the once resilient remodeling market, which historically performed well during economic downturns, is lagging as home-equity values continue to decline. Unlike prior downturns, we expect this trend to continue for three primary reasons:

Declining home prices are reducing existing homeowners’ equity positions, thereby reducing the amount of capital available for cash-out refinancing.
Tighter lending standards have been implemented, resulting in higher rates for home equity loans. Accordingly, we expect levels of consumer borrowing against homes to decline.
Historically, 27 percent of home equity loans extended were used to fund residential improvements. From 2003 to 2006, this increased to approximately 40 percent as homeowners took advantage of above-average home appreciation and low interest rates. In turn, we expect remodeling to remain depressed until the second quarter of 2009, reflecting a reversion to mean spending rates. This trend is already emerging, as the level of cash-out refinancings has declined the last two quarters, down 28 percent and 52 percent, respectively.

In the News

Social and environmental issues have taken center stage, especially the potential threats from climate change and natural resource scarcity. The popularity of green building has become an integral part of the construction industry. Manufacturers must now evaluate their building products on the environment level as well as their business. Early adopters are well positioned to address the growing demand for LEED-certified 'green buildings' in new construction, as well as renovation. Green facilities typically require higher upfront costs for construction; however, they afford higher rent premiums and occupancy rates and lower operating costs. According to McGraw-Hill, the value of green building construction is projected to increase to $60 billion by 2010. The education, office and healthcare segments will account for more than 80 percent of total non-residential green construction in 2008.

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Chemicals Industry Review Q3-2008; McGladrey Capital Markets

Capital Raising and Acquisition Financing in the Market Maelstrom

It is hurricane season, and it seems every weekend a new storm hits the financial markets, rendering one's previous perception of the business realities obsolete. However, there are facts that remain true:

• Equity in the private market remains abundant and is seeking profitable investments; funds not put to work will have to be returned or the internal rate of return will be lowered for the next capital raise.
• Credit markets have tightened and are the major issue.
  There are well-capitalized banks and financial institutions in search of good transactions that will help them meet their revenue and profitability targets.
• There are fewer banks, less competition, and less appetite for risk. This translates into higher fees up front, higher spreads, and tighter covenants.
• A financially strong company with a good strategic plan can finance an acquisition…and so can a well capitalized private equity firm.

Recent Trends

Chemical Industry M&A Landscape: 2008 vs 2007

The chemical industry finished 2007 with record level M&A activity, primarily driven by consolidation among the strategics. Lyondell and SABIC led the charge with the two transactions representing over $31 billion in total value, or about one-third of total 2007 deal value. Private equity buyers also stepped up to the plate,weathering the storm amidst the financial markets, and completed three major transactions (Univar by CVC, VWR by Madison Dearborn and Sequa by Carlyle) at prices of approximately $3 billion each.

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Basic Industries Review Q3-2008; McGladrey Capital Markets

Key Trends - Spotlight on the Housing Markets

Inventories, Inventories, Inventories

Housing starts, new home sales and existing home sales are the headline points regarding the housing industry. In our opinion, inventories are the cornerstone and driver of the eventual recovery. Inventories, both in new and existing homes, are the lynchpin to the housing recovery, both in its timing and its scope. Underlying supply and demand fundamentals are key to the housing markets. Excess supply, in the form of months of inventory, causes downward movements along the price curve until equilibrium is achieved. This excess supply has arisen from two primary sources: excessive build out of new homes from 2004 through 2006; and the subprime/Alt-A mortgage markets.

In the News

The Multi-Billion Dollar Tourniquet

The announced proposal of a government-funded financial aid package (current estimates place the total package in the $500-$700 billion range) to purchase mortgage-backed securities from financial institutions is an important step in stabilizing credit markets. While it is not an absolute antidote by itself, it is a necessary component in the efforts to stabilize a credit system that has stalled in the face of uncertain counterparty risk among financial institutions. Banks' balance sheets are bloated with mortgage-backed securities whose underlying assets are loans based on non-standard provisions such as negative amortization schedules and significant stepup reset features commonto the subprime and Alt-A mortgage markets.

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Aerospace & Defense Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Elections and the Defense Industry

During their respective campaigns, presidential candidates John McCain and Barack Obama have both emphasized the importance of national security and have maintained that the core U.S. Department of Defense budget will grow roughly 4-5 percent per year. This growth will effectively continue the trend already seen in the latter years of the Bush Administration, during which core Defense Department spending increased roughly 6 percent For major defense companies, this steady growth outlook is likely to attract investors, even during the current uncertain economy, with the exception being contractors having major exposure to the supplemental budget as the Iraq War winds down.

Cancellation of the KC135 Bidding

In June 2008, the Pentagon cancelled the $35 billion contract to build the next generation of U.S. Air Force tanker refuelers after the congressional Government Accountability Office concluded that the Boeing proposal for the contract did not undergo a fair review and proposed a fresh bidding process for the contract. Originally awarded to the European Aeronautic Defense and Space Company and Northrop Grumman, the contract was the first of the three that, when combined, could reach a value of $100 billion over 30 years. Political scrutiny surrounded the contract, as members of Congress opposed handing the contract to a European firm at a time when the U.S. economy is struggling.

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RSM EquiCo Capital Markets is Renamed McGladrey Capital Markets

Global investment bank RSM EquiCo Capital Markets LLC, one of the nation’s most successful merger and acquisition advisory firms, has changed its name to McGladrey Capital Markets LLC (www.mcgladreycm.com).

The firm’s new identity reflects its closer integration with RSM McGladrey, Inc., one of the nation’s largest providers of accounting, tax and business consulting services. Both firms are indirect subsidiaries of H&R Block, Inc. (NYSE: HRB).

Media, Entertainment & Gaming industry review Q2-2008; RSM EquiCo Capital Markets

Content is Still King

Content vs. distribution, the long-standing debate in the world of media, may have finally anointed a clear winner: content. Years before the advent of cable television, the Internet, satellite radio and the numerous other distribution channels in the market today, companies that controlled distribution were regarded as the “gatekeepers.” Content providers battled over airtime and the gatekeepers chose the victors. As each new distribution channel was introduced, the number of consumer viewing options multiplied, reducing the power of the gatekeepers.

Rather than simply provide access to content, media companies discovered a need to aggregate quality content in order to attract the consumer. Comcast's $51 billion acquisition of AT&T in 2002 provided Chief Executive Brian Roberts with nearly 60 percent of all cable/satellite television subscribers, leading market mavens to speculate the return of the gatekeepers to power. This speculation resulted in a spate of acquisitions as News Corp., Time Warner and other media giants fought to keep pace. But as HBO, ESPN, USA Networks and other powerful cable networks have shown, the experts miscalculated the power of the consumer. With the growing reach of the Internet—through streaming media sites such as Hulu and YouTube, social networking sites including Facebook and MySpace, news aggregators like Digg, and the ubiquitous blogging community—the options available to the consumer have never been greater. Read complete report.

Healthcare industry review Q2-2008; RSM EquiCo Capital Markets

Healthcare Information Sharing

Advances in information technology have enabled better gathering, processing, management, and distribution of data. Nevertheless, less than one third of all U.S. hospitals and less than 20 percent of physicians' offices have meaningful forms of electronic data handling capability. As a result, IT spending is likely to remain robust for the foreseeable future.

Two areas of particular interest involve interoperability of healthcare systems and patient information management. Interoperability of health systems enables information exchange between hospitals and other facilities in order to improve the quality, efficiency, and effectiveness of treatments. In June, the Certification Commission for Healthcare IT (CCHIT) published its approved criteria for certifying certain electronic-health-record products, and they will begin accepting applications as early as August. Organizations such as CCHIT and the Healthcare Information Technology Standards Panel are committed to the adoption of widely accepted interoperable healthcare IT standards throughout the United States.

Concerning patient information management, Longs Drug Stores Corporation announced a partnership with Google to launch Google Health, a platform for linking Longs' pharmacy clients with doctors and healthcare providers in order to manage their electronic medical records. Separately, Kaiser Permanente has teamed up with Microsoft to launch a pilot program that would allow Kaiser's members to store their personal health information securely online using Microsoft's Health Vault. Read complete report.

Government Services industry review Q2-2008; RSM EquiCo Capital Markets

Key Topic: Beyond the Beltway - Huntsville, Alabama

The release of the Defense Department's 2005 Base Realignment and Closure (BRAC 2005) transformation put Huntsville, Ala. on executive whiteboards throughout the government services and defense community. BRAC 2005 effectively cements Huntsville's position as the center for U.S. missile technology by realigning the Missile Defense Agency and the U.S. Army Space and Missile Defense Command with the Army Aviation and Missile Command and the Aviation & Missile Research, Development and Engineering Center at Redstone Arsenal and NASA Marshall Space Flight Center.

The Missile Defense Agency, part of the Defense Department, facilitates missile defense systems development that integrates multi-service capabilities into a seamless theater-defense system. It is also responsible for guiding the development of a missile defense system capable of defending the United States from foreign missile attack. Space and Missile Defense Command is responsible for developing the Army's missile defense systems and assuring the Army's access to and utilization of space access in the execution of its mission.

Senior leaders from the Beltway and beyond have taken note and many are actively building a presence in northern Alabama. Following is a timeline highlighting the recent migration to Huntsville. Read complete report.

Global Financial Services industry review Q2-2008; RSM EquiCo Capital Markets

Sector Highlights - Specialty Finance
Sovereign Wealth Funds - Controversial Value

Wobble or topple? Which word will come to mind should another $55 billion evaporate out of the U.S. and European financial institution communities? Since the fourth quarter of last year, Sovereign Wealth Funds have poured about $55 billion into U.S. and European financial institutions, to the great benefit of their shareholders and customers. And this number is expected to growth further.

Questioning the steady stream of SWF capital infusions has become the fodder of politicians, lobbyists, protectionists and bloggers, among others. Yet alternative solutions on par with the magnitude of needed capital have yet to surface. With many of our financial institutions taking massive hits due to bad risk management and investments, the foreign capital has enabled balance-sheet strengthening and saved more than a few shareholders and taxpayers from painful results. Using SWFs to redistribute surplus wealth to those in need is a huge benefit to our capital system. Where are the Democrats when you need them? Read complete report.

Food & Beverage industry review Q2-2008; RSM EquiCo Capital Markets

Consumer Shopping Habits are Changing

A recent survey on food shopping in 2008 indicates that increased fuel and food costs are influencing how consumers shop, cook and dine. So far in 2008, families are eating their main meal at restaurants only 1.2 times per week, down from 1.3 in 2007 and 1.5 in 2006. Although retailers are benefitting as consumers eat at home more often, shoppers are making fewer two trips per week due to higher fuel costs.

Grocery spending has increased by 4.9 percent to a weekly average of $97.80 so far in 2008, up from $93.20 in 2007, exceeding food-at-home inflation of 4.2 percent over the same period. Some 48 percent of consumers claim their grocery-shopping patterns are being impacted by higher prices, up from 41 percent in 2007. In 2008, shoppers are changing their overall behavior: 48 percent are purchasing fewer food items, up from 40 percent in 2007, while 40 percent are purchasing more canned, frozen or boxed food items as opposed to fresh, non-preserved food, up from 30 percent in 2007. Read complete report.

Energy Services industry review Q2-2008; RSM EquiCo Capital Markets

Valuations Rise Rapidly as Competition for Deal Flow Intensifies

Although overall M&A deal volume declined in the second quarter of 2008 as global credit markets tightened and leverage became sparse, activity in the renewable energy sector remained strong. The industry continued to consolidate as companies sought to expand their energy-generation capacity through strategic acquisitions. The escalating competition for deal flow, particularly among the large, international power companies and specialized renewable energy companies, put upward pressure on valuation multiples. While it is still difficult to determine appropriate values for renewable energy transactions, average valuations increased to $4.2 million perMWof operating capacity. Compared to the cost of recent greenfield developments for approximately half that amount per MW, it appears that buyers are increasingly willing to pay significant premiums for attractive targets. Read complete report.

Engineering, Construction and Building Materials Industry review Q2-2008; RSM EquiCo Capital Markets

Global Infrastructure Growth

Global infrastructure spending is estimated to average $2 trillion annually through 2015, fueled by population growth, urbanization and industrialization. More than half of that spending is forecast to occur in emerging economies, driven by favorable regulatory policies, improved government finances and increased private-sector participation. Developing countries such as China and India have set ambitious infrastructure targets. China is earmarking over $543 billion for infrastructure expenditures from 2006 to 2010. Meanwhile, India is budgeting $494 billion for the next five-years (2008-2012) and $989 billion from 2013 to 2017.

The U.S. infrastructure is “aging and inadequate,” which will drive infrastructure expenditures. Recent commentary by E&C companies regarding infrastructure needs, backlog and order trends bodes well for continued strength in the infrastructure related end-markets. Read complete report.

Chemicals Industry review Q2-2008; RSM EquiCo Capital Markets

Recent Trends

These are extraordinary times for the industry, with major producers announcing 40-45 percent price increases during the past two months in response to skyrocketing raw materials costs. With oil at $135 a barrel, one might expect the chemical industry to be suffering — and it is in specific sectors. Yet the questionwe keep hearing is: “Can I get the product?” Price concerns are much less important.

During the past year, the United States has again become an attractive place to produce chemicals, largely because of the soft dollar. Recently, the nation's appeal has been further enhanced by the rising cost of shipping, which has made Asian and Middle Eastern bulk-chemical suppliers less competitive. Despite the slowdown in the U.S. economy, the domestic market is still significant, and a production base in the United States has become almost mandatory for European producers, most of which have seen significant margin decreases due to the strong euro.

The result: some U.S. plants are gaining new life…and some companies are becoming highly attractive to international buyers. Read complete report.

Basic Industries review Q2-2008; RSM EquiCo Capital Markets

Logistics Growth Rates Average Four Times that of GDP

The U.S. Gross Domestic Product growth rate is an accurate leading indicator for the annual growth rate of the third-party logistics (3PL) market. The 3PL market has grown at an average rate of more than four times that of the overall economy since 1998 . The primary growth factors for logistics outsourcing (besides general economic growth) include the desire of 3PL customers to concentrate on core competencies, reduce aggregate logistics costs, and improve supply-chain efficiencies through economies of scale.

These drivers traditionally move in an inverse relationship with the economy and actually increase during economic slowdowns, as many 3PL customers increase cost-cutting measures. Figure 1 (see the full report for image) illustrates the correlation between U.S. 3PL market growth and U.S. economic growth as measured by GDP.

For 2008, forecasted growth for the U.S. 3PL market involves modest growth of 8 percent, from approximately $119-$124 billion in 2007 to an estimated $125-$134 billion for 2008. Figure 2 shows 3PL growth through 2008. Read complete report.

Aerospace & Defense industry review Q2-2008; RSM EquiCo Capital Markets

Key Trends

High Jet Fuel Prices Challenging Financial Health of the Airlines

The current operating environment for the commercial airline industry presents a set of unprecedented challenges that may threaten the viability of even the largest fleet operators. A combination of $143 a barrel oil and a weakening global economy has forced over 20 airlines into bankruptcy this year and caused many others, including Air Canada, Qantas, and US Airways, to reduce capacity. Today's oil prices have reduced the financial effectiveness of capacity cuts, as even full planes are not cash-flow positive at these levels. Drastic measures such as fuel surcharges and baggage fees may not be sufficient to return the airlines to profitability. Operators are struggling to generate a profit as the rise in fuel prices has increased fuel expenditures to between a third and a half of most carriers' operating costs. In the equity market, volatility surrounds the sector as analysts have questioned the ability of industry participants to adapt to high oil prices.

The difficulties facing the airline industry have caused concern over the health of the order book for new commercial aircraft, since the order book is only as healthy as the customer accepting delivery. Over the near term, orders appear secure as the initial deliveries are going to international, regulated airlines that generally are in stronger financial condition. Uncertainty arises when the unregulated, mostly U.S.-based airlines are due to accept deliveries in 2010 and 2011. The effect on the global supply chain is unclear, as the airline industry must face the difficult decision of buying new, more fuel-efficient aircraft or cancelling orders in order to conserve cash. Read complete report.

Technology industry review Q1-2008; RSM EquiCo Capital Markets

Internet Software

M&A Activity in Gaming Software Industry Heats Up

• Premiere Entertainment Productions Inc. acquires online gaming capabilities by purchasing Digiwave Solutions Inc.
• Electronic Arts Inc. announces acquisition of Take-Two Interactive Software Inc. for its interactive gaming capabilities
• 360 Holding AB announces acquisition of Pokerstaker Ltd. for its online poker offerings
• SoundBite Communications Inc. acquires Mobile Collect Inc. for its e-gaming software offerings
• PEIC Acquisition Corp. announces acquisition of Parlay Entertainment Inc. for its Internet-based gaming and entertainment software

Read complete report.

Rubber & Plastics industry review Q1-2008; RSM EquiCo Capital Markets

Outlook for Commodity Resins

Commodity resin prices are off to a tumultuous start in 2008, with prices for polyethylene (PE), polypropylene (PP) and PET seeing recent drops and PVC stubbornly holding on to gains. Softer-than-expected demand and slow export business led to declines in PE prices, causing manufacturer margins to increase, which in turn led PE buyers to seek lower prices from their suppliers. The decline in exports has left North American manufacturers pleasantly surprised at how well domestic demand has held up in early 2008. PP and PE (especially HDPE) continue to benefit from the soft value of the U.S. dollar, which has effectively made the U.S. a low-cost supplier of those resins. After some difficult production and consolidation decisions made in 2007, the remaining resin producers are intent on rebuilding margins. By reducing overall capacity, forecasting resin production to better track fluctuating demand should become easier and eventually place pricing power solidly back in the hands of producers. Current expectations are that resin prices will average 5-10 percent higher in 2008 than in 2007. Read complete report.

Recreation & Leisure industry review Q1-2008; RSM EquiCo Capital Markets

Key Trends

The recent economic slowdown has negatively impacted many industries, including recreation and leisure. U.S. economic growth was nearly flat during the last three months of 2007, according to the U.S. Commerce Dept. Also, consumer confidence sank to a five-year low in March as tight credit markets, rising prices and worsening job prospects deepened worries that the economy has fallen into recession. Several sectors of the $115 billion sports and recreational products industry have been affected by the slowdown in demand, particularly higher priced products like pleasure boats and RVs - not surprising in light of the squeezing of discretionary income. However, several sectors have been bright spots, including those tied to outdoor activities such as golfing and bicycling, as well as health and fitness. The following describes recent news and outlook in these three sectors. Read complete report.

Healthcare industry review Q1-2008; RSM EquiCo Capital Markets

Healthcare Consumerism on the Rise

Educated healthcare consumers are beginning to realize differences in the performance of healthcare plans and providers. Concurrently, there are a number of useful consumer tools, mostly Internet-based information sources, that are enabling these consumers to become more engaged in their healthcare decisions and purchases. In 2008, this consumerism movement will challenge health plans to develop innovative and affordable insurance products that encourage personal accountability. Consumer directed health plans (CDHPs) have been the standard bearers of this movement. These plans, which typically feature high deductibles and consumer-controlled savings accounts, are designed to increase consumer awareness about healthcare costs and provide incentives for consumers to consider costs when making healthcare decisions. Recent studies by PricewaterhouseCoopers show a lower medical cost trend in these plans, which is expected to result in increased adoption by employers and employees. Additionally, certain tax advantages received by CDHPs have led to an increase in their popularity. Though only 4 percent of the commercially insured population is currently enrolled in CDHPs, the market share of these plans is expected to triple by the end of 2008. Read complete report.

Government Services industry review Q1-2008; RSM EquiCo Capital Markets

Key Topic: The Defense Department's Reset Program

Since the onset of major military operations in Afghanistan and Iraq, in-theater systems and equipment have been deteriorating at rates far exceeding normal peacetime levels. The Army maintains that increased operating tempos and harsh conditions in the theater are causing its equipment to wear out prematurely. In general, the Army's major systems and equipment are operating at rates that exceed sometimes by factors of five or six their average operating rates in peacetime.

In response, the Defense Department has instituted and funded programs specifically to combat the deterioration and loss of these systems and equipment. From 2003 through April 2008, the Army alone will have spent over $55 billion to compensate for deterioration and loss of in-theater systems and equipment as shown above. Furthermore, department-wide spendingmay be as high as $92 billion over the same time period based on Congressional Budget Office estimates. Read complete report.

Global Financial Services industry review Q1-2008; RSM EquiCo Capital Markets

Data Processing Services
Follow the Money, All the Way to the Bank

Operating under the stress of a highly “transaction-oriented” environment, the global financial services industry (banking, financial and insurance companies) continues to have a significant impact on business process industry growth. Not only are financial services companies aggressive and demanding users of business services; they also are major stakeholders through their ownership positions in seven of the top 10 business service providers, asserting their powerful influence on new products and services, e-commerce settlements and the lucrative financial relationships needed by every business client. Read complete report.

Food & Beverage industry review Q1-2008; RSM EquiCo Capital Markets

Flavors Influencing Demand

Taste, convenience and health continue to be the primary drivers of food choices. In 2008, growing popularity of ethnic food is expected to drive demand for food flavors. Greek, Lasian (Latin and Asian fusion), Korean, Cuban and Japanese food are expected to become more mainstream. In 2008, “sensory irritants” like peppercorns that stimulate aging Baby Boomers' palates are expected to become increasing popular. Flavors crossing categories will be popular as well, with coffee, pomegranate and wasabi leading the way. Drinkable and bite-sized desserts, and cheese as a dessert are among those predicted to be the next fads. (Source: Packaged Facts, 2008) Read complete report.

Energy Services industry review Q1-2008; RSM EquiCo Capital Markets

M&A Q1 Review and Outlook - Oilfield Services

Overall M&A deal volume in the oilfield services sector declined in the first quarter of 2008 as the global credit markets tightened up and leverage became sparse. A closer look at the data reveals a bifurcated market, with the so-called “mega-deals” (over $1 billion in transaction value) experiencing a substantial slowdown, while the middle market and especially the emerging middle market (deals under $100 million) are continuing a strong deal pace. In Q1 2008, 54 deals were closed in the sector, compared with 88 during the same period a year ago, a 39 percent decline. Total deal value declined to $6.2 billion in Q1 2008, compared to $12.8 billion in Q1 2007, as smaller deals captured a larger share of deal volume. Average valuation multiples also declined, from 16.1x EV/EBITDA in Q1 2007 to 11.6x EV/EBITDA in Q1 2008, as a result of credit market conditions and smaller average deal sizes. Read complete report.

Engineering, Construction & Building Materials industry review Q1-2008; RSM EquiCo Capital Markets

2008 Industry Outlook

We are cautiously optimistic about companies that serve the commercial market, which we expect to grow, albeit at a decelerating pace. Meanwhile, we expect infrastructure construction to grow in 2008 due to increased highway funding, with a continuing favorable pricing outlook. E&C companies with improved cash flows will accelerate M&A activity in 2008, particularly within the infrastructure upgrade and build-out, upstream oil and gas, and nuclear decommissioning sectors. The green building movement will continue to be driven by rising energy costs, strained water supplies, and environmental awareness. We expect green-building M&A activity to accelerate in 2008, which will likely lead to higher valuations in this niche segment of the building materials industry. Furthermore, aggregates will continue to be sought after and command aggressive pricing. In conclusion, we believe opportunities exist for international strategic and private equity groups to acquire overleveraged companies at attractive valuations. Read complete report.

Chemicals industry review Q1-2008; RSM EquiCo Capital Markets

Overview

M&A activity in the chemical industry peaked in 2007, finishing the year with an estimated $82 billion in total transaction value, a 14 percent increase over 2006. This result was expected, as deal volume in the industry has increased dramatically over the past three years. Cross-border transactions are also driving significant deal activity as cash- and resource-rich buyers begin to diversify globally. For example, the two largest deals in 2007, Basell's acquisition of Lyondell and SABIC's acquisition of GE Plastics (which collectively represented over $31 billion in transaction value), were both cross-border transactions. RSM EquiCo is also experiencing this global diversification first hand, as we are receiving more inquiries from strategic buyers in India looking to invest in and increase exposure to North American and European markets. Read complete report.

Basic Industries industry review Q1-2008; RSM EquiCo Capital Markets

Spotlight on Raw Materials

Fueled primarily by growing demand from China, India and other developing countries, commodities of all types, particularly those used in manufacturing processes, have exhibited dramatic price increases over the past year. The CRB Metals Index, which tracks a basket of raw materials and includes copper, zinc, steel scrap, tin and lead scrap, increased 46 percent in the 13 months ended February 29, 2008, outpacing the aggregate CRB Commodities Index's near 30 percent rise over the same period. The current pricing environment is somewhat disjointed from the underlying fundamental economic supply/demand function. The long-term outlook for raw materials used in basic infrastructure and manufacturing continues to be positive. However, speculative investment capital has poured into commodities, from oil and gold to copper, aluminum and zinc, as noted in the aforementioned CRB Metals Index.

In general, the most likely scenario we see unfolding is for most commodities to moderate in price as sentiment shifts from safe-haven investing and inflation hedging to a global slowdown mentality. While the rest of the world is not likely to follow the road of sluggish growth to the same degree as the United States, reduced U.S. consumption will negatively affect growth in some regions, notably Japan, China and Europe. These tempered short-term expectations are likely to take some of the speculative excess out of the current pricing environment, without changing the long-term secular trend. Read complete report.

Aerospace & Defense industry review Q1-2008; RSM EquiCo Capital Markets

Key Trends: Boeing Loss to Northrop Creates Stir

The $1.5 billion initial U.S. Air Force ASC award to Northrop Grumman for the new KC-45 refueling tanker has created ripple effects on the U.S. supplier base that are being intensely debated. The award, which has the potential to grow to $35 billion, not only puts Northrop in a favorable position on future transport aircraft, but it also has given Airbus an important foothold in the U.S. market, since the winning proposal featured the European designed A330.

Following the decision, both Boeing and politicians on Capitol Hill protested that the award will sacrifice American jobs and opportunities. The validity of that point is debatable, since the new KC-45 will be assembled at manufacturing facilities in Mobile, Ala. by 25,000 American workers. This issue highlights the ongoing trend towards globalization of aerospace and its associated pains.

On one hand, this award, based on a stringent set of technical specifications, will provide U.S. troops with the best possible equipment at the lowest cost to the American taxpayer. On the other, Department of Defense dollars will directly benefit a non-U.S. company. While the overall net effect is uncertain, it is clear the issue of globalization will continue to dominate headlines and directly affect future contract awards. Read complete report.

Technology industry review Q4-2007; RSM EquiCo Capital Markets

Internet Software

Financial Securities Service Sector Heats Up

• Credit Suisse Private Equity announces acquisition of online trading solutions provider Thomson TradeWeb, LLC
• Euronext N.V. acquires Atos Euronext Market Solutions for its IT solutions offerings to financial companies
• HSBC Trinkaus & Burkhardt AG announces acquisition of securities service provider International Transaction Services GmbH
• Pension GHCO announces acquisition of First Capital Group, LLC for its high speed connectivity to theworld's futures markets

Consolidation in Online Travel Software

• Priceline.com, Inc. acquires Agoda Company Pte Ltd for its specialized hotel discount booking services
• HomeAway, Inc. acquires online vacation rental booking company, Owners Direct Holiday Rentals Limited
• Travelguru.comannounces acquisition of Desiya.comfor its online hotel booking services

Read complete report.

Rubber & Plastics industry review Q4-2007; RSM EquiCo Capital Markets

Raw Material Price Increases Cause Instability

Due to the Saudi and Dow Taft outages, ethylene glycol (EG) prices have risen 40 percent from Q3 to Q4. The shortage of EG, coupled with historically high energy prices, has led to a subsequent increase in raw material costs for polyethylene terephthalate resin (PET). In response, producers of PET have aimed to raise their contract prices again in December by a consensus of $0.02-0.04/lb. Unfortunately, the pass-through of costs to customers has yet to make headway for profit margins as most producers began to tread into negative territory in late 2007 with no sign of relief expected in 2008. On the rubber side of things, most tire makers are set to increase their prices by 5-7 percent over the next few months. These price hikes are a direct result of the year-over-year increases in natural and synthetic rubber prices. However, in Q4 raw material prices remained relatively flat as the increase in synthetic rubber prices (+5.3 percent) was offset by a decline in natural rubber prices (-3.8 percent) from October to November. Industry consolidation should continue as strategic players aim to achieve sustainable economies of scale and increase market share. Read complete report.

Recreation & Leisure industry review Q4-2007; RSM EquiCo Capital Markets

U.S. Health Club Industry

According to the International Health, Racquet & Sportsclub Association, U.S. health club memberships experienced a compound annual growth rate of nearly 5 percent from 22.9 million in 1993 to 42.7 million in 2006. The major growth drivers for the $17.6 billion U.S. fitness and recreational sports clubs industry are demographic trends and the relatively recent trend toward health-consciousness in the United States in response to the rising prevalence of obesity.

In the past, fitness clubs had relied mainly on customers from age 20-45 to generate new and recurring revenue. With tens of millions of “Baby Boomers” now making up a significant proportion of the American population, fitness clubs have had to broaden their focus to include older members. For clubs seeking to capitalize on this changing demographic trend, this presents compelling opportunities for growth. People are living longer and are continuing to focus on personal fitness through their older years. Awareness of the health benefits of physical fitness and of the risks of sedentary behavior has significantly increased. Concerns over obesity have reached the point where many believe it to be an epidemic of American society. Nearly 60 percent of adults in the United States are considered overweight or obese. According to the 2007 Trust for America's Health Report entitled “F as in Fat,” obesity rates have not declined in a single state year over year. In fact, adult obesity rates rose in 31 states last year, with 22 states experiencing an increase for the second year in a row. There should be plenty of growth ahead for the industry as less than 15 percent of the population belongs to a health club, according to the IHRSA. Read complete report.

Healthcare industry review Q4-2007; RSM EquiCo Capital Markets

Industry Growth Continues

Rising income levels, an aging population and technological advances have contributed to the growth of he healthcare industry in 2007, which is expected to continue to outpace the overall economy in the next decade. U.S. healthcare spending is estimated to reach $4.1 trillion by 2016, more than 19.6 percent of GDP, according to the most recent projections by the Centers for Medicare and Medicaid. Although this long-term growth is expected to affect most healthcare markets, Global Insight expects the ambulatory healthcare market, particularly home health services, to benefit the most. The ambulatory healthcare market, which comprises establishments primarily engaged in providing skilled nursing services in the home, grew 6.3 percent in 2007 and is expected to see revenue growth of 6 percent in 2008. This growth is due to several factors, including aging demographics, a decline in the number of hospital beds per capita, increasing consumer awareness in home health services and new technology allowing more healthcare procedures and services provided in the home. Read complete report.

Government Services industry review Q4-2007; RSM EquiCo Capital Markets

Federal Civilian Workforce

Since the early 1990s, the federal civilian workforce has contracted 34 percent while the federal budget outlay for human resources has expanded by 73 percent, on a constant-dollar basis, over the same time period.

We believe this represents a structural shift that will keep the defense budget fromreturning to cycle lows and may serve to continue the uptrend. Furthermore, fundamental growth trends for the government services outsourcing market remain strong due to several reasons:

• Reduction in the federal civilian workforce: At its lowest level since the 1960s
• Government's need to modernize legacy information systems: More complex operational, network and logistics systems
• Transformational efforts within the Department of Defense: Streamlined mobile military force
• Global war on terror: Budget environment support has been robust for GWOT; Increased spending by the Department of Homeland Security
• Increased use of private sector outsourcing: The Bush Administration prefers outsourcing solutions for political and economic reasons

Read complete report

Global Financial Services industry review Q4-2007; RSM EquiCo Capital Markets

Sector Round Up – Financial Technology

According to Kimsey Consulting, global expenditure on trading and related technology and services was an estimated $45.8 billion in 2007. Globally, the largest single country market is the United States, accounting for an estimated 35 percent of total global spending on trading and related technology and services. The second largest market is the UK, accounting for approximately 14 percent of spending, says Kimsey. In regional terms, Europe is the largest market, with an estimated $19 billion being spent in 2007. In comparison, Asia/Pacific spent around $7.5 billion.

Expenditure on applications and associated hardware and services is calculated at an estimated $28.8 billion, almost three times the amount spent on market data information. Expenditure on telecommunications into the dealing roomwas an estimated $6 billion.

The report forecasts that although growing economic uncertainty is likely to see mature markets remaining comparatively static, the ongoing development and expansion of financial, commodities and energy trading activity in emerging markets will support continued growth in financial technology investment through 2008. Read complete report.

Food & Beverage industry review Q4-2007; RSM EquiCo Capital Markets

Nutritional Value-Based Food Ratings on the Rise

According to The Food Institute's December 2007 report, the Delhaize Group-owned Hannaford Supermarkets intends to license its Guiding Stars® nutrition navigation system to supermarket chains, vendors, healthcare groups and others in early 2008. In 2006, Hannaford introduced the program, which rates foods from zero to three stars based on their nutritional value. Of the more than 25,000 items rated, 28 percent received one, two or three stars. The program is currently in place at 164 Hannaford Supermarkets throughout the Northeast and 106 Sweetbay stores throughout Florida. Topco Associates LLC recently introduced its own food scoring system called the Overall Nutritional Quality Index, which gives an at-a-glance comparison of foods based on overall nutritional quality. The Index was developed by a panel of 12 health and nutrition experts and scores products across all food and beverage categories on a scale of one to 100. Topco aims to introduce the program to retailers, manufacturers, restaurants and online. Read complete report.

Energy Services industry review Q4-2007; RSM EquiCo Capital Markets

Industry Outlook

This past year was an exciting one for energy sector M&A. With oil prices nearing $100 per barrel and the issue of global warming putting the spotlight on alternative energy, M&A and funding activity in the sector increased over 2006. In 2007, 1,514 deals were announced in the global energy sector for a total value of $282.8 billion, compared with 1,356 deals and $266.4 billion in 2006. Although the total number of M&A transactions in North America increased by 3.6 percent in 2007, the charts below indicate that North America's share of total deals fell from 61 percent in 2006 to 58 percent in 2007. This was driven by strong activity in the rest of the world and by lower M&A activity in Canada, where drilling activity declined in 2007 and share prices of Canadian oilfield services trustswere generally depressed. Energy M&A activity in 2007 was particularly strong in Latin America and Europe (including Russia), where deal activity increased by 75.7 and 31.6 percent respectively. While the headlinegrabbing billion-dollar-plus deals were up 7 percent over 2006, the middle market experienced the strongest growth in 2007; deal activity in the $100 million to $500 million size increased 41 percent over 2006. Read complete report.

Engineering, Construction & Building Materials industry review Q4-2007; RSM EquiCo Capital Markets

Strong End Markets for E&C Companies

Continued strength in end markets, particularly in oil and gas, mining, industrial and infrastructure sectors, should drive growthfor engineering and construction companies, which are expected to benefit from new capital spending cycles in federally funded transportation, power (coal and nuclear) and nuclear remediation sectors. New power plants, retrofits and upgrades of existing plants (environmental controls) continue to provide growth opportunities. Currently there are 21 proposed nuclear power plant sites identified by the Nuclear Energy Institute in the United States Aging facilities are also providing demand for aftermarket services. Near-term opportunities are service and replacementwork for the aging fleet of nuclear power plants. Demand for engineering, procurement and construction services in the transportation sector continues to be robust. According to Granite Construction Inc., approximately one quarter of U.S. highway bridges need repair or replacement in the near term. The collapse of the I-35W Mississippi River Bridge in Minneapolis was a wake-up call for the Federal Highway Administration, which issued a strong technical advisory to all State DOTs and other bridge owners to immediately re-inspect similar bridges. On November 1, the FHWA released a total of $183.5 million to help rebuild the bridge. In late November, the FHWA awarded $1.59 million in grants to five companies developing innovative technologies to improve highway quality and safety. Read complete report.

Chemicals industry review Q4-2007; RSM EquiCo Capital Markets

Strategic players in the chemical industry are weathering the downturn with stronger balance sheets

In contrast to the 2001 economic downturn, major chemical industry players have improved balance sheets with average leverage hovering below1.5 times net debt-to-EBITDA ratio. This is generally a result of lessons learned after 2001, a better-thanexpected pricing environment, and the exercise of spending discipline. The financial strength of strategic buyers will likely result in numerous transactions where they will have the upper hand, especially large transactions (above $500 million), which are extremely difficult for private equity firms to syndicate under current credit conditions. Read complete report.

Basic Industries review Q4-2007; RSM EquiCo Capital Markets

Spotlight on Packaging

The packaging industry's multiple subsectors exhibit very different dynamics depending on the raw materials used in the manufacturing process. Paper-based packaging producers (primarily paperboard and containerboard) were finally able to push through price increases during the beginning of the fourth quarter, despite somewhat muted demand. Non paper-based packaging producers (plastics, glass and various metals) continue to come under pressure as prices of underlying commodities used in the production processes (principally plastic resins and metal ores and alloys such as aluminum and tin) continue to outpace overall inflation, as measured by the core PPI Index. Read complete report.

Aerospace & Defense industry review Q4-2007; RSM EquiCo Capital Markets

Aerospace and Defense Outlook for 2008

The commercial aerospace market has strengthened considerably, with executives generally projecting very favorable conditions for growth through at least the next three years. The phrase “super cycle” has been used to describe the momentum currently flowing through the global commercial aerospace supply chain. As testament, 2007 was a record year in terms of commercial aircraft deliveries, with Boeing and Airbus delivering 440 and 455 aircraft respectively. Looking forward to 2008, there are more than 2,300 open orders for commercial aircraft with scheduled deliveries through 2010. Domestic carriers, as a combined group, have pent-up demand for more than 1,000 replacement aircraft over the next five years as the commercial fleet continues aging to an unhealthy level of nearly 25 years, on average.

The defense market is a bit less certain, as sentiment has shifted toward a more neutral stance regarding levels of future operations and funding. This is in stark contrast to the sentiment witnessed over the last several years of budget growth. The delays in funding caused by seemingly endless political impasses, combined with the upcoming presidential election, have only heightened investors' concerns about the long-term outlook for the sector. Many see the sector as being under pressure beyond 2008, with less emphasis being placed on programs correlated to supporting ongoing operations abroad. Read complete report.