Still cautious on US Tech, buy on dips (page 2 of 2)

Industry bellwethers such as Intel, Microsoft and IBM issued rather cautious comments about the economic recovery but broadly met or exceeded earnings forecasts. We do not consider the current uncertainty as the end of the recovery that started last October. We view the current wobble in sentiment as a buying opportunity. We are encouraged by economic and earnings reports steadily showing signs of improvement and valuations coming back to more reasonable levels.

So far 107 S&P 500 companies have reported 4Q01 earnings and results are coming in above expectations. 62% of companies have reported above expectations and just 10% have announced results below. At the sector level we find that cyclicals and technology are providing the greatest positive surprises.
These results bode well with our findings in Europe. Our European earnings revisions scorecard shows that 12 of the 15 cyclical industries have shown an improvement in their earnings revision rank in January relative to December. The biggest improvers were mining, construction, forestry & paper and general retail. Among these sectors we recommend Lafarge (LG FP; EUR 98.80), Stora Enso (STERV FH; EUR 14.40) and Pechiney (PEC FP; EUR 59) even though the latter is not a real mining stock.

With many investors only just beginning to see improving sentiment in earnings, we believe the most recent pull-back in cyclicals provides a buying opportunity and is not the beginning of a longer-term downward trend.

The sectors to see a deteriorating rank include the defensives, software and financials.

Stora Enso (STERV FH; EUR 14.40) came under pressure after a report showed higher pulp inventories in Northern America. We do not believe that the rise has any significant impact on the paper industry's fundamentals. We are not concerned about the direction of pulp prices short term as the historical link between paper prices appears to have been cut. In contrast to pulp, paper inventories are in good shape (low), supply discipline is holding and as a result prices are holding up at healthy levels. We believe that rising pulp deliveries partially reflect a strong recovery in order inflow to European paper mills. Pulp is not important fundamentally but has a negative impact on sentiment for paper shares. Hence we recommend using the current negative sentiment to buy our preferred cyclical stock, Stora Enso, at current levels.

ASML (ASML NA; EUR 20.60) reported slightly disappointing 2001 earnings. ASML announced a loss of EUR 479 million or EUR 1.03 per share. The outlook of the company remained very cautious and the management reiterated that the recovery would not happen before 2H02. However, despite the cautious statement the stock's fall was probably more affected by Intel's cut in capital spending. While this will undoubtedly affect ASML negatively we would argue that ASML will not experience the full 30% cut of Intel's capital spending. ASML's strong product line in the 193nm and 300mm products will be the area where companies continue to spend. There were a few positive points in ASML's report that support our positive view on the stock, even if the story might be delayed by a few months. The average selling price (ASP) of new systems rose 18% last year, which should help to bridge the time until the recovery sets in. Additionally cancellations are easing telling us that the worst should be behind us. We think ASML is extremely well positioned to increase market share going into the next capex upcycle. ASML remains a must-own in the semiconductor industry.

During the annual shareholder meeting Siemens' CEO (SIE GY; EUR 72.35) said that new orders and sales had increased in the December quarter vs. last year. The IC Mobile unit probably broke even in this period and earnings might be significantly higher compared to the September quarter. Although concrete figures will only be released on January 23 we view Siemens' optimism as a good sign for the share price. Siemens remains a promising story with an attractive mix of cyclical and technology exposure. We see big scope for improvement and believe that the management is willing to unlock this potential. We reiterate our buy recommendation on Siemens with a price target of EUR 80.