Equity markets in Europe remained depressed for another week as economic data fail to convince inves (page 1 of 3)

International Business Machines Corp. (IBM, $83.10, CSFB recommendation: Hold) stock price remains weak. The company is in the process of evolving through different business categories. This would give the potential of building a more scalable business model. IBM's evolution from a physical to services-based model has generated synergies across the business units, producing higher returns. This evolution from a largely physical to a predominantly services-based business should increase workforce. Furthermore IBM is making the strategic investments to evolve into a knowledge-based business, benefiting from a focus on Web services and grid computing.

The strategic importance of networks has grown because intranets often link directly with suppliers and customers. In such a network environment, the demand for an open system, which allows seamless communication between computing devices, grows increasingly fast. These new customers' need for openness is reflected in company's ongoing technical and marketing investments directed at rebuilding its systems and software as open platforms. Although these strategic changes would not reflect in the very short-term, we remain positive on the company and current stock price levels are attractive for a long-term investment. 12-month target price $122.00.

Boeing Co. (BA, $43.35, CSFB recommendation: Buy) continues to evolve and the company is more balanced than before in terms of exposure to military, space and commercial business, and it is becoming a more business-oriented and financially disciplined organisation. Although the prospect of major new aircraft orders is thin, as confirmed by management, we keep our 12-month target price at $50.00 and recommend to accumulate the stock at $40.00 level. Commercial business segment remains focused on reducing costs during the downturn and sustaining the margins. Space business has grown from $6.9 billion to $11 billion this year and has had some very impressive wins. Management believes 2002 margins could be better than 2001, but warned there could be one more small charge related to cleaning up the commercial satellite business. Finally, military business remains solid and certain products are seeing good profit generators. The business continues to deliver good margins and cash flows.

US Technology Stocks


During the past few weeks, institutional investors have continued to pull funds out of the technology sector. Outflows from tech sector mutual funds total $2.2 bln YTD. Ownership of the top-100 tech stocks has increased 2% since the start of the year, despite the declines some of these stocks have suffered. This may indicate a shift in strategy regarding the technology sector from a growth- towards a value-style approach.

One point we are certain is that, the long-term winners are the profitable companies and those gaining market share in the current environment. Recent quarterly reports indicate that tech spending has stabilised and so are the revenues. There would probably not be a return to the inflated growth rates of the late 90s, but a normalised CAGR of around 6-8% sounds reasonable. The tech companies will have to remodel their business in order to face the lower long- term growth. Those who are able to improve their operating margins and increase their profitability, will be able to face the tougher market and gain market share. The weaker companies will disappear. This is likely to happen especially in the software and the communication sector, which saw a very large funding rush during the tech rally.