US Technology mid-quarter updates cloud the expectations of a recovery. (page 1 of 3)

Principal Financial Group, Inc. (PFG, $28.67, CSFB recommendation: Hold) was downgraded from Buy by CSFB because life insurer's investment portfolios showed that PFG might have greater risk of credit deterioration, on the margin, relative to many of its peers. The company has higher asset leverage than many of its competitors (its equity equals 14.3% of its invested assets).

The other reason for downgrading is the current valuation near CSFB's target price of $31.00. We still believe that the stock is attractive for a long-term investment due to a high earnings yield of 6.94% and due to a 15% potential ROE (source CSFB). 12-month target price $32.00.

International Business Machines Corp. (IBM, $78.30, CSFB recommendation: Hold). The company announced restructuring actions. These actions should improve the economic returns of its technology division, which accounted for 24% of hardware revenue in 2001. Firstly Big Blue announced a definitive agreement with Hitachi Limited, which purchased for $2.05 billion IBM's HDD-related assets, to merge their hard disk drive operations into a standalone company.

IBM will maintain a 30% share. Secondly, the company is taking steps to reduce excess aluminium semiconductor capacity in its Burlington facility, while focusing on next-generation copper technologies. Finally, it announced plans to take work force related actions across its business. Management expects to take a $2-$2.5 billion pre-tax charge, most of which will show up in 2Q'02. These actions combined with the previous announced strategic changes of evolving through different business categories and increasing services-based businesses would bring higher operating margins and a wider development potential. Nevertheless, due to the current market weakness and uncertainty, we maintain a hold recommendation for the short-term.

Goodrich Corp. (GR, $29.43, CSFB recommendation: Buy) announced it was selected to provide pylon aft fairing for the A380 superjumbo aircraft. European aircraft first deliveries are expected in 2Q 04. Financial details were not disclosed, but Goodrich's A380 total revenues to date are expected to exceed $3-$4 billion over the life of the contracts, according to CSFB. Furthermore the planned spin-off of the company's engineered industrial business (EnPro, NPO) left the company as a pure aerospatial/defense supplier. The company is well positioned to benefit from the slowly recovering fundamentals in the airline industry, which should re-boost GR's important aftermarket business. 12 month target price $40.00.


US Technology Stocks


During the last week, we have seen some prominent companies issuing profit warnings for the current quarter. This came as a surprise, with Intel Corp- the world's biggest computer chip maker lowering its second quarter sales forecast last Thursday, citing lower than expected sales in Europe and customer shift toward cheaper chips. Investors had expected some improvement in corporate demand. Intel chips power around 80% of new PCs and are used as a signal for global PC and software demand. According to that, shares of the semiconductor capital equipment companies, such as Applied Materials Inc. (AMAT US: $20.62; CSFB rating: Hold) and KLA-Tencor Corp. (KLAC US: $49.39; CSFB rating: Hold), came under pressure. They are unlikely to see increasing orders for their equipment, as long as the chip-maker do not see sufficient demand in the end market. Intel in the past has been very cautious forecasting their numbers, which was a reason why the company usually was on track with their numbers.