US Technology mid-quarter updates cloud the expectations of a recovery.

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.

We had expected Intel to meet those conservative consensus forecasts. The company not only reduced its sales guidance to $6.2-6.5 billion, from $6.4-7 billion, but also saw its gross margin drop to 49%, missing the 53% target given in April. The second quarter of the year is the weakest for PC sales, but this weakness worries us, as we believe the 3.1% growth for the global chip market, forecasted by the Semiconductor Industry Association, might still be too optimistic, even after being reduced from an earlier 6% growth estimate. According to Gartner Inc research, global chip sales fell 33% last year to $152 billion, after a rise of 31% in 2000.

Another disappointment came from RF Micro Devices (RFMD US: $10.12; CSFB rating: Buy), the maker of mobile-phone semiconductors, which reduced its current quarter sales and profit forecast, citing delayed orders, especially from one un-named customer. RF Micro Devices' largest customer is Finland's Nokia OYJ (NOK1V FH: EUR13.04; CSFB rating: Buy), the world's biggest cell-phone maker, the second largest is US Motorola Inc (MOT US: $14.82; CSFB rating: Buy). Both stocks faced heavy losses in last Fridays trading session, as a reaction to the short fall from RFMD. Motorola's share price, however, recovered during the session and closed slightly up. Nokia, as the market leader, saw strong competition from Asian handset maker, which are challenging Nokia with innovative products and new applications. Nevertheless, the handset market is maturing with demand driven by replacement needs, (as the PC industry once did).


Europe


The Euro STOXX50 remains 10% away from the 'post September 11' lows of 2877.68 (closing). However, 13 companies already traded below these levels, as corporate profits did not show encouraging recovery signs. Despite seemingly low prices we remain cautious on the overall markets. Firstly, sentiment indicators do not give the green light yet and secondly, we do not expect the newsflow to improve in the weeks ahead as we head into the profit warnings season with the likelihood of further disappointments remaining high. With market breadth remaining very negative, 48 stocks out of 50 were down last week, we recommend investors to remain cautious and 'only' place aggressive limits on selected stocks with an investment horizon of 12 months. A technical rally might be in the cards but it would not be sustainable in our view.

Adecco (ADEN VX; CHF 93) closed the week 9.71% lower after the company lowered its sales forecast for 2003. Investors need to bear in mind that this warning did not really come as a surprise. Adecco's sales and profit forecasts for this and next year have been way ahead of analysts' forecasts and nobody really believed them. Adecco has had a target of CHF 1.8bln of EBITA in 2003 since 1998. CSFB analysts are currently forecasting CHF 1.2bln of EBITA in 2003. CSFB's EBITA forecast for this year is looking at a figure of CHF 1bln, which would have implied an 80% increase to meet Adecco's target in 2003. We reiterate our buy recommendation and would use the coming days of weakness to buy the stock with a 12-month investment horizon. We continue to believe that the company is very well positioned to benefit from an upturn in the economy.

A negative report in the New England Journal of Medicine regarding costs of Sanofi-Synthelabo's (SAN FP; EUR 59.20) most important drug Plavix caused the stock to drop 9.50% for the week. The study used a computer model of the US population to estimate the cost of giving aspirin, Plavix or a combination to all heart disease patients over age 35 from 2003 to 2027. Aspirin alone was the cheapest, at a cost of USD 11000 for every year of life saved compared to USD 130000 for Plavix alone or in combination with aspirin. We believe that studies like that are a very controversial way to judge a drug that has shown excellent test results and as such we do not expect that prescriptions will suffer significantly on the back of these results. However, the study does reflect the market's current focus on costs and patent protection. We doubt the usefulness of this study, as new drugs are inevitably more expensive than existing ones (especially if compared with aspirin!).

Despite no new evidence, this report is likely to keep sentiment for the stock and the industry negative. However, we remain convinced that the patent protection for Plavix remains very strong and expect the stock to rebound once the company proves its earnings resilience. We expect earnings growth to remain very strong and even see some potential for earnings upgrades, which confirms our view that the stock is currently traded below its long-term potential.

Serono (SEO VX; CHF 1150) received the allowance to launch a needle-free device used for the delivery of a human growth hormone in Europe. The product is already approved in the USA. However, Serono remains negatively affected by the overall biotechnology weakness and traded below our worst-case stop-loss of CHF 1200. Despite a positive long-term outlook for the company after the approval of Rebif in the US market, we believe that it will take some more time for the product to feed through to the bottom line. Hence we have decided to cut loss and remove the stock from our recommendation list.

This week's focus will be on Nokia's (NOK1V FH; EUR 13.04) mid-quarter trading statement on June 11. The company is widely expected to lower its sales forecast while EPS guidance should remain unchanged. After last week's statement from Ericsson, that the recovery in the infrastructure industry cannot be expected before 2004 and last Friday's profit warning of RF Micro Devices, we remain cautious on the sector. Additionally, the Finish Communcations Supplier Association released figures that showed that sales of mobile phones to retailers in Finland fell 23% in May. In the past years, the Finish mobile market was watched closely for indications of trends in sales. Nokia's 2H02 outlook might well cause disappointment although we would stress that at current levels, a great deal of bad news is reflected in today's valuations.