US Technology

US Stocks

Apple Computer Inc. (AAPL, $16.85, CSFB recommendation: Hold) announced revenues and earnings shortfall for 3Q 02 ending this month. Revenues are expected to range between $1.40-1.45 billion vs. $1.6 billion expected, while EPS is expected to be between $0.08-0.10 vs. $0.11 previously estimated. Consumer demand for PCs was weak during the current quarter. The company also cited Europe and Japan as regions where trends have turned significantly down across all market segments. Apple expects some seasonal strength as the back to school season kicks into full power. However U.S. State budgets are in red and should give problems for companies dependent on a big back to school kick. Apple's professional exposure to advertising and publishing do not help the company due to economic pressure on these segments. For the time being we remain cautious on the computer maker industry. The company is expected to make public its results on July 16th.Hold.

American International Group, Inc. (AIG, $67.00, CSFB recommendation: Strong buy) stock price remains weak due to concerns related to unclear CEO succession and general doubts on companies with complicated financial system. On June 18th, the company held its first ever analyst meeting, showing that the company would increase transparency. Furthermore, after Enron's disaster, the company was one of the first large caps to announce more disclosure in its balance sheet. Finally, unpredictable further terrorism attacks are still possible. Nevertheless AIG remains one of our favourite stocks. In spite of its relative high P/E, historically current valuation should be attractive. In general, for the industry, property-casualty insurance pricing is rising. This improvement is now both strong and broad based. The corporation's strengths include innovative product development to satisfy specific market needs, a high level of pricing and underwriting discipline. The company should be well positioned for future growth based on the strength of its balance sheet, its scope and profitability world-wide, and the capability of its management. AIG is now number three in the domestic life insurance industry. Its objective is to attain the largest life insurance company in the U.S., the same position that it enjoys in commercial lines property-casualty insurance.

On foreign markets, AIG has a far stronger position than other U.S. based insurers. The scope of AIG's worldwide operations allows capital to be allocated to faster growing, less competitive, more attractive markets. AIG possesses the highest credit ratings from each major agency. This is a precious asset in these nervous markets and AIG's balance sheet strength is an important competitive advantage. Another advantage is AIG's human resources policy. Management's wealth is directly related to that of its shareholders. AIG's management owns or controls about 23% of its stock. AIG has historically provided its staff with sufficient incentives. This gives AIG's capability to recruit and retain highly capable managers.

Goodrich Corp. (GR, $27.05, CSFB recommendation: Restricted) announced that it entered into definitive agreement to acquire TRW's aeronautical systems businesses. GR will pay $1.5 billion in cash to be financed by debt ($1.1 billion) and equity-linked securities. This would increase the debt/cap ratio from 51% to 63%. TRW's aeronautical systems business designs and manufactures high-integrity systems and equipment in the following product areas: cargo systems, engine controls, flight controls, power generations and management, hoists and winches, missile actuation, and equipment services. Goodrich management expects 2003 EBITDA for TRW Aeronautical to be about $180 million, excluding special charges and including synergies. This represents roughly 27% of GR's EBITDA. Buy

US Technology Stocks

Shares in the Nasdaq Composite continue to decline for the fifth straight week, as investors pull their money out of stocks. Technology stocks have seen a nice start into the week, but as PC maker Apple Computers (AAPL US: $16.85; CSFB rating: Hold) and PC chipmaker Advanced Micro Devices (AMD US: $8.04; CSFB rating: Buy) issued profit warnings, they caused a sell off in PC and semiconductor stocks. The Philadelphia Semiconductor Index, the leading indicator for the semiconductor industry, fell 10.8% during the week. This decline in the index is going on, despite an improvement for the semiconductor capital equipment May book-to-bill ratio to 1.26, from 1.22 in April, both indicating a growth in demand. Orders in May reached $1.08 billion, which is up 50% from May 2001. We have the shift in technology going on towards the new 300mm wafer and 0.13 micron technology in which contract manufacturers are investing. In fact, companies mainly in Taiwan have been building new fabs for manufacturing those chips. There is certainly a trend towards the 300mm wafers, as they allow cost reduction, as more chips can be made out of one wafer.

We continue to see some positive data, which support the long-term outlook for the sector, despite the overwhelming pessimism, which currently guides the market. Dell Computers (DELL US: $23.98; CSFB rating: Buy) CEO Michael Dell supports our view and contradicts Apple Computers, saying his business is on track so far and is not changing his guidance.

It seems we had a reversal of the late 1999, early 2000 rally, where every good news was reason to buy and bad news just was perceived as being temporary. Nowadays even optimistic guidance and positive data can only to hold up the stock during a single session and gets forgotten overnight. There is a risk of a vicious cycle,

where pessimism lets share prices tumble, and falling share prices feed the pessimism.

Both the Nasdaq Composite and Nasdaq 100 closed Friday's trading session almost on their intra-day lows and the Nasdaq Composite was just 53.9 points above its late September low of 1387.06 while the Nasdaq 100 was already significantly lower than its September 21 low of 1088.96 points, at 1035.63. We do not exclude further weakness, as investors might take this as another reason to sell their holdings in technology companies. There is the possibility of a technical rebound, but given the current sentiments, it might be of a very short one.

Europe

Aventis' (AVE FP; EUR 68) R&D day supported our view that the company is best positioned to grow ahead of the industry. Aventis highlighted that it planned to more than double the number of blockbusters in its portfolio by 2006. We are particularly encouraged as the company's plan to submit additional data to the FDA next month on Ketek (bacterial infection) and that should lead to a US launch by early 2003. We believe that this product has scope for substantial upgrades.

Aventis gave impressive evidence of its early stage pipeline with more than 30 compounds in phase l/ll. Five drugs advanced to phase llb, six were delayed, two dropped and four were added. It is worth mentioning that CSFB's earnings model did not take any revenues for the two dropped compounds into account.

Despite the overall positive scorecard the market decided to focus on the delayed and dropped compounds and potential generic competition rather than on the positive news from the later stage products.

We do not believe that the halting of these early drugs or a potential loss of Allegra will substantially change the investment story on Aventis. The halting of drugs in development is part of the corporate risk for pharma stocks and the concern regarding patent issues on Allegra is not new. Aventis gave guidance a few months ago how earnings would change if generic competition were to set in for Allegra, which accounts for 8.5% of sales. Sales growth would be expected to be in the range of 9%-10% while earnings would grow between 20%-25%. Given the broad product mix and strong pipeline we believe Aventis could manage the loss of this patent. However, our base case scenario does expect the patent to hold. The company said it was on track to reach sales growth between 11%-12% and earnings growth up to 30% for the year. We continue to believe that Aventis remains an attractive buying opportunity at current levels. Despite growth well above industry levels Aventis trades at a 25% discount to the sector on EV/EBITDA and 20% on EV/Sales.

Just nine days after the 2Q02 sales warning, Nokia (NOK1V FH; EUR 13.50) hit the market with a sales warning for 2H02. The company said that revenues for the period would just grow up to 10% instead of the earlier forecast of minimum 15%. Despite the warning, the management reiterated its EPS guidance for 2002 and the number of total handphones sold of 400-420 million. Additionally the company reduced its long-term sales and earnings forecast to at least 10%, which is down from a range of 25%-35%.

After the 2Q02 update, the sales warning did not come as a surprise. However, based on the company's guidance for 1H02, we calculate that a sales growth target of up to 10% for 2H02 remains aggressive, as it would reflect more than 20% growth for the second half of the year. As Nokia left the number of handphones sold unchanged, the reduction points very much towards the excessive weakness in the network unit, which explains why Ericsson (ERICB SS; SEK 15.40) fell almost 10% on Thursday. Despite Nokia's undisputed leadership in the sector we wonder why the management remains so confident on the industry handphone sales. For the second time in less than two weeks the company reduced its sales guidance but reiterated earnings forecasts. While sales are very straightforward earnings can be influenced by different accounting and cost cutting measures. At this point in the cycle we would focus on sales as a better guidance. We remain cautious on the stock.

Last Friday, Roche (ROG VX; CHF 111.75) received EU approval for its hepatitis C treatment Pegasys. This reflects a success for the company after a long series of setbacks. Pegasys is considered to be the only top-selling drug to be introduced this year. Despite the unspectacular pipeline, Roche remains attractive to us due to its strong position in diagnostics, little exposure to patent expiry risk and its restructuring potential.

Arcelor (LOR FP; EUR 14.23) released 1Q02 figures today. The company published a loss of EUR 24 million versus consensus forecasts between EUR 37 - 98 million. The group expects a 'significant improvement' for 2Q02. We remain confident on the stock, as the company's higher exposure to spot market prices should lead to an improvement of profitability in the months ahead. Despite being Europe's biggest steel producer, Arcelor trades at a significant EV/EBITDA discount to its peers. We think this is not justified.