Current quarter reports have given a better view of what we have to expect till the end of the year. (page 3 of 3)

However, excessive pessimism has often caused equity markets to overreact in the past. Further, there is no clear evidence that European companies have joined the American way of creative accounting. Hence, investors who are prepared to take a long-term investment horizon should start building up positions in well-managed and attractively valued companies. Even if markets were to go slightly lower from here, we believe that the long-term upside potential is significantly higher than the current downside risk. With respect to short-term trading we remain more cautious despite several indicators pointing to a technical recovery.

Philips (PHIA NA; EUR 24.20) reported 2Q02 earnings that were above expectations. The company reported a profit of EUR 171 million before a 1.561bln writedown for its 3.5% stake in Vivendi (EX FP; EUR 17.45). Sales growth was 5% over the first quarter 2002 and 4% over year, which was the first positive growth since 4Q00. Cash flow from operations was a healthy EUR 496 million and margins improved. Sales growth was driven by the medical and the consumer electronics unit, Philips' biggest unit. This division posted an operating profit despite a 7% decline in sales and most encouragingly showed signs of recovery in the USA. The operating loss at the chip unit narrowed to EUR 64 million from EUR 255 million. The company continues to expect to post a profit for the whole year before write-offs. The outlook was cautiously optimistic as Philips said that it expects virtually all its businesses to improve in the second half. Without being too enthusiastic on the stock for now, we view Philips as one of the most attractive European technology stocks due to its business mix and valuation but expect it to perform in line with the overall technology sector.

LVMH (MC FP; EUR 44.95) published a 15% increase in operating profit for the first half of 2002. 1H02 sales dropped 2% due to a 9% decline in the retail sector, which includes DFS. The drinks and fashion business did well, with sales increasing 7%. LVMH said that about 60% of USD sales are hedged at a level of 0.90 against the Dollar until next year. The company sees a substantial improvement in operating profits in the second half of the year. However, with the current uncertainty in consumer sentiment and currency movements, LVMH remains a risky call despite it being reasonably valued and its restructuring measures having a beneficial impact on the bottom line this year.

Ahead of schedule, BNP (BNP FP; EUR 43.68) announced a rather disappointing preliminary 2Q02 result, which could be called an 'operating profit warning'. BNP said that 2Q02 profits dropped 13% to about EUR 1bln. The impact on P&L is on revenues and not on risk provisions due to the prevailing conditions in the equity and bond market, which in June affected the revenues of the Asset management and Corporate & investment Banking core businesses.

The negative impact that led to the sharp decline in June (France Telecom, Vivendi) can only be estimated at this point in time. However, these trading losses are unlikely to be repeated in the rest of the year. According to CSFB, the worst-case scenario would be a 10% reduction in EPS for 2002 and next year. Under this scenario BNP would still be trading at 10.5x and 9.5x P/E, which is cheap. We would use the negative news flow that is likely to come up in the days ahead to buy the stock.

TPG (TPG NA; EUR 19.89) hit our stop-loss level of EUR 21 on the back of Deutsche Post's (DPW GY; EUR 10.10) reduction in profit forecasts for its postal services unit. Deutsche Post expects profits to be EUR 1.5bln lower through 2007. Our investment case on TPG was based on the stable cash flow from the postal business and, most importantly, the recovery in the express and logistics unit. Due to the economic recovery being postponed we expect a recovery in the share price to be some distance away. We take a loss of 12.72%.

Nokia's (NOK1V FH; EUR 12.53) earnings report failed to inspire markets despite a 2Q02 EPS of EUR 0.19 vs. a EUR 0.18 consensus. Looking at the decline in sales it becomes very obvious that these strong EPS figures were mainly achieved due to cost cutting. After so many quarters of strict cost cutting investors might ask how long the company can go on cutting costs. Nokia also reduced estimates for industry handset sales from 420 million to 400 million. Nokia's outlook was little convincing. The company sees 3Q02 earnings in the range of EUR 0.15-0.17, which is below CSFB's forecast of EUR 0.19 but expects a rebound in Q4. Nokia also gave very little updates on the networking sector. Even though Nokia is trying to find a bottom at these levels we still cannot see any meaningful upside for now. Betting on a recovery in Q4 remains risky, in our view.