Short-term cautious on the Tech sector (page 1 of 2)

US Stocks
• Recommendation update

Northrop Grumman's (NOC, $92.17, CSFB: Outperform) annual conference highlighted a solid outlook for revenue, earnings, and cash flow through 2005. The company expects good sales growth for 2003-05, with revenues of $25-26 billion for 2003, $28-29 billion for 2004, and $30-32 billion for 2005. Figures for 2002 are still not available, however in 2001, sales reached about $17 billion. A good 2/3 of this work is based on firm orders of logical follow-on work where NOC is the likely contractor, such as with aircraft carrier work as a sole source supplier. Operating margins are expected to hold steady at about 7% through 2004, with some improvement expected in 2005 as further synergies kick-in and less profitable programs are completed. NOC also expects to continue its strong cash flow performance, with $1.1-1.3 billion in 2003 operating cash flow (vs. $0.8 billion in 2001, and before the $1 billion B-2 tax payment in March), $1.5 billion for 2004, and $2 billion in 2005. The TRW acquisition was touted as the "capstone" of NOC's transformation that began ten years ago. All seven divisions underscored the cross-sector capability and overall depth the company now possesses, and the expectation that it will create sales synergies in future contracts. However these acquisitions would require time to be fully integrated. Emphasis was also placed on the stability of the current pipeline through 2005, with 65% of estimated sales effectively visible from either firm or logical flow contacts. This conference did not churn up anything new about Northrop Grumman. However we maintain our BUY rating. We believe NOC is well positioned to be one of the major beneficiaries among the defence contractors.

Boeing Co. (BA, $30.15, CSFB: Outperform) delivered 15 planes in January, which was in-line with the current environment in the airlines industry. To match its delivery expectations of 280 for 2003, BA has to deliver 24 aircraft for the remaining 11 months. Hence, without a pickup awaited in 2H03, BA would not be able to meet its estimates. For long-term investors, we believe the current level is attractive. We have a BUY rating on Boeing due to its low valuation, limited downside risk and its defence related business, which is performing well. Potential negative news-flow ahead includes protracted weakness in global traffic, possible additional airlines bankruptcies, and an Iraq conflict, which could destabilise an expected recovery in commercial aviation industry.

Last week ended with a strong session on Friday, especially for technology stocks. The trigger for the rally in computer related stocks was positive sales guidance coming from Dell Computer Corp. (DELL, $25.77, CSFB: Outperform). The company expects sales for the current quarter to be of $9.5 billion, while the market was expecting sales of $9.45 billion. The profit forecast of $0.23 however was in line with analyst estimates. Dell Computer expects to outgrow the market, as it is able to gain market share and sees solid growth for its business in China. While the PC market is expected to grow at a 10% rate this year, Dell's expectations for its growth are of 25%, compared to the sales in the same quarter one year ago.

More important for Dell's future growth however will be the question if it can establish itself as a prime reseller of computer storage products of third parties, like it already does for some products of the computer storage company EMC Corp. (EMC, $7.91, CSFB: Outperform).