Short-term cautious on the Tech sector

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). The PC market in China should continue to grow well and support Dell's growth, but the company has to undertake the strategic steps to diversify further away from the PC into other markets, as the Chinese PC market is set to become mature more mature.

Dell Computer in this perspective looks quite attractive for a long-term investor. There is still genuine potential for growth in the storage market, as soon as corporate IT spending starts to pick up.

In the very short term we would like to see the stock consolidate, as we believe the 10.8% share price increase in Friday's session after the earnings release already discounts most of the near term growth. We have to keep in mind that the guidance coming from different semiconductor makers and semiconductor capital equipment makers is very cautious and does not indicate a strong replacement cycle. Therefore we have to remain cautious towards the computer industry, and take this into account when looking at Dell.

Europe
• The DJ EUR Stoxx 50 closed the week with a 3% increase to 2199.97
• We added Societe Generale to our recommendation list. Over half of its operating profit comes from Retail Banking, which shows the defensiveness of its earnings. Expected dividend yield 4.6%.

After falling to a new low on Thursday the DJ EUR Stoxx 50 posted some relief gains and managed to end the week in positive territory after the speech of UN Weapon Inspector Hans Blix indicated that war will be delayed.

Although markets might enjoy some more days of relief, we believe that fear and uncertainty of war will soon return. Despite the often anticipated after war rebound in economic recovery, we believe that a careful interpretation of fundamentals shows a different picture. Therefore, for stock selection, we remain cautious and continue to favour stocks which pay an attractive dividend yield such as BNP Paribas (BNP FP, EUR 39.15) or ENI (ENI IM, EUR 13.495), stocks in sectors which show positive earnings momentum such as VOD LN (VOD LN, GBP 1.15) or stocks which distinguish themselves by either gaining market share from its competitors such as SAP (SAP GY, EUR 83.10) or by having a unique business model such as JC Decaux (DEC FP, EUR 10).

JC Decaux is the only pure outdoor advertising play - an area, which in general suffers less in a downturn. They are the leader in street furniture which offers high visibility and high margin. In addition we like its unique business model, which focuses on long-term contracts and gives them even some pricing power. JC Decaux wins around 70% of the concessions it bids for and has an 81% renewal rate, which shows the potential for future growth.

JC Decaux reported an increase of 2.2% of its 2002 sales figures to EUR 1,578m which was slightly better than its guidance and CSFB's expectations and we believe the overall numbers are comforting in the current advertising downturn. Growth was supported by a solid performance of the street furniture (+5.3% organic growth yoy) and the billboard businesses (+2.8% yoy).

Given its unique concept, its valuation is difficult to compare. The stock currently trades at a discount to Clear Channel (CCU US, USD 35.93) - US advertising company with an exposure to outdoor advertising as well (JC Decaux at PE and EV/EBITDA 04 of 17.9x and 6.2x vs. Clear Channel of 24.3x and 12.12x). We believe a premium is justified due to its better resistance to economic downturns and better visibility which makes the stock more defensive.

After Societe Generale (GLE FP, EUR 52.85) reported 4Q results, which were in line with expectations on an operating level but significantly better if adjusted for restructuring charges, we added the stock to our recommendation list.

The stock came recently under pressure after BNP Paribas ruled out an immediate take over of Societe Generale. We see the weakness as a buying opportunity for an investor with a 12 to 18 month time horizon. However, given the current uncertain environment we would advise to accumulate the stock in stages. Societe Generale is trading at a 6% discount to the European sector and comes with an attractive dividend yield of 4.6%.

We like the defensiveness of Societe Generale's business as around 56% of its operating profit comes from the Retail Banking. Although having a Tier 2 position in numerous corporate & investment banking businesses, management has successfully developed a franchise in some high-growth niche products such as equity derivatives and alternative fund management which adds to the diversification of its earnings.

Further more, after the final acquisition of Credit Lyonnais (CL FP, EUR 53.9), Societe Generale will become the next take-over target in the French banking sector, although a final acquisition still might be some time away.