Auto Part Manufacturers: safer play than carmakers (page 1 of 2)

US Equities
• Recommendation update

Consumers are spending an increasing amount of time in their vehicles and demanding new features. The number of Americans travelling twenty minutes or more to work increased 21% between 1990 and 2000 (source: Census data). Auto Parts Manufacturers respond to these needs by emphasizing interiors, particularly in light trucks. Complete interiors and full cockpits are longer-term opportunities and frequent product updates and/or new features help mitigate price pressure. During the auto show in Detroit last month, the interior was one of the major topics. Higher implementation of options such as leather seats, heated seats, third row seats would likely continue as would implementation of newer products such as rear seat entertainment systems. For example, leather seats were factory installed on 28.3% of vehicles in 2002 vs. 21.1% in 1998 (source: Morgan Stanley). Furthermore, with capital spending, and asset growth among large interior companies, we believe potential new entrants have significant barriers. We see the main risk factor in this industry as being a sharp decline in vehicles sales, which would force carmakers to reduce spending on interiors. However, Ford design chief reiterated that Ford Motor Co. (F, $8.32, CSFB: Neutral) would not cut costs on the interiors. Hence we maintain our long-term Buy rating on Johnson Controls Inc. (JCI, $77.96, CSFB: Not rated). Firstly, JCI is a leader in seats manufacturing. Its Automotive System Group makes seats and interior systems sold to the original equipment automotive market, in addition to the automotive replacement market. In 2002, this segment accounted for about 75% of JCI's total sales. Secondly, we believe with a wide range of customers, sales should be protected from high volatility. Major customers include Advanced Auto, AutoZone, Costco, DaimlerChrysler, Fiat, Ford, General Motors, Honda, Interstate Battery Systems of America, John Deere, Mazda, Mitsubishi, Nissan, NUMMI, Pep Boys, Peugeot, Sears, Toyota, Volkswagen, and Wal-Mart (source: SASI). However, in the short-term, stock price would remain under pressure from a likely war on Iraq, like the majority of consumer-related stocks.

Europe
• The DJ EUR Stoxx 50 closed the week 3% lower.

The results of the recent reporting season suggest that the gap between the dividend yield and cash (positive for the first time in 25 years) is relatively safe and probably growing slightly. Although there were many cases especially in the insurance sector where dividends were cut, there were also many cases where dividends were increased substantially. Several UK banks such as RBOS (RBS LN; GBP 14.53) or Barclays (BARC LN; GBP 3.67) raised dividends by 15% and 10% respectively. Companies on our recommendation list such as DaimlerChrysler (DCX GY; EUR 28.40) raised it by 50% and Nestle (NESN VX; CHF 273) by 10%.

Further rate cuts from the ECB will widen this gap even more. We would assign a 75% chance of the ECB cutting rates by 50bps and a 25% chance on 25bps. We would like to reiterate our call to focus on dividend yield when picking stocks - a strategy, which we believe, provides for some downside protection in the current environment.

Roche (ROG VX, CHF 81.45) reported full year result and forecasted double-digit sales and operating profit growth in local currencies and stable operating profit margins for the whole group in 2003.