Earnings reporting season getting into full swing this week (page 1 of 2)

US Equities

• Recommendations update

As the war in Iraq is expected to end soon, economic data and company earnings would replace news from the Middle East in investors' decisions. The coming week, among economic data, Industrial Production for March will be reported on Tuesday. It is expected to decrease 0.2%, while a month earlier, it increased 0.1%. On Wednesday, a 0.4% increase (vs. +0.6% a month earlier) in Consumer Price Index could be announced.

Among our recommendations, The Bank of New York Co., Inc. (BK, $22.59, CSFB: Restricted) will announce its 1Q results. Consensus expects an EPS of $0.412 vs. $0.500 y-o-y. Johnson Controls Inc. (JCI, $76.25, CSFB: Not rated) is also expected to report its quarterly earnings, with an EPS of $1.385 vs. $1.210 y-o-y. We do not expect too much of a surprise due to sluggish corporate banking, and a weak automobiles market for BK and JCI respectively. However we would like to see some guidance in order to have a clearer picture on both companies for the coming year. We maintain our Buy recommendation on The Bank of New York for investors who want to play a possible rally at the end of the war in Iraq, and a turnaround in investment banking business. We have a long-term Buy on Johnson Controls due to its low correlation with the S&P 500 (-0.098 on a two-year basis).

Countrywide Financial Corp. (CFC, $58.47, CSFB: Not rated) reported record loan production volume during March of $37.9 billion, up 23% m-o-m, due to high close rate. The recent back up in mortgage rates created concerns amongst borrowers that this may be their last chance to refinance (source: Merrill Lynch). This should continue in April. Servicing portfolio business is also expected to remain strong, as CFC continues maintain two loans to its servicing portfolio for every one loan that runs off. During March, this business grew at a 44% annualized pace (source: Merrill Lynch). On April 29th, the company is expected to report a quarterly EPS of $2.081 vs. $1.32 a year ago. We believe this forecast is achievable. Besides, we would like to reiterate our Buy recommendation on CFC as a defensive stock. Beta vs. the S&P 500 is at 0.78, and correlation with the index is negative (-0.758, source: Bloomberg).

The US oil industry, specifically the US oil service industry is currently in the spotlight, as discussions regarding the reconstruction of the oil industry in Iraq commence. In fact, it would put US oil services companies in good stead to win contracts in Iraq.

So far Halliburton Co. (HAL, USD 21.60, CSFB: Outperform) has been in the news, having won a contract to repair damages and extinguish possible fires at oil wells, totalling USD 50.3 million. As the destruction due to the war has been far less than anticipated, such short-term contracts for emergency needs could be lower than initially expected.

Furthermore, a huge cloud of uncertainty looms over exactly how the contracts would be awarded or distributed. In the near term, we feel it would be far too soon to lend too much currency to the idea of US companies benefiting from the post-war reconstruction of Iraqi oil resources.

The CEO of Schlumberger Ltd. (SLB, USD 38.07, CSFB: Neutral) said that he had no idea what a post war regime would look like. Schlumberger Ltd., as the world's largest oil services company, and which we recommend as a buy, is however likely to be involved into the reconstruction of the Iraqi oil industry. We believe that the company's expertise in oil field services and in a later stage in seismology will give Schlumberger the possibility to win contracts to rebuild and service oil fields or be involved in exploration at a later stage.