Earnings reporting season getting into full swing this week

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.

European Equities


• The DJ EUR Stoxx 50 closed the week 1% higher at EUR 2247.47


• Given the still existing gap between top-down and bottom-up earnings estimates, we expect further downward revisions to continue.

With the coalition forces entering into Baghdad the focus of investor's mind will likely shift towards economic and earnings growth again.

On the economic front, the European Commission published its biannual forecast for the euro zone countries and drastically lowered its growth projection for 2003 from 1.8% to 1%. The main reasons for the revisions are the remaining geopolitical tensions, the volatile oil prices and the stronger Euro that is dampening Europe's exports. As a consequence, we expect further monetary easing by the ECB as we have pointed out earlier on.
On the earnings side, the 1Q earnings reporting season will get into full swing this week with companies such as Novartis (NOVN VX; CHF 53.05), Philips (PHIA NA; EUR 16.48), Adecco (ADEN VX; CHF 43.15), Roche (ROG VX; CHF 87.00), Nokia (NOK1V FH; EUR 13.45) (only 1Q sales) and SAP (SAP GY; EUR 81.50) reporting results. The profit warning issued by STMicroelectronics (STM FP; EUR 17.1) earlier on and the announcement by Nokia to cut another 1800 jobs in its network sector does not augur well for the upcoming announcement of quarterly results for technology and technology related companies. However, after Nokia already indicated in its mid-quarter update that the network division would make a substantial loss (-15%-20%), these cuts come not as a new surprise. Given the up-trend in the replacement business, the number of mobile phone units sold in the 1Q by Nokia is likely to have risen compared to last year. However, on the back of competitive pressure, the average sales price is likely to fall, especially at the low end, leading to only a slight increase in sales yoy. Nokia will report on Thursday 17 April.

Overall, given that earnings estimates are still too high, we believe downward revisions will continue. On the other hand, with the uncertainty of war basically removed, we can expect the outlook statements to become more concrete.

LVMH (LVMH FP; EUR 39.36) reported 1Q sales. Organic growth (comparable structure and at constant exchange rates) rose 6%, however taking into account the weaker Dollar sales dropped 5.2%, which still was in line with expectation. The stock increased almost 4%.

Although especially the Louis Vuitton brand showed success when reporting a double-digit increase in volume during the first three months of the year, LVMH is further trying to trim its cost base as the environment remains challenging. Less profitable businesses will be sold further and further savings are looked for at DFS. Focus will be on further tangible growth in operating income in 2003 and priority will be given to cash generation. We maintain our positive stance.

Roche (ROG VX; CHF 87) released 1Q sales slightly below expectations (CHF 6.7bmn CSFB CHF 6.97b, an increase of +15% in local currencies, +3% CHF) mainly due to its Diagnostic division (CHF 1.74bn, an increase of 7% in local currencies, -3% in CHF). The pharmaceutical division grew in line with expectations (CHF 4.99bn, an increase of + 18% in local currencies, -5% in CHF) more than twice as fast as the global market average with growth of 18% in local currencies.
Guidance for current year was confirmed (double digit sales growth for the group helped by strong underlying growth of marketed products, the integration of Chugai and new product launches) and the Vitamins unit should be divested to DSM at the end of the 1H 03. The public offer for Disetronic is expected to close May / June 03.

We remain positive in the long-term as Roche's balance sheet is improving and positive sales data can be expected from newly launched products such as Pegasus and Fuzeon.

Aventis (AVE FP; EUR 41.69) came under pressure at the beginning of the week on news for a generic challenge for Lovenox, one of its blockbusters. Lovenox makes up around 6% of pharma sales and represents around 15% of core EBIT. Key patents will expire in Dec 2004 and Feb 2012. But Aventis stated that it has not yet been officially notified of the filing. The next day, the FDA has admitted to mistakenly posting information regarding an application seeking approval of a generic form of Aventis' Lovenox on its website. However, the spokeswoman would not disclose how the mistake occurred or acknowledge that a challenger even exists. We remain our positive stance.