Cautious view on analysts' expectations on corporate earnings

US Equities


• Recommendations update

As earnings period continues this week, we would like to reiterate our general cautious view on analysts' expectations on corporate earnings. Believing they may be too optimistic for the coming quarter. Based on a study by CSFB, analysts have lowered their earnings growth rate forecasts for the S&P 500 for the first quarter to -3.4% q-o-q and to 9.8% y-o-y. However, the growth rates for the second quarter are at 11.7% q-o-q, and 8.9% y-o-y. Hence, these estimates could be optimistic given the weak US economy. Therefore, we could see further earnings warnings this reporting season. Based on earnings growth rates estimates, and market capitalization, CSFB expects that profit warnings issued by companies in Materials, and Consumer Discretionary sectors would have the highest impact on the S&P 500 estimated growth rate for the second quarter, while profit warnings in Financials sector would have the lowest impact.

Among our recommendations, Countrywide Financial Corp. (CFC, $59.67, CSFB: Not rated) will report its first quarter earnings on April 29th. Consensus expects $2.081 EPS, representing a 57%-increased y-o-y. We would not be surprised if the company attains this record EPS due to the current mortgage industry. With the current low mortgage rate, mortgage originations are high. Last week, Citigroup Inc. (C, $38.26, CSFB: Outperform), and JP Morgan Chase & Co. (JPM, $26.50, CSFB: Outperform) announced profit growth in part due to high mortgage volume. Besides CFC's strong business, we still believe the company offers an attractive way to diversify a portfolio due to its negative correlation with the S&P 500, based on a two-year analysis. Therefore, we reiterate our Buy rating on Countrywide Financial.

Investors in the oil sector have highlighted the 24th of April in their agenda, as they will be watching closely the OPEC decision on a change in production quotas. In fact the market has already started to price in a reduction OPEC output, as crude oil prices rise. The West Texas Intermediate rose to USD 30.57 per barrel last Thursday, driving our recommended oil and oil service stocks Exxon Mobil (XOM, CSFB: Neutral), Schlumberger Ltd. (SLB, CSFB: Neutral) and Noble Corp. (NE, CSFB: Neutral) higher.

We expect the oil market to remain volatile, but in our view the supply-demand situation could be more favourable for our oil stocks than the market currently anticipates. After the recent oil worker strikes in Venezuela, the country has still not reached its normal production levels. With a daily output of 2.25 million barrels in March it is still 20% below its quota of 2.8 million barrels a day.

We see the crude oil prices fluctuating between USD 28-32 in the near term, based on the assumption that the oil market should remain tight. This environment should be favourable for our recommended oil and oil service stocks, which we believe should see some strength over the next couple of weeks.

The three companies are also due to report their quarter earnings during this week. Schlumberger is expected to report an EPS of USD 0.24 on the 22nd, Exxon Mobil forecast is for an EPS of USD 0.70 on the 23rd, and for Noble Corp we are looking for an EPS of USD 0.31 on the 23rd of April.

We have added Qualcomm Inc. (QCOM, CSFB: Neutral) to our US Buy List, after the company's shares declined due to weak numbers reported by a competitor making radio frequency chips for mobile phones. Qualcomm however has reaffirmed its earnings guidance for its first quarter and also for the current quarter. Currently the stock already prices in a decline in earnings for the third quarter, as the market anticipates that Qualcomm could also see a slow down in orders. This in our view offers a good buying opportunity for a long-term investor, as the stock valuations in this perspective are attractive. The stock currently trades at 23.6 times its 2003 earnings.

But the stock could also offer a short term trading opportunity, as we expect the company to offer solid earnings prospects for the coming six months, and therefore the stock should recover from the recent weakness. Qualcomm will report its quarter on the 23rd of April and we are looking for a USD 0.36 earnings per share.

Altria Group (MO, $32.19, CSFB Neutral) reported 1Q03 results last week, which were broadly in line with company's guidance. Importantly, MO maintained its guidance of $4.60-$4.70 for FY03. MO's 1Q03 net income decreased 7.6% to US$2.2bn while diluted earnings per share was down 1.8% to US$1.07. Despite a fall in shipments by 16% for 1Q03 For PM USA, we are of the belief that Domestic tobacco fundamentals are stabilising, 1) promotional spending is bearing fruit with sequential improvements in retail market share over the past two quarters, 2) Price gap between deep discount and premium brands have stabilised over the past 6 months. PM International continues to be the stalwart in MO's portfolio with operating income having increased 8.1%. With regards to litigation we are very pleased with the outcome of the Miles bonding issue, especially with the fear of a potential bankruptcy of PM USA having been lifted. Essentially, the bond that MO has to post in order to appeal the case has been halved. A pre-existing term note of $6bn, the result of an intercompany financing arrangement between PM USA and its parent Altria will serve to finance the bond. We believe that the market had grossly mispriced that MO due to undue fears of bankruptcy. On the back of this we see it fit to upgrade MO from a HOLD to a BUY with a stop loss level of US$27 and a target price of US$40.

European Equities


• The DJ EUR Stoxx 50 closed the week 3.4% higher at EUR 2324.27

• Allianz' right issue - existing investors with a long-term view should take this opportunity to bring down their average price. However based on our fundamental view on the industry and the sector we would not advise new investors to buy the rights

The DJ Stoxx 50 continued its climb on the back of continued positive sentiments and earnings reports from several companies on both sides of the Atlantic coming in more or less in line with market expectations. However, with the earnings season only just having started, we believe the sustainability of the increase will depend on how many companies will meet their targets and how concrete and positive guidance is becoming. In addition, the DJ Stoxx 50 is less than 4% away from its 40 week moving average and therefore will face resistance.

The insurance sector was once more the sector leader with Allianz (ALV GY; 58.96) increasing by over 14% in the last week. Allianz will issue 117m new shares at a price of EUR 38 each to raise EUR 4.4bn of capital. The offering period will end on 29 April 2003. We believe existing investors with a long-term view should take this opportunity to bring down their average price. However based on our fundamental view on the industry and the sector we would not advise new investors to buy the rights.

Another stunning performance came from our favourite European technology play SAP (SAP GY; EUR 94.10), increasing more than 15% in the last 4 trading days. SAP's 1Q figures came in below expectations at the top line partly due to an adverse currency impact, but tight cost control led to better than expected results at the bottom line. Total revenue was EUR 1.52bn, operating profit EUR 298m and EPS EUR 0.60 (CSFB forecast EUR 0.53). Margins were the key positive which came in at 20%. The market was pleased especially with the positive developments in its US division and the licence revenue, which came in better than expected at EUR 352m representing a 12% decline (4% in constant exchange rates), but still impressive compared to the competition, which saw declines of 50% yoy. SAP reiterated its full year earnings guidance of EUR 3.45-3.60 and licence revenue of around EUR 2.2bn.

Given the fact that the stock has run up substantially in the last two weeks, we believe that the upside from here is likely limited and we would use lower levels as entries for long-term exposure. The two forces driving the story are the installed base and the dominant market position. The catalyst on a 12-18 months view is that according to a recent study from Deutsche Bank around 40% of the installed bases need to be upgraded. Usually in this process, new functionality will be added, which should be a major licence revenue driver going ahead.

Nokia (NOK1V FH; EUR 14.76) reported 1Q results on Thursday. However, following the mid-quarter update in which Nokia narrowed its 1Q guidance towards the lower end of the range, few surprises were expected in terms of headline numbers and continued strong operating cash flow. Revenue came in in line with expectations (EUR 6.77bn, down 3% vs 1Q 02) and EPS at EUR 0.18 (EUR 0.17 stripping out capital gains, down 10.5% yoy) at the upper end of the downward revised range. The outlook for the mobile division remains favourable and Nokia expects the overall market to expand 10% this year. Mobile phones sale grew by 1% yoy in the 1Q and for the 2Q mobile phones sales are expected to grow between 4 and 12% yoy backed by its broad and competitive product range including a growing share of compelling colour and multimedia models. The outlook for the network division, on the other hand, remains cloudy. Nokia expects the overall market to decline 15% this year. Nokia had to book a net loss of EUR 127m in the 1Q and will take a restructuring charge in the 2Q of EUR 350-400m. This expense will take off around 5-6 cents of the 2Q EPS, which is expected to be in a range of EUR 0.13-0.16. We remain neutral on Nokia and would like to see a pick-up in the network business before we become more positive.

Another stock we like and is also on our recommendation list is Adecco (ADEN VX; CHF 49.6). Adecco was a star performer in yesterday's session increasing by 15%. The results were well ahead of market estimates. Net income fell by only 4.5% to EUR 65m, versus CSFB's forecast of EUR 41m (consensus range EUR 34-51m). A third of the outperformance stemmed from higher gross margin and the other two thirds from lower SG&A (fell by 10.6%yoy), related to the accelerated branch closures in Q4 last year. Adecco seems to have outperformed the market in each region, for instance in, Adecco Staffing North America revenues rose by 9% against a market up less than 4%. While cost seem to be under control, the revenue outlook remains uncertain. However, the stringent cost control reduces the downside risk to numbers and we believe Adecco offers material upside potential on a 12-month view especially when economic data starts to improve.