Specific weak US dollar stock plays

US equities

The U.S. Trade Account, representing the balance between the exports and imports of goods & services became negative in the early 70's. Before, the U.S. was net exporter of goods, and net importer of services.

Since mid-70's until 2002, the situation changed, and the U.S. became a net importer of goods, and net exporter of services. Despite the increase in services exported, this did not offset the import of goods. However, exports of goods from the U.S. remain significant, representing about 70% of total exports of goods & services

Therefore, we believe companies with a large part of revenues coming from exports of goods should benefit from a weak U.S. dollar. Hence we recommend 3M Co. (MMM, $125.45, CSFB: Neutral). At the end of FY2002, this Blue Chip had more than 50% of its revenue coming from outside the U.S. (25% from Europe), which is the largest part among the large cap in the capital goods sector (source: Bloomberg).

Based on our current investment focus on energy stocks and on dividend yield stocks, we have added ConocoPhillips (COP, $52.09, CSFB: Outperform) to our US Buy List. We are taking profits in Schlumberger Ltd. (SLB, $47.40, CSFB: Neutral) and Noble Corp. (NE, $35.82, CSFB: Neutral) and switching the positions into ConocoPhillips. ConocoPhillips is the No3 US integrated oil company as a result of the merger between Conoco and Phillips Petroleum completed at the beginning of September last year.

ConocoPhillips, with its strong downstream business has been benefiting from expanding refining margins during the first half of the year. We expect refining margins to remain strong as we see the possibility of a tightening supply/demand situation.

Low inventories in the OECD countries, namely in the US, on one side, and the production cut by the OPEC starting on the first of June and a further possible cut during the organisation's meeting on the 17th of June, could bring supply/demand out of balance.

What makes ConocoPhillips attractive as an investment at this point is the indicated dividend yield of 3.07% and attractive valuations. The stock currently trades at a 9.77x 2003 earnings and at a price to book of 1.14x.
In a longer-term perspective we do like the company's strategy to grow its liquid natural gas business.

Natural gas is becoming increasingly important, demand is in a steady rising trend, and prices remain high, due to tight supply. ConocoPhillips is responding to this trend and is developing its natural gas sources, mainly in Asia. The company has large projects in development in Indonesia and Australia/East Timor, which should start production in 2003, respectively 2004.

In our view ConocoPhillips, given compelling valuations, growth potential, its ongoing merger related integration process, and the 3.07% dividend yield make the stock a good pick in the energy sector.

Gold and the gold mining stocks continue their rise, as the US Dollar tends to weakness. And as the economic outlook remains uncertain, we grow increasingly confident with our forecast of gold reaching $425/450 per ounce during the year. Therefore, in order to increase our exposure to gold, in addition to Placer Dome Inc. (PDG, $10.59, CSFB: Outperform) we are buying Newmont Mining Corp. (NEM, $28.71, CSFB: Neutral).

Newmont Mining's (No 1 US gold mining company) attractiveness lies in the fact that it is not hedging its gold reserves. This means, that it has very high earnings sensitivity to the gold price and thus is an ideal vehicle to invest in gold.

In terms of valuations, with a 40.2x forward P/E and a price to book of 2.07x, it is slightly more expensive than Placer Dome's P/E of 28x and price to book of 1.97x, but this premium is a result of the fact that Newmont Mining does not hedge parts of its reserves.

We have a 12 months price target of $35 for Newmont Mining, based on our price assumption for gold.

To add further to the weak US Dollar play, we will be looking to create a formal list of potential beneficiaries. However, here are a few names we shall be doing our due diligence on. These are stocks with either European or International sales accounting for more than 25% of total revenues:

1. Air Products & Chemicals (APD US, $43,82, CSFB: Neutral)
2. Archer-Daniels-Midland (ADM US, $11.68, CSFB: Neutral)
3. Coca-Cola (KO US, $43.95, CSFB: Outperform)
4. Pepsi Co (PEP US, $43.30, CSFB: Neutral)
5. Sealed Air (SEE US, $44.08, CSFB: Outperform)

We will keep you posted.

European equities


• The DJ EUR Stoxx 50 closed the week 1% higher at 2349.13

• Rigorous cost cutting exercises should support the market but weak economic fundamentals and strong Euro point to a range bound market

• Reiterate our two preferred oil stocks

The Eurotop 300 has been trading above its 3-month moving average for over a month now and the breadth to the current market rally has been the best since the end of the bull market. However, we would caution against too much optimism, as we believe for the rally to continue in that pace we need an improvement in economic data and the top-line.

On the economic front, Germany released its 1Q GDP figure. After not having grown in the 4Q and reporting a decline of 2% in the 1Q, Germany is technically in a recession. Combined with negative growth in Italy and the Netherlands, the eurozone growth is set to remain zero. This would very likely increase the chance of a rate cut on the ECB's next meeting on June 5th.

On the positive side, we can state that newsflow from the recent 1Q earnings season was often better than expected, and together with rigorous cost cutting exercises should serve to support the market. On the other hand, the strong Euro will weigh heavily on corporate earnings in Euroland. A recent study by Deutsche Bank estimates that the effect of a 10% drop in the dollar some 355 companies would be an average of a 4.7% drop in EBIT.

On the corporate front, we saw another slew of earnings reports this week. KPN (KPN NA; EUR 5.84) and Telefonica Moviles (TEM SM; EUR 6.74). Deutsche Telekom (DTE GR; EUR 12.30) reported an unexpected profit for the first time in two years (net income at EUR 850m and EPS of EUR 0.20) due to cost cutting, asset sale and further debt reduction, and also increased its EBITDA guidance for the full year to EUR 17.2-17.7bn. UBS (UBSN VX; CHF 71) reported good results with revenue 17% above consensus estimates.

On the disappointing side were figures from the German bank HVB (HVM GR; EUR 12.10), which reported its third consecutive loss of EUR 77m on write downs and the truck and engineering group MAN (MAN GR; EUR 14.32), which disappointed with net income declining to EUR 18m whilst the market expected EUR 7m increase. Allianz (ALV GY; EUR 67.35) reported a loss of EUR 520m and disappointed when saying that they would have to write down its investment portfolio by up to EUR 500m if the stock markets move sideways.

We would like to reiterate our positive view on the energy sector. Energy stocks tend to have healthy balance sheets, comfortable dividend yields, strong earnings revision momentum and show attractive valuations.

Our two preferred plays in Europe, TotalFina (FP FP; EUR 124.0) and ENI (ENI IM; EUR 13.346), come with an attractive dividend yield of 3.64% and 5.62% respectively. Both of them reported a good set of figures. TotalFina has one of the highest production growth figures among the supermajors and Eni offers the highest dividend yield of the European integrated, and on 6.2x EV/EBITDA, the stock looks attractive trading at an 11% discount to Total and a 20% discount to BP.

Please note that CSFB initiated coverage of the luxury goods sector with a market weight and rate LVMH (MC FP; EUR 43) outperform. Key points are the strong business model reflected in strong EBITA margins, consistent with significant pricing power. In addition, the stronger outlook of the company after the restructuring and the focus on its remaining core products including the selective retailing business, DFS and Sephora, should provide a catalyst.

The fact that the company still reports double-digit growth for its most important division Louis Vuitton in April and May shows that the outbreak of Sars, which raised concerns about the vulnerability of the whole sector would not hinder the sector's performance over the medium term. The stock ended the week 9% higher after positive comments by its CEO on the annual general meeting.

Our preferred play in the steel sector remains Arcelor (LOR FP: EUR 9.96), which reported results in line with expectations. EBITDA came in at EUR 641m compared to EUR 301m in the 1Q last year and EPS of EUR 0.4 compared to EUR -0.05 in the 1Q last year. On a divisional basis, strong performance was reported in the flat rolled division driven by higher steel price (according to Metal Bulletin, the benchmark European steel prices have gained 11% from a year ago) and synergy whereas the long division suffered from higher scrap prices.

While in the short term the steel fundamentals are likely to remain weak we would like to point out that Arcelor remains a restructuring and debt cutting story. After its merger only a little over a year ago, the synergy realisation remains on track and is so far impressive. Arcelor managed to cut costs by EUR 230m since the merger, which is more than double of what the company predicted.