US stimulus package implications (page 3 of 3)

In addition, KPN underperformed in the current rally as all eyes in the telecom sector were on Deutsche Telecom (DTE GR; EUR 12.12) and France Telecom (FTE FP; EUR 19.98).

We believe going forward this gap should narrow as KPN's management is very committed to further cost cutting and their efficient operating structure should enable them to improve their competitive position. Their strategy is to focus on free cash flow and in fact KPN has one of the highest free cash flow yield in the sector. As the end demand remains weak, an investment in KPN has to be seen as a cost-cutting and restructuring story. We assigned a target price of EUR 6.50 and a stop-loss level of EUR 5.30.

Adidas has a net USD exposure of over USD 1bn (substantial part of production is outsourced to Asia denominated in USD and major part of sales is in Europe), which makes it actually a beneficiary of a depreciating USD. A

According to a study by Deutsche Bank, a 10% depreciation of the US Dollar would have a positive 20% effect on Adidas' EBIT. Adidas has a strong brand, diversified product portfolio, low beta to the DAX and is attractively valued compared to its peers (in the last 5 years Adidas traded on a PER of 17.2x, PER for 03 stands at 13.11x; current discount to Nike 23%, which is in line with its 5-year average); current premium to Reebook 4.5% (less than its 5-year average of a 26% premium). In addition, Adidas manages to keep its margins rising on the back of an improving product mix and selective price increases. We assigned a target price of EUR 85 and a stop loss level of EUR 70.

As there are few companies, which actually benefit by a depreciating US Dollar it is also worth mentioning Arcelor (LOR FP; EUR 9.03). The positive impact of a 10% weaker US Dollar on Arcelor's EBIT is estimated to be 10.8%. Arcelor remains a cost cutting and restructuring story as well. Created by a merger only a little over a year ago, the cost cutting achieved so far is impressive.

Besides this 'currency theme' we would continue to focus on defensives such as pharmaceuticals. Our favourites remain Sanofi-Synthelabo (SAN FP; EUR 51.40), Aventis (AVE FP; EUR 44.5) and Roche (ROG VX; CHF 97.7). Roche showed a particularly strong performance during the last week increasing by over 12%.

Several developments such as the successful US launch of the hepatitis C drug Pegasys, the FDA approval of the HIV drug Fuzeon, a positive FDA advisory committee vote for the anti- allergy antibody Xolair, and the announcement earlier in the week of the Phase III success of Avastin in colorectal cancer. This should lead to better visibility as the stock enjoys EPS and rating upgrades by several brokers.

Furthermore, we would continue to focus on the energy sector. According to a study by Deutsche Bank the sector with the most positive earnings revision ratio is clearly energy with upgrades for 66% of the companies.

In fact, the 2003E index earnings were upgraded by 3.2% over the last month. Other sectors with upgrades in their 2003E earnings include food & beverages, financial services and telecoms. Our favourite plays in the energy sector remain Total (FP FP; EUR 121.70) and ENI (ENI IM; EUR 13.524).