A new outlook for commodity stocks (page 3 of 3)

86.6). It was not only better than expected, but also better than the 16-months low in April.

Especially the sub index of expectations showed an impressive increase (actual 97.2 vs. 94.9). However, we remain cautious as the increase seems to come from retailing and manufacturing, which were at a 15-year low and a bounce from these levels is not an indication of a recovery, but more an indication that the retail recession is easing. In addition, the current conditions component has been a better reflection of German economic reality than the expectations component over recent years.

To summarize our current view: we see opportunities for a long term investor in the energy sector, the commodity sector in general and in newly added stocks, which are a play on the strengthening Euro.

In the energy sector, Total (FP FP; EUR 124.50) offers attractive levels for investors with a 12-month view. Total offers strong growth in production, comes with an attractive dividend yield of 3.62%, trades at a discount to the other supermajors and the restructuring in Chemicals should provide further positive newsflow.

In the commodity sector, specifically in the pulp & paper sector, we like Stora Enso (STERV FH; EUR 8.85). Industry fundamentals remain positive, dividend yield attractive at 5%, price increases coming through and with less revenue generated in the US than its competitors, Stora has a smaller transactional risk.

We would also like to reiterate our two new plays on the depreciation of the US Dollar, Koninklijke KPN (KPN NA; EUR 5.93) and Adidas-Salomon (ADS GY; EUR 74.80).

Vodafone (VOD LN; GBP 132.50) reported a solid set of results for the financial year ending end of March. Vodafone reported a 26% increase in EBITDA to GBP 12.65bn (consensus estimates looked for an increase of 23% to GPB 12.4bn), a 33% increase in sales to GBP30.38bn (consensus estimates looked for GPB 33.8bn) and better than expected free cash flow of GBP5.17bn owing to lower than expected capex and cash taxes, and greater dividends received from associates. EPS before goodwill increased by 32% to GPB 6.81 (consensus expected EPS to rise by 24% to GBP 6.4 before goodwill amortization and exceptional items). Another good news was the 15% increase in dividends to GBP 1.62.

Due to the general write down of goodwill (not related to 3G) of GBP14.5bn, the company reported a net loss of GBP 9.81bn (vs GBP 16.15bn).On the operational side, stronger than expected subscribers (at 119.7m) were offset by weaker than expected ARPU.

Given that Vodafone's CEO Sir Christopher Gent will be stepping down at the end of June after building up Vodafone for 18 years, it is not surprising that the results came in at the top end of expectations. However it will be interesting to see what decisions his successor Arun Sarin will make when he takes office on 1 July. The two most important issues are the minority stake in US cellular company Verizon Wireless and the handling of the 3G licenses.

Last Friday, mmO2 took an asset impairment charge of GBP 5.9bn against its GBP 10bn 3G licenses in Germany and the UK. After several of its competitors managing down expectations on 3G, Vodafone will not write down its 3Q licenses, but amortize them over 20 years for the time being. A potential justification for doing so might be its superior market share. It remains to be seen if the new CEO decides to take different measures.

The strong core earnings and positive broker comments led the stock to new highs of GBP 1.325 on Friday surpassing our target price of GBP 1.30. We would advise investors to take partial profit. Given Vodafone's expected free cash flow yield of 6.3% against 5.5% of the sector, its strategic advantage over its competitors with the launch of Vodafone Live and attractive valuation (with a PER of 15x for 04 the stock is trading at the sector average though the shares deserve a premium due to its market position) we decided to raise the target price to GBP 1.40. Stop loss remains at GBP 1.15.

Nestle's (NESN VX; CHF 273.00) investor seminar was held over two days during last week. CSFB believes that Nestle is on the right track to grow its margins. On the one hand, nutrition is taking up a bigger part of the R&D and should facilitate higher margins on the other hand, a bigger part of the synergies from the Ralston acquisition will now already be realised by the end of this year instead of only next year.

This confirms our stance that in the current environment Nestle remains an attractive defensive play at these levels for a long-term investor. Nestle is currently trading at a 10% discount to the average of its two competitors Unilever (UNA NA; EUR 49.70) and Danone (BN FP; 116.90).