DaimlerChrysler is our top auto stock pick (page 3 of 3)

Roche (ROG VX; CHF 111.25) reported 1H results, which were in line with expectations as a whole.

Sales increased by 17% in USD and only 6% in CHF reflecting the adverse exchange rate impact of the strong Swiss Franc, compared to the USD. Whereas the net profit fell 24% due to losses on investments, operating profit increased by 15%. The company reiterated its full year target that sales and EBIT will increase in double-digit figures and operating margin will stay stable at 18%.

Roche remains one of our favourite European pharma plays. We like the unique set-up of a diagnostic and pharma division and believe the stock is going through a period of rerating. Our target price is CHF 120. We would not chase the stock at these levels as current levels represent a premium to the sector.

Also last week, Roche agreed to buy Igen International for USD 1.42bn, which will finally end a dispute over blood-testing technology.

DaimlerChrysler (DCX GY; EUR 31.39, PSA Peugeot Citroen (UG FP; EUR 39.34), Renault (RNO FP; EUR 49.80) and Volkswagen (VOW GY; EUR 36.80) all reported 1H results last week.

Whereas PSA Peugeot Citroen disappointed whereby positive volume effects were overshadowed by negative currency movements and Volkswagen reported in line operating results, which showed a strong decline, Renault exceeded expectations and even reiterated its outlook.

The autosector has underperformed the broader market during the last 12 months and the recent earnings reports are not yet as encouraging as was expected. However, we believe that once we see an improving economic environment the next sector rotation is likely to be into autos. Our favourite pick remains DaimlerChrysler.

DaimlerChrysler confirmed its expectations when it warned last month that the Chrysler unit will post a 2Q loss on the back of an escalating price war in the US. The group reported sales of EUR 34.3bn, which fell considerably short of the mark from the previous year's period due to currency effects and lower automobile sales.

The group's operating profit fell two thirds to EUR 641m, but the level was more than double the consensus estimate of EUR 288m. However, management reiterated its full year guidance. In addition to the original plan to save EUR 2bn at Chrysler, a further USD 1bn of cost cuts were announced to offset losses incurred from the incentives. We reiterate our buy preferably at levels below EUR 30.

Other heavyweights such as Infineon (IFX GY; EUR 11.07) and STMicroelectronics (STM FP; EUR 18.89) results impacted trading. Whereas Infineon reported sales in line and a smaller than expected 3Q net loss, STMicroelectronincs' earnings were on the disappointing side reporting a 24% drop in the 2Q profit.

The company mentioned a difficult pricing environment and lowered margin forecast. Given the still uncertain environment we would not rush into these counters at this point.

Adecco (ADEN VX; CHF 62.15) reported 2Q results in line with consensus. The company also announced that they would issue a convertible bond worth CHF 750m due 2013. As CSFB will be co-lead manager in the issue we are restricted from making any comments until the blackout has been lifted.

Stora Enso (STERV FH; EUR 11.00) published results in line with the statement issued earlier this month. Weak global demand, price pressure in various grades and the mandatory mid-summer stoppages were the main drivers of the weak performance. The company sees global economic activity as "muted".

However, there appears to be signs of improvement in USA, but not yet in Europe. The stock offers a value play on the global economic recovery, with sound balance sheet and attractive dividends. At P/B of 1.17 the stock is some 15% below historical average. The dividend yield of 4.1% (2003E) is at the high end of the last five years.

Our media mid cap play JCDecaux (DEC FP; EUR 10.51) reported results in line with expectations. Excluding currency movements, organic growth reached 1% in a challenging advertising market. The management does not foresee any recovery in the 2H in Europe, but sees signs of recovery in the US. We continue to like JCDecaux's business model.

The fact that the contracts are usually for the longer term adds a defensive element in an otherwise cyclical market. However, due to the announced delay in any recovery in the advertising market, and the over 50% rally we saw in the stock since its March low, we believe the stock could suffer from some short term weakness.