DaimlerChrysler is our top auto stock pick

US Equities

Last week, U.S. stocks remained virtually flat, with the S&P 500 gaining 0.54% due to mixed earnings reports. However, better-than-expected durable goods orders for June boosted the S&P 500, which rose 1.74% last Friday.

Coming Thursday, investors would keep an eye on GDP figures, expecting a 1.5% growth for 2Q. In the meantime, earnings reports would continue to drive the market, and among our recommendations, the following companies will present their quarterly figures this week (source: Bloomberg):

• Northrop Grumman Corp. (NOC, $87.10, CSFB: Outperform); $0.859 EPS expected on July 28,
• ConocoPhillips. (COP, $52.94, CSFB: Outperform); $1.432 EPS expected on July 30, and
• Exxon Mobil Corp. (XOM, $35.76, CSFB: Neutral); $0.558 EPS expected on July 31.
• Clear Channel Communications (CCU, CSFB : Outperform) $0.369 expected on July 29.

Northrop Grumman Corp. is expected to report $0.859 EPS vs. $1.52 y-o-y. We continue to believe NOC would be one of the major beneficiaries from the defence budget increase for 2004, which is currently being discussed by the Senate and the Congress.

The company consists of four business segments - Electronics, Ships, Information Technology & Services, and Integrated Systems -, each of which has a significant part in NOC's revenue - 30%, 27%, 24%, and 19% respectively in 2002 (source: Bloomberg). Hence, we reiterate our Buy rating on Northrop, believing steady earnings and strong cash flow would support stock price for defensive investors.

We would like to reiterate our Buy rating on Harley-Davidson Inc. (HDI, $45.70, CSFB: Neutral), which reported good quarterly earnings recently (see U.S. Daily Comments from July 17). We believe investors would be attracted to HDI's attractive risk/reward profile and increasingly focussed on HDI's quality stream of consistent 15% earnings growth, accelerating cash flow generation, and opportunity for accelerated dividends, and shares repurchase (source: A.G. Edwards).

Furthermore, we believe its 100th anniversary would serve to boost sales, helped by a weak dollar. Hence, we believe our target price of $55 is reasonable, given a theoretical price of $62 given by the Dividend Discount Model (source: Bloomberg).

We have added the medical device maker St Jude Medical Inc (STJ, $52.79, CSFB: Not rated) to the US Buy List, a stock that we see as an attractive long-term investment. The worldwide medical device business represents some $175 billion in annual sales. Standard & Poor's projects a 12-13% annual revenue growth and a 15-17% earnings growth for the industry over the next three years.

The industry's most profitable sector comprises innovative high technology products such as implantable and external defibrillators, orthopaedic devices and diagnostic imaging systems. St. Jude shares sold off sharply after the company announced its Q2 results. While overall sales of $495 million were up 23%, it was the sales in the implantable cardioverter defibrillators (ICD) that disappointed the market.

A key event will be the launch of its new cardiac resynchronisation therapy device (CRT-D) in the first half of 2004, in order to compete with Guidant and Medtronic in this increasingly important area in the ICD market.

The US ICD market is expected to grow to about $4.4 billion by 2005, from the current 2003 estimate of $2.9 billion, and with its new CRT device St. Jude could grow its market share to 15-20% by late 2005, compared to an estimated 10-11% currently. The stock currently trades at a 23.94x consensus 2004 FY earnings forecast which given the company's growth outlook appears attractive.

Last Friday the drug maker Pfizer Inc (PFE, $33.04, CSFB: Outperform) reported quarterly earnings, an EPS of $0.30 on total revenues of $9.993 billion. Revenues were distorted by an inventory work down related to the acquired Pharmacia Corp. and the Pharmacia revenues were only captured partially as they were integrated during the quarter.

Including non-cash charges related to the acquisition, Pfizer posted a net loss per share of $0.48. Core pharmaceutical sales growth was broadly in line with expectations, as well as operating margins. Pfizer has increased its drug prices by 4-5% on average, which should provide further support to second half sales prospects. Pfizer has reiterated its earnings guidance for a $1.80 EPS in 2003 and a $2.10 in 2004.

Pfizer has also given an update on its pipeline and with 63 drugs in early development, 27 in mid-stage, 12 in advanced development as well as 4 in registration, the pipeline possesses considerable breadth. Key drivers in the near term will be the launch of the migraine drug Replax, the hypertension drug Inspra, of Pregabalin a follow-up version of the highly successful CNS drug Neurotonin and a combined Norvasc plus Lipitor cardiovascular treatment, which offer, solid incremental sales growth opportunities.

The oil service company Noble Corp (NE, $32.97, CSFB: Neutral) posted Q2 earnings of $0.33, in line with consensus estimates. US domestic revenues mainly supported the results, as utilization in international drilling declined slightly.

Noble Corp is continuing to pursue its growth strategy by constantly increasing its fleet through opportunistic acquisitions of vessels and should also be able to capitalize on its leading position in geologically strong areas, such as the Gulf of Mexico, Middle East and West Africa. Especially in West Africa, which is a source of long-term growth thanks to immense estimated deep-water offshore reserves, Noble Corp has won contracts and is bidding for new projects.

The company also expects the Middle East to remain a robust market. Noble Corp continues to deliver solid results, confirming its strong position in the industry. With deep-water offshore drilling expected to experience strong growth rates over the coming years, Noble Corp has solid earnings prospects.


European equities

• The DJ EUR Stoxx 50 closed the week slightly down at 2442.13
• Pharmas and autosector in focus last week. Coming week will shift attention to the financial and telecom sector.
• Update on Stora Enso, JCDecaux and Adecco

The reporting season continues with the focus last week on the pharma and auto-sector. Negative exchange rate effects continue to impact the top-line and the outlook given by most companies remains cloudy.

The coming week should shed some further light on the telecom and bank sector. This week should also give some further insight into the state of the consumer and business confidence. The German IFO, the French INSEE and the EC sentiment survey will all be released this week. The ECB faces another rate decision this coming Thursday, but the market does not expect any adjustment at this point in time.

On the technical side, the DJ Euro Stoxx 50 index is currently consolidating with the medium term trend slowing. A break above 2540 is needed to improve the outlook. A break below 2400 will invoke the next support 2360 or even 2275.

Novartis (NOVN VX; CHF 53.05), Serono (SEO VX; CHF 876) reported broadly in line with expectations and all of them managed to grow revenue above the global pharmaceutical market average which is currently estimated at 7% YTD.
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.