Still cautious on the US stock market (page 3 of 3)

Arun Sarin has the reputation of being an innovative operating man with a track record of generating shareholder value.

The biggest challenge will be integrating its 45% stake in Verizon Wireless, which is held through AirTouch. But there could also be renewed interest in Cegetel, which is 70% owned by Vivendi Universal through SFR, which remains among the most profitable operations in Europe. Vodafone has given Vivendi Universal six-month notice to end the stand off, which prevents Vodafone from buying any Vivendi Universal shares.

This will likely cap the share price over the medium-term. However, we would advise to buy on weakness ahead of interims in November, which should show robust margins. For the long-term investor, Vodafone remains the no 1 or 2 player in all core markets and we are confident that its new CEO can deliver on the expectations.

One of this week's outperformers was BNP Paribas (BNP FP; EUR 47.55) after it reported figures slightly better ahead of expectations. The positive surprise came mainly from a record 2Q net banking income (increase of 13% yoy) and from the lower loss provisions. Improved earnings from corporate and investment banking helped revenue and gross operating profit to record highs, but the stronger USD impacted profits from consumer banking.

Return on equity came in at 14%. We reiterate our buy for investors with a long-term horizon. Going forward a recovery in the French retail market, which remains one of the most attractive in Europe, could be expected.

Wholesale banking should remain robust with improving earnings driven by better operating performance in investment banking and lower cost of risk in commercial banking. Looking at valuations the stock trades at a discount to its peer average and we view the decision to buy back EUR 2bn in the coming 18 months as an improvement in acquisition discipline, which should support the stock further.

ENI (ENI IM; EUR 12.977) reported an 8% increase in EBIT yoy despite a strong Euro. 2Q oil production rose 5%, which is on track to reach the company's target for annual growth of 6% through 06 making it one of the fastest growing oil companies. We reiterate our buy on ENI, which comes with an attractive dividend yield of 5.7%.
Our other favorite oil stock Total (FP FP; EUR 128.70) will be reporting this Wednesday.

According to a recent study by Citigroup, BNP Paribas, ENI and Total rank at the top out of the top 15 European large caps, screening them by (1) trading at a discount to the market and (2) enjoying relative earnings upgrades.

Historically, portfolios based on positive earnings revisions have outperformed stocks with poorer earnings revisions. A possible alternative to gain exposure to these counters could be through an ELN. Given the current technical support, indicative levels for BNP Paribas look attractive with a floor of around 94%, 36 days and an indicative yield of around 10%.

Aventis (AVE FP; EUR 43.89) reported better than expected 2Q figures, which reflected a recovery of US sales of its two main blockbusters Lovenox and Allegra. The company retained its guidance of high single digit underlying revenue growth and reported EPS growth in the mid to high teens.

But this is on a changed currency assumption at USD 1.10 per EUR whereas the previous guidance was at USD 1.02 per EUR. So, in effect this is a 2-3% upgrade. We believe the shares remain undervalued trading at around a 22% discount to European sector average and remains attractive for long-term investors.