Still cautious on the US stock market (page 1 of 3)

US equities

Reporting season is coming to an end this week. Among our recommendations, the following companies are expected to report their figures these coming days.

• Gillette Co. (G, $30.25, CSFB: Not rated); $0.292 EPS expected on August 5,
• Masco Corp. (MAS, $23.90, CSFB: Not rated); $0.455 EPS expected on August 6,
• The Macerich Co. (MAC, $36.85, CSFB: Neutral); $0.290 EPS expected on August 7, and
• Carolina Group. (CG, $25.09, CSFB: Not rated); $0.970 EPS expected on August 7.

On the macroeconomic side, Factory Orders for June, ISM Non-Manufacturing for July, and Consumer Credit for June will this week's key data. (Source: Bloomberg).

Masco Corp.'s 2Q'03 result is expected to meet or to exceed street estimates of $0.455 EPS next Wednesday. This would represent a 5.8% increase y-o-y.

However, the company is aggressively repurchasing its shares, hence we remain more cautious than analysts. Several new product programs are working in coating and cabinets, but contrary to analysts, we do not believe that strong home sales would be a driver for a rise Masco's share price.

According to Bloomberg, stock price is not significantly correlated with new home sales. In the current environment, we believe the company's strengths come from currency gains (the company had 16% of its revenue coming from Europe at the end of FY 2002) and from its diversified business segments (5 in total), each having a significant part in MAS' sales, protecting earnings from a shortfall. Hence we reiterate our long-term Buy rating on MAS, believing a 2.34% gross dividend yield makes the stock attractive.

Within our cautious view on the broad market we have filtered out two trading opportunities. The first recommendation, which is also within our theme of energy stocks, is the second largest oil service company Halliburton Co.

Halliburton (HAL, $22.24, CSFB: Outperform) reported strong Q2 results with revenues growing to $3.6 billion. Net EPS was of $0.06, versus an estimated $0.02. Contracts in Iraq contributed 9% of the revenues.

Company management said it expects a gradual improvement in the second half of the year in most regions and all business segments. The results were mainly supported by firm results in its core oilfield business. We believe that Halliburton should continue to see strong earnings momentum thanks to the favourable oil price, and the exploration and production segment being in an up trend.

One caveat is that the company is in settlement talks for asbestos claims concerning its engineering and construction group Kellogg Brown & Root (KBR).

CSFB models that in a worst-case scenario the company would incur total liabilities of approximately $1.7 billion, reducing 2004 EPS by $0.09 to $1.38.

Halliburton trades at an approximate discount to its peers of 35%, taking in account the above model, which results in a fair value of around $30 when closing the valuation gap to its peers. Which means that possible asbestos claims at current levels appear to be priced in. Hence the stock looks attractive for an investor seeking exposure to the oil service sector.

We see the stock as a trading position with price target at $25. Since the asbestos cases remain a risk factor, we would also recommend setting a tight stop loss level.

The second trading opportunity is the wholesale drug distributor Cardinal Health Inc (CAH, $56.10, CSFB: Neutral). Cardinal reported an 'in-line' quarter on the top and bottom line, though bottom line was positively impacted by much lower interest expenses and lower tax rate.