Although merger speculation could provide some support, both of the stocks face patent risk and Sanofi still has a share-overhang (L'Oreal owns 19.5%, Total 24.5%).
We maintain our positive view on the energy sector from a structural point of view, however after December's strong rally in oil stocks we are removing our two favourites Total SA (FP FP; EUR 141.30) and ENI (ENI IM; EUR 14.737) from our recommendation list. Since mid November, Total increased by around 14% and ENI by around 12%.
The rally brought both stocks close to our target prices and lead to fuller valuations: the European oil sector's PER relative in 05 is 5% above its 10-average levels. We prefer to see the individual stocks to consolidate before entering new positions. Consolidation could be triggered by the upcoming 4Q earnings results and the companies' strategy presentations around February and March.
We added Credit Agricole SA (ACA FP; EUR 19.46) as a value play with a unique combination of a PER 04/05 discount to the sector (as valuation focus of the sector will switch in 1Q 04 from 04 estimates to estimates for 05, the valuation discount should become even more evident), retail defensiveness (earnings are up to 80% retail driven) and further restructuring potential.
We have a target price of EUR 22 and a stop-loss level of EUR 17.40. Valuation: PER 04 10.2x (sector average of European retail banks 11.3x, universe average 12.4x), PER 05 8.9x.
And finally, three of our recommended stocks reached our target prices, which we subsequently increased:
Vodafone (VOD LN; GBP 1.4825) reached our target price of GBP 1.40. The stock yields 27% since beginning of last year. We would advise to take partial profit. We will increase our target price to GBP 1.66 (+18.6) on a 12-months view and our stop-loss level to GBP 1.19. We reiterate our buy.
We keep the stock on our list as from a sector point of view we believe telecoms with its more stable profit growth should benefit from a sector rotation out of cyclicals when the cyclical stock market recovery is peaking later this year.
After Vodafone focused during the last 3 years on cost, capex and yield, prospects of top-line growth is improving. In addition, the 3G bandwagon is expected to start rolling this year and the market should anticipate an improving revenue outlook.
Valuations are slightly below the sector average however we believe Vodafone's combination of growth and visibility justifies a higher multiple. The stock is also supported by a GBP 2.5bn-share buyback program out of which only 10% was completed up to the end of last year.
SAP AG (SAP GY; EUR 139.59) yields 13% since recommendation beginning of September last year. Given SAP's status as a market leader and the fact that corporate spending is slowly picking up, we still consider SAP a core holding and first choice in the software sector. We increase our target price to EUR 153 (+11%) and our stop-loss level to EUR 117. CSFB currently has an EPS forecast of EUR 4.25 which implies 11% license growth and a 2% operating margin improvement.
Any further improvements in market conditions are likely to lead to upward revisions of these. CSFB estimates that every 1% increase in license growth rates leads to around an extra EUR 0.05 of EPS. Therefore assuming license growth of around 15% this would lead to EPS of around EUR 4.5. Applying EPS of EUR 4.5 to the estimated IBES PER for 04 (34x) leads to a price of EUR 153.
Depfa Bank Plc (DEP GY; EUR 108.70) yields 17% since our recommendation 2 months ago. We believe the investment case is still valid and is basically built on the following: 1) the increase in demand for loans due to increased government budget deficits and 2) the fact that since November the company enjoys 100% freefloat (before below 60%) which should make the stock more attractive.
Valuations remain undemanding with a PER 04 of 9.82x. We increase our target price to EUR 120 (+16.50%) and our stop loss level to EUR 90.
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Credit Suisse, Private BankingTuesday, January 13 - 2004 at 09:51 UAE local time (GMT+4)
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