Some short-term trading calls

US Equities

An upbeat pre-announcement from the enterprise software maker Siebel Systems Inc (SEBL, $15.25, CSFB: Outperform) has initiated the short-term rally in enterprise software, while better than expected sales figures at Nokia added legs to communication equipment.

In order for trading oriented investors to capture this short-term momentum we have issued some short-term trading calls on the enterprise software and on the communication equipment sector. The trading ideas are companies, which have a solid track record and a key position in their respective segment.

In the enterprise software segment we have added BEA Systems Inc (BEAS, $13.38, CSFB: Neutral) to the US Recommendation List, along with the Web design software maker Macromedia, as both of them are poised to benefit from the expected pick up in corporate IT spending. BEA Systems Inc provides e-commerce infrastructure software.

The company's systems are used in e-commerce applications in various industries. As Enterprise and application software have a relatively high leverage on a recovery in IT spending, BEA Systems should fully benefit from the momentum driven the sector. We have a target price of USD 15 and a stop-loss at USD 12.

Motorola Inc (MOT, $15.71, CSFB: Neutral), Ciena Corp (CIEN, $6.96, CSFB: Outperform) and Polycom Inc (PLCM, $22.32, CSFB: Not rated) are companies operating in different areas of the communication equipment sector and should benefit from the tailwind coming from Nokia's solid revenue figures.

We expect the handset maker Motorola to post similarly solid sales figures, driven by new models and improved pricing. Our trading target for Motorola is at USD 18, while we set a stop loss at USD 14.90.

Ciena should continue benefiting from a gradual recovery in communication spending, as Q4 ' 03 indicated flat to +10% sequential sales increase and gross margins in the mid 20% range. We believe that Ciena has not yet regained full steam, but positive surprises could come while the company reports its Q1 '04 earnings in late February, including market share gains in the optical business.

Third, Polycom is poised to benefit from the cost cutting pressure in international corporations, as the company's audio- and video- conferencing systems allow an efficient way of communication. The growing penetration of broadband network access has paved the way for Polycom's technologies.

We see a short-term fair price for Polycom at USD 26, but would cut loss should the stock drop below USD 21.80. Our trading recommendation would be suitable for aggressive investors who want to capitalize on short-term momentum. Such trades require a tight discipline of taking profit or cutting loss, as momentum can be short lived and sentiment turn around rapidly.

More conservative investors should find attractive value in dividend yielding stocks, as well as in stocks of small and mid cap sized enterprises, which are often overlooked but offer sound growth perspectives while retaining low valuations.

The multi-line insurer Allstate Corp (ALL, $44.02, CSFB: Outperform) is on of our defensive plays. Although the stock has reached our 12-months price target at USD 44 last Friday, returning a 22.22% profit since recommendation on August 13 last year, valuations remain attractive.

This prompts us to revise our 12-months price target upwards to USD 49, an incremental 11.4%, based on the P/E of 11.74x expected earnings and a price/book ratio of 1.6x, which leave some more room for upside in Allstate's share price. Beside this the stock offers a compelling 2.09% indicative dividend yield.

Another investment idea in the insurance sector is the mid cap company IPC Holdings Ltd (IPCR, $40.85, CSFB: Not rated), which with a expected P/E of 8.13x, versus 12.19x for the S&P Midcap Reinsurance index (source Bloomberg), and a price/book ratio of 1.31x offers decent value.

Especially in the light of the solid fundamentals, the healthy 66% operating margin, the average 9.5% p.a. net income growth the company achieves, and the 1.96% indicative dividend yield, IPC Holdings is a good buy at this point.

The insurance sector has under-performed the broader market in 2003 and this could turnaround in 2004.

CSFB changed its rating on Altria Group (MO US, $53.10) from a BUY to a HOLD. This we believe is not an indictment on the fundamentals of the stock, but more representative of the fact that MO has had quite a decent run of late.

The stock remains in line with our thematic play on high dividend yielding stocks. MO Currently yields 5.05%.

There are five triggers, which we believe would serve to drive the stock this year:

1) Favourable resolution of two outstanding important legal issues
2) A diminshing legal risk profile
3) A spin off of it 84% stake in Kraft foods,
4) A break up of Altria in terms of both Philip Morris USA and Philip Morris International becoming separate legal entities.
5) The weakening dollar as 30% of Altria's operating income is generated by PMI ie outside of the United States. We have a target of USD63 on the stock.

We would like to stress that 2004 will be a banner year for US Media Stocks. We would like to highlight two media stocks we have on our US Buy list. We are reiterating our BUY call on Time Warner Inc. (TWX US, $18.59). The company had pledged to reduce its debt level from $30bn to $20bn by the end of 2004.

Encouragingly, this target has in fact already been reached after certain strategic divestitures, most recently of its music business. The stock is now trading at $18.59. We have a 12 month target price of $24, which gives investors an upside potential of 30% from current levels.

Also, with the apparent success of the third installation of the Lord of the Rings Trilogy, we would view this as a further driver to TWX's share price. This is not even taking into account the release of the DVD set and all the other paraphernalia and merchandising that goes along with it.

We would also reiterate our BUY on VIACOM (VIA/B US. $44.13). The company will over the next few weeks decide whether to create a gay-themed cable network playing on the popularity of shows like "Queer eye for Straight Guy" belonging to the Bravo network owned by General Electric Company.

Viacom has till now, very successfully been able to buy or create cable networks that address a niche market, such as Black Entertainment Television, which is an immensely popular network amongst the African American population. The stock currently trades at $44. We have a target price of $48, but will be looking to review it with an upward bias.


Europe

• The DJ Stoxx 50 closed the week flat after reaching new highs on Thursday.
• We added Nokia and Alcatel to our recommendation list in order to capitalise on the current positive momentum in the communication equipment sector. Tight buy and sell discipline is advised.
• We added Credit Agricole as a value play in the retail banking with potential for additional cost cutting after the merger with Credit Lyonnais
• We removed Aventis, Sanofi-Synthelabo, Total and ENI as the stocks have seen a nice run in the last 2 months
• We increased target prices for: Vodafone, SAP and Depfa Bank Plc.

European markets continued their rise with the technology and telecom sector outperforming the overall market.

On Thursday, indices reached new highs supported by the unscheduled 4Q update by Nokia, which triggered not only a rally in its own share but also in its competitors and suppliers to the industry. Nokia finished the day 12.65% higher, Alcatel 10.40% and Ericsson 13.85%.

The upbeat figures of Nokia and further current positive signs from the communication equipment sector suggest that the mobile phone industry could have finally turned the corner. We added Nokia and Alcatel to our recommendation list in order to capitalise on the current positive momentum in the industry.

We would like to point out that both of these recommendations come with a higher risk/return profile as the industry is at a turning point. Therefore, we would advise to buy into these two counters only with tight discipline of taking profit and cutting loss.

We attach a target price of EUR 18.30 and a stop-loss of EUR 14.60 to Nokia (NOK1V FH; EUR 16.15). Nokia surprised the market on several fronts: 1) Nokia expects EPS of EUR 0.28-0.29 (expectations where for EUR 0.21-0.23), 2) higher than expected average selling price of its mobile phone, 3) Nokia's message about infrastructure was just as optimistic.

Given these figures we would expect analyst's earnings revisions which should support the stock in the medium-term. Nokia's recent restructuring aligns its business structure with its strategy of new and old domain and should increase transparency, communications of the different units and should give more insight into new product, replacement cycle and ASP progression in the long term. Nokia is trading on a PER 04 19.90x.

For Alcatel (CGE FP; EUR 12.29) we attach a target price of EUR 14.00 and a stop-loss of EUR 11.10. Our recommendation is based on the following three points: 1) Signs of an industry rebound: on 6 January, Alcatel's CEO said that he expected the communication equipment market to rebound eventually and that the company was well placed to play a role in any industry consolidation.

In the short term, comments from its COO in an interview early December reflected that level of activity with operator customers continues to improve. 2) Signs of a capex recovery: also on 6 January, SBC increased its wireline capex outlook for 04 from USD 5bn to a range of USD 5 to 5.5bn. SBC is a major customer of Alcatel and selected Alcatel recently to be a primary supplier in its Fiber-to-the-Premises rollout.

In addition, France Telecom also stated it would spend an extra EUR 100m over the next two years to speed deployment of high speed Internet access (xDSL). Alcatel should also here be a main beneficiary as it is a key supplier to France Telecom for xDSL. 3).

Although Alcatel is nearing the end of its restructuring, management repeatedly mentioned to target additional efficiencies in 04. Valuation: On an absolute level, Alcatel looks fully valued, however on a relative level, Alcatel historically traded at a discount of 31% to its peer group (Nortel, Lucent and Ericsson) versus 45% currently.

In the course of the week we conducted several changes to our recommendation list. We removed Aventis SA (AVE FP; EUR 51.40) and Sanofi-Synthelabo SA (SAN FP; EUR 57.35) as we believe the current positive momentum in equity markets will not favour the more defensive positioned pharma stocks at this point in time.

In addition, both stocks outperformed the European pharmaceutical index in the rally which started mid November (Sanofi +6%, Aventis +9.4%, Index +1%). 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.