Earnings momentum drives US equities higher

US Equities

We maintain our Buy rating on Teledyne Technologies Inc. (TDY, $19.30, CSFB: Not rated) for aggressive investors interested in small-cap.

The company is active in electronic and communication products for wireless and satellite systems, and aircrafts. Besides, it also manufactures aviation and missile engines. Hence, we believe TDY would benefit from the high defense spending in 2004.

Aflac Inc. (AFL, $36.92, CSFB: Underperform) is our long-term growth play, especially in Japan, where the company makes about 75% of its revenue. However, with this large exposure, the company faces a currency risk converting its Yen earnings into US dollars.

Besides, in the near-term, concerns about its weak client base could pressure stock price. The company provides supplemental insurance to individuals, helping to fill gaps in consumers' primary insurance coverage. We recently increased our stop-loss level to $34.50 from $28, protecting a 9%-gain. We recommend to take some profits on the stock at current level.

Pentair Inc. (PNR, $47, CSFB: Not rated) is a mid-cap manufacturing electrical and electronic enclosures, professional tools, and water products. We believe results from the water technologies and enclosures units would continue to drive the stock price higher.

Profit taking activity in the metal and mining sector over the last two weeks has offered good buying opportunities in the sector. And in fact we have added two new mining stocks to our recommendations, as well as added back Newmont Mining, which share price declined after we had taken profit.

Non-ferrous metals appear to be in a major up-cycle, which is supported by weakness in the US Dollar, under-investment in the metal and mining sector, as well as unrelenting growth in demand for metal coming from China. And despite the sharp climb in 2003, shares in the commodity industry have more potential, based in the outlook for strong commodity pricing and persisting US Dollar weakness.

Nickel remains the metal with the best fundamentals in the industry and we see continued strength in fundamentals into 2004, as we look for demand from China to remain strong throughout the year. In 2004 China is expected to need over 140,000 tonnes of nickel, a 20% increase from 2003. While domestic production is rising, it is not growing fast enough to meet demand in the near future.

In order to capitalize on the nickel fundamentals we have added Inco Ltd (N, $38.80, CSFB: Outperform), which primarily produces nickel, and nickels alloys, but also copper, cobalt and sulphuric acid.

Inco's offers a good investment vehicle for nickel, as the company's earnings have a relatively high sensitivity to nickel prices. Although the company will probably see production cost rise due to capital spending for key future projects, the expected strong nickel and copper pricing should more than offset the rising production costs.

We have a 12-months price target of USD 42 for the stocks and recommend setting a stop-loss level at USD 35.

Based on our continuously positive outlook for gold we have added Freeport-McMoRan (FCX, $37.96, CSFB: Not rated). Freeport through its subsidiary P.T. Freeport Indonesia Company is mining and milling copper, gold and silver in Irian Jaya, Indonesia. We particularly like the company for its strong cash generation, the cost structure and also value the improvement in its balance sheet.

The lean cost structure should help the company fully benefit from the increment in commodity prices, while the improved balance sheet lowers the risk for the equity investor, while the healthy cash generation actually allows the company to pay a for the industry relatively high dividend giving the stock an indicative gross dividend yield of 2.11%.

The company shares trade at a 19.29x expected earnings, a 8.57x price to book and a 2.97x price to sales, which is quite attractive, especially the price to sales ratio in the light of the strong operating margins of 36.73% FCX achieves.
Our 12-months price target for Freeport-McMoRan is at USD 42, we recommend setting a stop-loss limit at USD 36.

Europe

European indices closed the week slightly up with the telecom, food & beverage and insurance sector outperforming.


• We took profit on The Swatch Group to lock in a performance of over 20% since recommendation end of August last year.

• We added LVMH as another play in the luxury goods sector.

• CSFB upgraded the insurance sector. We reiterate our calls on Allianz AG and ING Groep NV.

• Update on 4Q 03 reports of Nokia, Siemens, SAP and LVMH.

On the economic front, the German ZEW Survey for January came in slightly lower than expected at 72.9 (last 73.3, expected 73.4). However, encouraging was the improvement in the current conditions component, which is expected to occur also in the IFO Index, which will be released this Tuesday 27 January.

The Swatch Group (UHR VX; CHF 165.25) surpassed our target price of CHF 158 a week ago and we advised that we would let it run a little further given the positive momentum. After the stock has climbed another 4% to CHF 164 on Monday we decided to take profit and remove the stock from our recommendation list. The stock yields almost 20% since recommendation end of August last year.

We added a new stock in the luxury goods sector and recommended a possible switch from The Swatch Group to LVMH (MC FP; EUR 61.20). LVMH has a favourable product and country mix, effective currency hedges for 2004 and trades at moderate valuations (PER 04 29x representing a 5% premium to the sector whereas it has been usually between 20 and 30%)).

Given the recent update from competitors there are signs of robustness of the US and also Japanese market in the 4Q. As short term catalysts we would considered the new stores opening plan (NY store in Feb), new product range (jewellry) and strong US spirits demand. LVMH published its FY03 sales figures last Thursday above expectations with 8% organic growth (local currency and comparable structure) in Q403 (consensus +5%).

This is a very good performance as comparable were very difficult in Q402. FY03 EBIT has been announced to be around +7%, slightly short of consensus estimates at 7-8%. We attach a target price of EUR 70 (+14%) and a stop-loss level of EUR 56 (-8%).

Besides LVMH, several companies were reporting on Thursday. Nokia (NOK1V FH; EUR 16.85) reported results at the top end of the range it gave on 8 January. Guidance for the 1Q 04 is for 3.7% yoy growth in sales and EPS of EUR 0.17 - 0.19 which is above analyst's expectations.

The good momentum in the handset market of the 4Q should continue with the market seem growing by 10% in 2004. The network infrastructure business also shows signs of recovery as operators begin investing again. Nokia guides for flat to slightly up in Euro terms. We remain positive on the stock and stick to our target price of EUR 18.3 for the time being.

Siemens AG (SIE GY; EUR 66.23) reported figures also at the top end of expectations. Restructuring efforts and continued turnaround at its Information Communications business helped Siemens to steer against the strengthening Euro.

With this performance Siemens is on track to hit its forecast of full year double digit earnings growth for the full year. We remain positive for Siemens' long-term potential but would expect some consolidation around current levels before earnings upgrade will push the stock further.

After already preannouncing its key performance figures earlier on, SAP AG (SAP GY; EUR 132.65) reported detailed numbers which demonstrated both the underlying strength of the business and the inherent leverage in the model.

SAP guides for 10% licence revenue growth in 2004 on the back of growing rebound in corporate information technology spending with the US. EPS forecasts are for EUR 4.2-4.3 after last year's EUR 3.84 which significantly exceeded SAP's earlier EUR 3.45-3.6 guidance.

We remain positive on the stock and would note that SAP has in the past seen material multiple expansion to announced on Thursday one of the strongest outlooks in the software industry with forecast of 10% growth in licence revenue.

CSFB upgraded the insurance sector from underperform to market weight. According to CSFB, with equity markets and bond yields rising the industry risk profile has improved.

We added 10 days ago two stocks in this sector to our recommendation list in order to play the positive momentum: Allianz AG (ALV GY; EUR 111.15) and ING Groep NV (INGA NA; EUR 21). For Allianz we have a target price of EUR 125 and for ING EUR 23, which represents a potential upside of 14.6% and 12% respectively.