Don't give up on oil stocks yet!

US equities

Crude oil declined sharply over the last week, leading to some profit taking in integrated oil company stocks.

Share price of oil companies such as our recommendations ConocoPhillips (COP, $56.08, CSFB: Outperform) and Exxon Mobil Corp (XOM, $37.97, CSFB: Neutral) saw strong performance during the month of August, so it is not surprising that investors are starting to lock in their gains as crude oil weakens.

The West Texas Intermediate fell to USD 28.88 per barrel as of Friday, from USD 31.57 at the end of August. News of an improved supply situation in the US with inventories rising and crude oil exports form Iraq slowly starting to pick up dragged crude oil prices down. The US Energy Department reported an unexpected 1.8 million barrel rise in US oil inventories to 280.4 million in the week ended August 29.

We continue to see a favourable environment for the oil industry, as crude oil prices around USD 28 still leave oil companies with solid operating margins.

This environment should continue to be favourable for the upstream part of the industry, the drilling companies like Noble Corp (NE, $35.40, CSFB: Neutral) and the service companies like Halliburton Co (HAL, $24.50, CSFB: Outperform), while integrated oil companies could start seeing a weaker environment being priced into the shares.

Hence we recommend setting protective sell levels for ConocoPhillips at USD 55, in order to protect the gains since our recommendation at USD 51.98 and for Exxon Mobil we increase the stop-loss level to USD 37, from the previous USD 33.

Bank of America Corp. (BAC, $76.15, CSFB: Outperform) stock price came under pressure, after New York Attorney General Eliot Spitzer said BAC allowed Canary Capital Partners LLC, a hedge fund, to trade shares of the company's Nations Funds after hours in return for additional investments.

We see the current weakness in BAC stock price as an opportunity to invest, as on the operating side, Bank of America is doing well. The bank has added 560,000 net new checking accounts year-to-date and is on pace to achieve its 2003 goal of one million new checking accounts (source: CSFB). Like the entire sector, rising mortgage rates pressured stock price, but we believe the increase in securities underwriting and asset management would support stock price.

A 25% increase in quarterly common stock dividend to $0.80 per share has been announced and will be effective starting in September 2003 (source: CSFB). The stock offers an indicative gross dividend yield of 4.20%. Valuations are attractive, and with current P/E of 13x, in-line with the banking sector. Dividend Discount Model gives a theoretical price of $95. Its move into investment banking should also contribute to the bottom line.

For aggressive investors, the current stock price weakness offers an opportunity to invest in Bank of America. An investment in the stock requires a tight discipline of taking profit and cutting loss.

The computer chip maker Intel Corp. (INTC, $28.71, CSFB: Not rated) said that it expects revenues for the current third quarter to be between $7.6-7.8 billion (up from $6.82 billion in Q2), at the top end of the range of $7.3-7.8 billion the company gave during its second quarter earnings report. At that time the company CEO Bryant gave a cautious statement, saying that it was too early to predict a recovery.

The improvement though seems to be limited to the computers and servers, as Intel also said that sales of communication gear remain soft. Intel's communication group has already reported weak Q2 results for wireless products, processors for routers, switches and other networking gear, and there is no improvement in sight in the near term.

It seems that the industry is starting to have a greater earnings visibility and that IT spending is on the way to a recovery.

The share price of our trading recommendation Dell Inc (DELL, $34.09, CSFB: Outperform) reacted positively to this news. We believe that Dell is a good way to participate in a potential IT recovery, as we expect the company to outpace its competitors and to continue gaining market share. We have a trading buy rating on Dell Inc with price target of $37.

On the pharmaceutical sector, the WTO has reached an agreement to exceptionally loosen the article on the Trade-Related Aspects Of Intellectual Property Rights (TRIPS), which would facilitate poor nations access to cheap medicines to fight epidemics and chronic illnesses while protecting patents held by drug makers.

This marks the end to an almost two year long debate to provide humanitarian aid to the poorest countries which can't afford the treatment of epidemic and chronic illnesses, such as AIDS and malaria, with efficient drugs. This agreement is a US led compromise, which allows the easing of patent protection on drugs needed to fight epidemics, but sets tight controls in order to avoid these being smuggled to rich countries and hence flooding them with cheap generics.

The International Federation of Pharmaceutical Manufacturers Association, which represents drug makers including Pfizer and Merck, also backs the compromise, as it has virtually no impact on the drug makers thanks to administrative hurdles that regulate the production and export of such generics.

Least developed countries in need for cheap supply of drugs to fight an epidemic will have to apply to make use of this system for urgent public non-commercial use loosening the patents, specifying the names and the expected quantities of the products needed.

More important are the measures to protect the patents and avoid these products being smuggled to rich countries. The products produced under the license for the TRIPS agreement shall be clearly identified as being produced under the system through specific labelling or marking. Suppliers will have to distinguish the products through special packaging and special colouring or shaping of the products themselves. And before the licensee ships the products, he has to post on a defined web site the quantities of the product and the destination, as well as the distinctive features of the product.

The countries importing the products for their needs will have to ensure that these products are not re-exported. This agreement removes a threat to the drug makers, which feared that the efforts to give access to poorest countries to effective medication would not be sufficiently regulated and could lead to a black market of their patented drugs.

European equities

The DJ EUR Stoxx 50 closed the week 2.3% higher at 2614.81 crossing the 2600 level for the first time since December last year


• Update on 2Q results of Sanofi-Synthelabo and mid year strategy update of Total

• We added SAP AG as a trading buy to our recommendation list

The DJ Stoxx 50 closed for the first time since last December above the 2600 level and managed to break the resistance at 2605. Looking at the technicals, the index remains in an uptrend but acceleration will only set in when next resistance at 2675 breaks.

On the economic front, a continuing string of qualitative indicators (manufacturing PMI, IFO, ZEW, upgrade-downgrade ratio) point to a rebound of growth and this week the Euro-area services PMI in August exceeded market expectations when it was reported at 51.2 for August which is the first reading above 50 reflecting expansion. However, the unemployment rate remained steady at 8.9% in July. The ECB left rates unchanged at 2% as expected.

We continue to recommend a two way strategy with positions in defensives and dividend yielding stocks such as our energy plays Total (FP FP; EUR 142.00) and ENI (ENI IM; EUR 13.931), and would also suggest to maintain an exposure to cyclicals such as autos (Daimler Chrysler (DCX GY; EUR 35.44), industrial goods (Siemens (SIE GY; EUR 57.15), MAN (MAN GY; EUR 21.52) and steel (Arcelor (LOR FP; EUR 12.40).

On the corporate side, Sanofi-Synthelabo (SAN FP; EUR 52.40) reported solid interim earnings and gave a positive outlook. 1H 03 net income came in at EUR 944m which is in line with expectations and reflects a 14% increase over last year. EPS grew by 19%. The results were helped by its blockbuster Plavix and Eloxatin. Sanofi increased its sales growth for this year from 13% to 15% and reiterated its EPS growth of close to 20% (at an exchange rate of EUR 1.10 per USD).

Sanofi-Syunthelabo announced a EUR 1bn share buyback program, which reflects the company's strong cash generation and should support the shares on the downside. Sanofi-Synthelabo remains one of our favourite pharma stocks. Trading at a discount of 10% to the sector in terms of PER 04 and with prospects of above sector average growth, the stock remains attractive in our view.

Total (FP FP; EUR 142.00) held its mid year strategy meeting in Paris. The company confirmed a 5% p.a. growth target to 07 for their exploration & production division and set new cost targets for its chemical division (a further USD 250m of cost savings from 05 onwards).

Whereas the growth theme is confirmed the stock is closing its valuation cap and is now trading in line with the Big 5 peer group. However, we believe the macro trends are still intact with oil prices, margins firm and the share buybacks expected to continue into the 2H. The indicative dividend yield is around 3%, which is slightly lower than the average of its peer however the cash cover is on the higher side with 4.9x.

Whereas we remain positive on the stock we would also like to highlight ENI (ENI IM; EUR 13.931) for a deep value play in the energy sector. ENI is trading at 11x 04 PER reflecting a 20% discount to Total. Indicative dividend yield is 5.6%.

Arcelor (LOR FP; EUR 12.4) jumped over 5.5% on the back of an upgrade of the European steelmakers by a broker and speculations that Arcelor could replace Orange (OGE FP; EUR 9.68) in the CAC 40 helped the stock as well. France Telecom (FTE FP; EUR 22.18) offered to buy out the 13.8% stake of Orange's minority shareholders in an all-stock deal worth up to EUR 6.6bn.

We added SAP AG (SAP GY; EUR 122.47) as a trading buy to our recommendation list in order to capitalize on the current strong momentum in the technology sector in general and SAP in particular. Several brokers upgraded the technology and software sector during the week. CSFB expects software spending to return to its growth trend of around 10% in 04 and is expected to continue to gain market share and grow its licence revenue by 15%.

As a consequence, CSFB increased its EPS estimates by 6% for 04 to EUR 4.16. EPS 05 is expected to increase by 20% due to the streamlining of its business and operational efficiency. Applying an EPS of EUR 4.16 the stock is trading at a PER 04 of 30.17x, which is in line with its peers, but already prices in some of the upside. Concerns over licence revenue in the 3Q remain due to a still difficult market environment.

However, the focus seems to have shifted beyond that. SAP has a leadership position and a well-established customer base on which the company should be able to leverage off as the corporate spending environment improves.

SAP is also among the stocks, which will be added to the Stoxx 50 effective 22nd September. We have a target price of EUR 138.00 and a stop loss of EUR 113.00.

On 1 September the constituents of the Euro Stoxx 50 and the Stoxx 50 indices were reviewed. Iberdrola (IBE SM; EUR 15.33) will replace Hypovereinsbank (HVM GY; EUR 16.84) as expected and Anglo American Plc (AAL LN; GBP 12.03) and SAP AG (SAP GY; EUR 122.47) will replace Munich Re (MUV2 GY; EUR 100.60) and Prudential (PRU LN; GBP 4.73) in the Stoxx 50 effective 22nd September.

This week, newsflow in the luxury goods sector should remain strong, as many companies will report their interim earnings next week. Whereas the results will not be reason for cheer given SARS and Euro strength in the 2Q, the outlook is expected to brighten. We reiterate our buy on The Swatch Group (UHR VX; CHF 138.00) with a target price of CHF 158.