Oracle stays a buy, German stocks also look attractive

US Equities

General Electric Co. (GE, $29.32, CSFB: Neutral) weighed on the market last Friday, after its shares fell 2.7%. The company reported Q3 earnings in line with analysts' expectations of $0.4 a share, but lowered guidance for Q4. Results were weaker than expected among industrial segments, balanced by a lower-than-expected tax rate.

Separately Friday, the company confirmed news accounts that it had agreed to acquire Amersham Plc (AHM LN, £p 660, CSFB: Underperform) for about $9.5 billion in stock, paying a $3 billion premium for the company. We maintain our trading-buy on GE with a tight stop-loss at $28.00.

Bank of America Corp. (BAC, $81.12, CSFB: Outperform) will start the earnings season for the major financial institutions and give a picture of what we can expect from the others banks. Consistent with many other banks, BAC has generated above-average earnings from mortgage banking, securities gains, and whole loan sale gains.

However, with the increasing mortgage rate, we expect revenue from this business to be lower than in the previous quarter (source: UBS). With a 3.94%-dividend yield, valuation still attractive, we maintain our Buy rating on Bank of America.

The drug maker Pfizer Inc (PFE, $30.75, CSFB: Outperform) received approval for Inspra, indicated for the treatment of congestive heart failure (CHF). The timing of this approval is in line with expectations, and the drug has previously received FDA approval for the treatment of hypertension, but Pfizer delayed the formal launch of the product until the CHF indication was received.

Inspra is the first anti-aldosterone agent to be approved for treatment of CHF. The drug will be fully commercially available in December. Inspra sales are expected to reach USD 350 million in 2004 and USD 740 million in 2005, according to CSFB estimates.

Pfizer is also expected to present clinical data on Macugen a drug for age-related macular degeneration (AMD) in November and a further milestone would be the filing of the inflammation drug Pregabalin in the US during the fourth quarter.

We expect these developments to boost investors' confidence after the recent share price decline following launches of competitive products to Pfizer drugs. Hence we reiterate our recommendation on Pfizer, as we are confident about the company's growth prospects of a 15-18% EPS growth for the next two years.

We did take a 23.59% profit in our recommendation Siebel Systems Inc (SEBL, $12.14, CSFB: Outperform) last Friday, after the share price of the enterprise software maker benefited from a rally since our recommendation on September 30, and hit our 12-months target price.

We believe that the stock has run up a bit fast and the upcoming earnings season could bear some risk of disappointment as the expectations have run high. The company will be reporting its quarter results on October 15 after market close and is expected to post USD 0.03 per share earnings, 1 cent better than in the previous quarter. We would recommend investors to take profit in Siebel Systems.

In the enterprise software sector we continue to have a buy recommendation on Oracle Corp (ORCL, $12.33, CSFB: Restricted), which as well rallied since we initiated our recommendation on the stock on September 30. The company extended its hostile offer to acquire rival Peoplesoft Inc (PSFT, $20.55, CSFB: Restricted) for USD 19.50 a share until December 31, as it awaits a US Department of Justice ruling on the offer.

At current stage it looks uncertain whether Oracle will succeed with its bid, especially with regard to the current share price of Peoplesoft trading above Oracle's offer. A possible acquisition of Peoplesoft would give Oracle broader access to smaller and medium sized businesses.

But the price Oracle is willing to pay translates into an over 36x estimated P/E for Peoplesoft, which is expensive for the stock. Should Oracle not be successful with its bid, given the high P/E multiple implied in the offer, the Oracle share price could actually see a further rally.

We added Kaydon Corp (KDN, $23.99) to the US Buy list. Kaydon Corporation designs, manufactures, and sells custom-engineered products for a variety of industries, including aerospace, defence, and industrial. The Company's products include antifriction bearings, bearing systems and components, filters and filter housings, specialty retaining rings, and shaft seals. We like the company for the following reasons

1.Kaydon has a portfolio of high-margin industrial components, which we believe, act as a cushion from a weak global manufacturing capacity.
2.KDN's strong margins and returns
3.Pricing Power
4.Sound Management

We are attaching a $30 (12 month) price target to the stock with a stop loss of $21.20.

European Equities

The DJ Stoxx 50 closed the week flat at 2518.44


• Year to date the Dax-Index returned over 20% compared to the 9% of the DJ Euro Stoxx 50 Index. If the recovery momentum is stronger than the impact from any US Dollar weakening and political reforms are approved within reasonable time, we believe Germany can continue to outperform.


• 3Q earnings season about to start also in Europe this week with Philips, ASML, SAP and Nokia among companies reporting

The week closed roughly unchanged with a high being reached on Thursday boosted by better than expected US job figures. The 3Q reporting season started in the US limiting the downside movement of the indices with the majority of companies meeting or exceeding expectations.

This week, the earnings season will get into full swing in Europe: Philips (PHIA NA; EUR 22.14) will report on Tuesday, ASML (ASML NA; EUR 12.64) on Wednesday and on Thursday we will get a whole list of figures with sales from Danone (BN FP; EUR 131) and Roche (ROG VX; CHF 110.5) and earnings from SAP AG (SAP GY; EUR 124.08) and Nokia (NOK1V FH; EUR 14.80)

SAP AG had already surprised the market this week by pre-announcing its key initial figures. License revenue is likely to come in at EUR 430m instead of the EUR 380m market consensus (13% above estimates). Sales decreased only by 3% instead of the 8% expected.

The results were supported by better closure rates especially in the US and some deals that had been expected to close in the 2Q but were signed in the 3Q. Given that the 3Q is normally the most difficult one as customers delay decisions on new projects until the 4Q and the fact that the improvement comes at least partly from the US, added to the surprise and positive sentiment.

On the day of the pre-announcement the stock increased by over 13% reaching a new 52-week high of close to EUR 130. Despite some profit taking during the remainder of the week, the stock still managed to close the week 8% higher.

We saw several broker upgrades coming through and expect the news flow to stay firm. When the company reports the details this Thursday the focus will then likely be on its outlook and on the operating margin development. We stick to our buy rating.

The further weakening US Dollar against the Euro limited further index gains negatively affecting export oriented sectors such as the automobile industry when the Euro reached a high of 1.1811. We would like to reiterate Adidas-Salomon (ADS GY; EUR 79.75) as our play on a weakening USD. With a net USD exposure the company will benefit from a weakening US Dollar over the medium to long-term.

Further corporate news, which moved the respective sectors were the spin-off of Hypovereinsbank's (HVM GY; EUR 15.33) real estate business, the purchase of Vivendi Universal's (EX FP; EUR 17.2) US entertainment asset by GE's television unit NBC and the announced takeover of the British medical products manufacturer Amersham (AHM LN; GBP 7.60) by GE.

Carrefour's (CA FP; EUR 44.4) 3Q sales increased 5.8% (ex-currency) in line with expectations reflecting a smaller currency impact on the top line in the 2H. Sales were helped by further store opening and demand at its European discount chains.

According to a study by Strategy Analytics, European mobile phone shipment increased by 13% in the 1H of this year on the back of new models boosting shipments. Nokia increased its market share in Western Europe to 49% (44% 1H02) and Siemens (SIE GY; EUR 55.46) to 13% (11% 1H02). Nokia will report this Thursday with EPS for the 3Q expected at EUR 0.18.

Although we never really approach Europe from a country perspective, we would like to reiterate our stance towards Germany. The German economy is still in a mild recession.

Sentiment indicators, however, have markedly improved and growth is expected to accelerate moderately in the coming months supported by consumption. On valuations, forward earnings appear to have bottomed out and at 14.5x earnings, the Dax still offers 15% upside potential to the average since 1988 of 17x.

However much hinges on the US Dollar. If the recovery momentum is stronger than the impact from any US Dollar weakening and political reforms are approved within reasonable time, we believe Germany can continue to outperform.

Year to date the Dax-Index returned over 20% compared to the 9% of the DJ Euro Stoxx 50 Index. In addition, Germany is expected to benefit the most among the European countries by the EU enlargement given its strong trade links with the accession countries. (Source: DB)

Stock to play a German recovery would be Deutsche Telekom (DTE GY; EUR 12.79), Volkswagen (VOW GY; EUR 41.54), BASF (BAS GY; EUR 38.90), SAP (SAP GY; EUR 124.80), Siemens (SIE GY; EUR 55.46) and MAN AG (MAN GY; EUR 20.23) with the latter three among our favourites.