Global equity strategy
STRATEGY
From crisis to consolidation
We look for industries and stocks that could emerge as winners primarily
due to the credit crisis forcing a more realistic cost of capital. We focus on:
■  Industries that need to change as they have been value-destroying, have
high leverage and are over-invested. This points to autos, transport, paper,
packaging, bulk chemicals, airlines, telecoms, auto components and parts
of tech.
■  The primary consolidation stories, as highlighted by Credit Suisse’s sector
analysts, are: car components (Johnson Controls, Denso), car batteries
(Panasonic), memory (Micron, SEC), wireless chips (Qualcomm), copiers
(Ricoh), Japan IT Services (NTT Data), European travel agencies (Tui and
Thomas Cook), UK building distribution (Travis Perkins), containerboard (IP,
SKG), European fine coated paper (UPM), US drug retailing (CVS, Walgreen),
Japan specialty retail (Yamada, K’s), Japan parcel delivery (Yamato), LTL (Con-
Way, Old Dominion), bottle/cans producers (Owens Illinois, Crown).
■  Other consolidating industries that should be monitored carefully:
foundries (TSMC, UMC), EMS (Hon Hai, Flextronics), TFT-LCDs (AUO),
handsets (Nokia), telecom operators in Spain, the UK and the Philippines (TEF,
Vodafone and PLDT), telecom equipment (Ericsson), autos (VW, Toyota),
airlines (Easyjet, AirAsia), Express Travel (UPS), chicken (Tyson), Hardline
(Best Buy), UK pay TV (BSkyB), UK DIY (Kingfisher).
■  Technology figures prominently on many of these lists and we believe is also
the sector most suited to sub-trend GDP growth, as it has experience of
deflation and has a very short asset life (and thus it ‘right-sizes’ very quickly as
required re-investment rates are high).
Which stocks should benefit from consolidation?
■  Among the stocks highlighted in the consolidating sectors, the following appear
cheap on HOLT and are rated Outperform: Nokia, Telefonica, Hon Hai, CVS,
Tui, Thomas Cook, Diana Shipping, IP, Vodafone, Micron, Ricoh, Panasonic.
■  We believe that with GDP likely to stay below trend, cost cutting is critical: SAP,
Nokia, CVS, Nike and Dell have the most flexible cost base in their sectors and
are rated Outperform by our analysts as well as being cheap on HOLT.
■  We screen for companies with the highest CFROI® in industries where the
profitability gap is very high (and where there is scope for consolidation), and
highlight the following Outperform-rated names: HTC, Flowserve, Lorillard,
Gilead, Amphenol, Mediatek, Reckitt, MSFT, SGS, Sun Pharma, NHN.
Among banks, we think the winners are:
■  Underleveraged banks in underleveraged countries (Intesa, UOB, Keiyo, Sberbank).
■  Banks in regions, such as much of NJA and Eastern Europe, where foreign
banks are scaling back operations.
Credit Suisse has created a basket of the global consolidators, which offers a
convenient way to play this theme (Bloomberg ticker: CSGLCONS INDEX).