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|  | JANUARY 6, 2005
Who's Who in "Global Picks 2005" Here's a more detailed look at S&P's new portfolio of 30 international standout stocks -- and why they made the cut By sector, here are the 30 members of Standard & Poor's Global Picks 2005 portfolio -- the collective "best ideas" of S&P's equity research staff worldwide (see BW Online, 1/6/05, "A Wide World of Stock Picks") -- and a brief investment rationale from S&P for each: Consumer Discretionary Burberry: We believe Burberry will capture a larger proportion of its brand value via the integration of distribution in Japan, Spain, and the U.S., where most of the retailer's revenues are generated through license and wholesale income. Further development of its accessories business should add more balance to its product mix and create opportunities for margin expansion. Esprit Holdings: Esprit has consistently delivered. Its net profit has a compounded annual growth rate of 52% over the past three years as a result of what we view as its effective merchandising strategy and strong brand equity. Although we think growth will moderate somewhat, net profit should still rise by more than 20% a year over the next two years, driven by increased market penetration of its wholesale business and improving retail margins. Harrah's Entertainment (HET ): S&P expects this diversified gaming company to acquire Caesars Entertainment by mid-2005, which should provide both revenue-enhancement and cost-reduction opportunities. We expect that the transaction will boost Harrah's presence in a number of markets, including Las Vegas and Atlantic City. Looking ahead, S&P expects Harrah's to benefit from efforts to encourage customer loyalty, and we expect it to have opportunities to use the Caesars brand with additional gaming facilities. Trading at a discount to peers, we believe the stock is underpriced. Mediaset: With an audience share of 45% in prime time spread over its three channels, Mediaset's Italian broadcasting business enjoys a dominant position in its primary market. This, combined with its majority stake in leading channel Telecinco in Spain, should allow it to effectively fight off the threat of fragmentation and thus continue, in our view, to enjoy advertising growth ahead of the market's expectations. Consumer Staples Chattem (CHTT ): Our recommendation is based on what we see as Chattem's leading market position in niche personal-care categories and attractive valuation. Successful operations in niche categories such as over-the-counter health-care products, dietary supplements, and skin-care products, affords Chattem the highest operating margin in our personal care universe at over 25%. We think the stock is underpriced relative to forward p-e, p-e to growth rate, and discounted free-cash flow. Danone: Among the larger European food companies, Danone is the fastest growing in our coverage universe. We're forecasting sales growth from existing operations of 6.5% in 2005 gradually slowing down to 5.4% by 2008, vs. Danone's target range of 5% to 7%. We're also expecting operating margin gains to average 33 basis points over the forecast period, which should drive an 8% compound annual growth rate in earnings per share. Energy China Oilfield Services: Despite expected upcoming corrections in crude prices, we believe that China Oilfield Services will continue to deliver strong earnings into 2005, profiting from China's oil demand, which is forecasted to break 6 million barrels per day. Anticipated pressure from Beijing to quench this thirst with domestic exploration and production, coupled with the company's increasing utilization rates and recent rig and vessel investments, leaves it well-positioned for continued earnings growth, in our view. Devon Energy (DVN ): On an earnings and cash flow basis, we believe Devon is among the most attractively valued stocks in our universe of exploration and production companies. We like its emphasis on North American production and natural gas reserves, and think it will continue to control cash-operating costs more successfully than peers due to savings resulting from its merger with Ocean Energy. We see substantial excess cash generated from operations as well as divestiture proceeds being used to accelerate balance sheet improvements and to repurchase common stock. Total (TOT ): We think Total's premium to its peers is justified based on its higher return on investment and above-average production growth at a relatively low cost.
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