Weekly Preview: Earnings Season Kicks Into Hyperdrive

Earnings season picks up next week as many key companies across multiple industries report results for the last quarter. Also, the flash, or initial estimates, of manufacturing PMIs from key countries around the world will be in focus, especially those in China.

Key Earnings

In the coming weak, earnings from key tech companies Apple AAPL, Facebook FB, and Netflix NFLX are expected.

Apple

Apple is expected to report third quarter EPS of $7.31 vs. $9.22 a year ago. Revenue is expected to rise slightly to $35.09 billion from $35.02 billion.

Morgan Stanley is optimistic on the stock heading into earnings. The analyst team has an Overweight rating on the stock and a price target of $540.00.

“We're positively biased into earnings as we expect Apple to beat consensus estimates on the back of strong demand for discounted iPhones. We expect Q4 guidance below consensus given historical conservatism ahead of new product cycles.”

“We believe Apple could ship at least 29M iPhones in Q3, above consensus of 26.5M. Demand data from our AlphaWise Smartphone Tracker and US Telecom analyst Simon Flannery's estimates, and supply chain checks by our Asia/Pac Tech analyst Jasmine Lu all suggest 29-32M iPhone shipments.”

“Even if we assume all iPhones above our 26M model are the cheapest iPhone 4 at a $50 discount, the higher shipments imply total revenue north of $36B, above guidance of $33.5-35.5B and consensus of $35.1B. The mix shift results in a slightly lower iPhone GM, and total GM close to the mid-point of Apple's 36-37% guidance. We believe Macs and iPads are likely in-line with our model of 3.9M and 18M. Net, EPS could beat our $7.22 and consensus of $7.32.”

“Potential June Q beat, accelerating new iPhone builds, and broad investor expectations for conservative guidance make us positively biased into earnings but shares are unlikely to re-rate before new carrier distribution, new services, or new products are announced with the next catalyst the late September iPhone launch.”

Meanwhile, the analysts at Jefferies are more cautious heading into earnings, noting signs from earnings from carriers such as Verizon VZ as providing some caution for Apple. They have a Hold rating on the stock and a $405.00 price target.

“Verizon iPhone activations were inline with our 3.8M est, which supports an inline to slightly better CQ2 for Apple depending on inventory adjustments; however, the key remains that CQ3 guidance is likely to be worse than expected.”

They also believe that the iPhone 5S will be delayed. “We continue to believe that Apple is having issues integrating the fingerprint scanner into the iPhone 5S. While the absence of the fingerprint scanner leaves little to differentiate the 5S from the 5, we think Apple is more likely to launch the 5S in late September rather than wait until December to incorporate the scanner (or to shift to a 4.3" display as Bloomberg reported). Our checks indicate Apple is trying to move forward the launch of the 4.7"-5" iPhone 6 from June 2014 to March 2014 and believe that Apple will focus its resources on the iPhone 6 rather than last-minute changes to the 5S.”

Jefferies also notes concern over news out of Russia. “Last week MTS, Russia's largest wireless carrier, announced it would stop selling iPhones due to the high marketing support and subsidies demanded by Apple. This week Vimpelcom and Megafon followed suit. Combined the three represent ~82% of the Russia wireless market. Gartner data indicates 400K iPhones were sold in Russia in Q1, representing only ~1% of Apple's total iPhone shipments; however, Russia is a fast-growing smartphone market (2012 >+50% Y/Y) and Vimpelcom has >200M total subs with many of them outside of Russia.”

Bank of America notes that the stock could see some volatility ahead of new product launches later this year. They have a Buy rating and a $540.00 price objective on the stock.

“We model 16.5mn iPads in C2Q13, 16mn in C3Q and 37mn in C4Q (~21%/~15% of total revenue/GP), reflecting a launch of the iPad 5 in Sept. and the iPad mini 2 (with retina display) in C4Q. A lack of meaningful activity in the supply chain today for iPad mini seems to support our view, although visibility into C2H13 remains poor, and the iPad mini 2 launch in C4Q will largely depend on the supply chain's activities in Aug-Sept. That said, a push out of the iPad mini 2 launch would pose a risk to our C4Q revenue/EPS estimates, potentially ~$4bn/~$0.60.”

“iPhones remain the most important driver (~50%/~60% of total revenue/GP), and the supply chain appears active with the low-cost iPhone (e.g. panel, memory) today, consistent our view that iPhone 5S and low-cost iPhone will be launched in C3Q13. While we have not incorporated lower-cost iPhones into our estimates, we previously wrote that a launch targeting emerging markets could add ~$11-12bn revenue (6% accretion) and ~$1.00-1.60 EPS (3% accretion), over time.”

Facebook

Facebook is expected to report second quarter EPS next week. Analysts expect the company to report second quarter EPS of $0.14 vs. $0.12 a year ago on revenue of $1.62 billion vs. $1.18 billion a year ago.

Deutsche Bank analysts weighed in ahead of earnings, expecting a “decent enough” quarter. They have a Buy rating and a $37.00 price target.

“We are expecting in-line or slightly better revenue for 2Q13 vs. consensus $1.61B. At 11x 2014 EBITDA vs. the mid 30%'s EBITDA growth rate, we view the risk/reward as compelling heading into 2Q results. However, we think shares could remain range-bound in the mid-high $20's until the October results, when the “growing through the tougher comps” debate is resolved. Our bullish stance is based on FB increasing mobile revenue materially over the next several years, as our math suggests only ~2% of impressions drive 30% of revenue from mobile, suggesting plenty of runway.”

“The tone from our meetings with management in 2Q was largely upbeat, especially as it relates to overall demand and growing through the tough-comp in 3Q. We are not expecting Instagram monetization in 2013, but should prove accretive to consensus estimates for 2014 and remain a pending catalyst for shares. Mobile app install ads should continue to accelerate in 2Q, and could amount to over $100m per quarter we estimate (from zero three quarters ago). We are modeling $1.4B in Ad revenue, which factors in flat desktop growth and $435m in mobile, both of which could prove conservative, and $219m in Payments.”

“The company continues to invest in infrastructure to support the massive traffic growth, and R+D headcount to support the various projects in the operating agenda. Our EPS of $0.12 is below the consensus $0.14 likely a result of our conservative margin forecast. Engagement is likely to continue to hold-up in 2Q, but we don't think the bear- case goes away anytime soon given their view that DAU/MAU is not indicative.”

Goldman Sachs is bullish heading into the quarter and actually sees upside risk to EPS estimates. They have a Buy rating and a $40.00 price target.

“We are modeling mobile ad revenue of $425mn (30% of ad sales) versus consensus of $443mn (32% of ad sales). With many of our contacts reporting mobile came in at 35% of client spend in the quarter and a few even seeing 40%, we see potential upside risk to both GS and the Street. Our contacts again reported meaningful q/q growth in spend with performance of the entire Facebook platform beginning to rival that of search for some of our contacts' clients.”

“For the desktop business (news feed ads + right rail), we expect revenues of $994mn, +14% qoq and +1% yoy. This compares to our view of consensus of $955mn (+9% qoq and -3% yoy).”

“We continue to believe Facebook is at the center of the mobile ad revolution and see considerable opportunity for it to drive higher pricing on its ad units as brand and direct marketers alike take advantage of its broad reach and precise targeting. Our $40, 12-month price target is derived from an equal weighting of our discounted cash flow, EV to EBITDA and Price to FCF analyses.”

Netflix

Netflix is expected to report second quarter EPS on Monday after the bell. The company is expected to report EPS of $0.40 vs. $0.11 a year ago on revenue of $1.07 billion vs. $889.16 million a year ago.

The analysts Goldman Sachs expect strong user growth in the quarter. They have a Neutral rating and a $235.00 price target on the stock.

“We expect results at the high end of subscriber guidance when Netflix reports earnings on Monday, July 22 after the close. We are forecasting revenue of $1,065mn vs. consensus at $1,073mn, and GAAP EPS of $0.36 vs. consensus at $0.39 and guidance of $0.23-$0.48.”

“We believe that a strong slate of originals and growth in the connected television/device ecosystem are driving domestic streaming subscriber additions in a way that is likely to continue. That said, while we believe there are considerable growth and margin opportunities ahead, with the stock trading at a significant premium to the sector, we remain Neutral.”

Meanwhile, J.P. Morgan is much more bullish on the stock ahead of earnings and expects streaming subs to be towards the high end of guidance. They have an Overweight rating on the stock and a $254.00 price target.

“We expect Netflix to report good 2Q results with US streaming subs the primary focus. We are modeling 2Q13 US streaming subs of 29.7M (528k net adds) vs. guidance of 29.40M-30.05M subs. 2Q is typically Netflix's seasonally softest quarter and our net adds estimate of 528k is equivalent to 2Q12 net adds though we think the brand and service have improved significantly Y/Y, which should drive upside to our projection.”

“We expect increasing consumer awareness of Netflix originals and additional originals through the remainder of 2013 to continue to increase Netflix's content differentiation and drive subscriber additions. This morning's Emmy nominations should help and Netflix's non-linear format should grow the audience for originals over time. Sentiment in shares has been positive given Hulu's owners' decision not to sell the asset as well as investors generally viewing Netflix's new video earnings call format as a positive indicator for the quarter.”

“We expect 2Q revenue of $1.062B, essentially in line with consensus of $1.072B. Our 2Q Streaming (US + Intl) revenue estimate of $841.7M is at the high end of guidance of $821M-$843M. Note that the company no longer provides subs and revenue guidance for the domestic DVD segment, which we expect to drive $220M in revenue. We estimate 29.7M ending US Streaming subs (528k Q/Q net adds) and 7.8M international subs (643k net adds) while our DVD subs decline to 7.3M (net loss of 698k subs). Our GAAP EPS of $0.37 is at the midpoint of guidance of $0.23-$0.48.”

Key Economics Releases

The initial “flash” estimates of manufacturing PMIs from China and the U.S. will be released next week as well as flash estimates of both the service and manufacturing sectors for the Eurozone, Germany, and France. Also, the durable goods orders report in the U.S. will be closely watched.

Daily Schedule

Monday

• Earnings Expected From: Halliburton HAL, McDonald's MCD, Kimberly-Clark KMB, Texas Instruments TXN, Canadian National Railway CNI and Netflix NFLX.


• Economic Releases Expected: the Chicago Fed National Activity Index, existing home sales and the weekly 3- and 6-month bill auctions are expected.

Tuesday

• Earnings Expected From: Apple AAPL, Freeport-McMoRan Copper and Gold FCX, Altria MO, AT&T T, UPS UPS, Valero VLO and Vmware VMW.


• Economic Releases Expected: the weekly Redbook, Canadian retail sales, the FHFA House Price Index, the Richmond Fed Manufacturing Index and the flash HSBC Chinese Manufacturing Index.

Wednesday

• Earnings Expected From: Boeing BA, Caterpillar CAT, Eli Lily LLY, PepsiCo PEP, Qualcomm QCOM and Visa V.


• Economic Releases Expected: the Eurozone, French, and German manufacturing and service PMIs, the U.S. manufacturing PMI, new home sales and a 5-year note auction.

Thursday

• Earnings Expected From: 3M MMM, Celgene CELG, Coca-Cola Enterprises CCE, Dow Chemical DOW, General Motors GM, Amazon AMZN, Expedia EXPE and Facebook FB.


• Economic Releases Expected: the German IFO Business Climate Index, British GDP, durable goods, jobless claims, the KC Fed Manufacturing Index and Japanese CPI.

Friday

• Earnings Expected From: KKR KKR, Tyco TYC and Weyerhaeuser WY.


• Economic Releases Expected: the Michigan Consumer Sentiment Index.