Weekly Preview: FOMC Minutes, Housing Market In Focus

In the coming week, the FOMC minutes will take center stage as investors look for cues as to whether the Fed will taper asset purchases in September. Also, key housing indicators and housing-related stocks will be in focus.

Key Earnings

In the coming week, the key earnings are from Hewlett-Packard HPQ, Home Depot HD and Target TGT.

Hewlett-Packard

Hewlett-Packard is expected to report its third quarter results on Wednesday. The company is expected to report EPS of $0.86 vs. $1.00 a year ago on revenue of $27.25 billion vs. $29.67 billion a year ago.

Analysts at Morgan Stanley weighed in on the stock ahead of the earnings report. The bank has an Overweight rating on the stock and a $28 price target.

“HP is two-thirds of the way through a 29K workforce reduction but front-end loaded investments in R&D and process improvements mitigated savings in F1H13. With cost per employee at the lowest level in five years, new product introductions, a revamped channel program, and improving US enterprise IT demand should begin to drive operating leverage in F2H13.”

“The combination of printer supplies growth (plus some Yen benefit), less bad PC trends, improving storage growth, better software deal close rates, and services restructuring ahead of plan with slower revenue run-off, all lead us to believe HP can do better than the -7% Y/Y revenue, flat gross margin, and -1% Y/Y OpEx assumptions for F2H13. Currency swings and aggressive server pricing are headwinds that do not fully offset the long list of tailwinds in our view.”

“Sustainability of cash flow remains a key investor concern but our in-depth analysis of peer cash conversion cycles and HP's historical ranges suggest a low 20 day cash cycle is a reasonable target. This, combined with fewer restructuring outlays, leads to FCF growth in FY14, to $4+/share. With FCF above EPS for the first time in four years, earnings quality is improving and we believe the company will be rewarded for EPS beats with multiple expansion. As this plays out, our bull case of 8x FY14 FCF of $4.20, or $34, becomes increasingly likely.”

Meanwhile, Goldman Sachs is taking the contrarian view on the stock heading into earnings. The bank has a Sell rating on the stock and a $17 price target.

“While HP's earnings and cash flow performance have handily exceeded expectations over the past two quarters, we continue to believe the company's historical underinvestment and continued end-market challenges could force a reset in expectations, and we remain below consensus as a result. For the July quarter, we model EPS of $0.78 versus guidance of $0.84 to $0.87 and consensus of $0.87. While continued savings from recent restructuring actions and a lower reinvestment rate could allow the company to exceed our forecast, we believe the secular trends in the business remain impaired.”

“While the company's reinvestment rate has been lower than we expected and resulted in higher net savings, it remains our view that this strategy is unsustainable and that the company's room to maneuver is growing more limited with each passing quarter. We do believe that HP's turnaround efforts have been encouraging thus far, but we also believe that expectations for the pace of the recovery and steady-state earnings are too high.”

J.P. Morgan, however, is neutral on the stock heading into earnings. They raised their price target to $29 ahead of the release from $24.50.

“For Jul-Q, our revised revenue and non-GAAP EPS estimates are $27.09bn and $0.89, versus $27.02bn and $0.85 previously. We also are lifting our non-GAAP EPS estimates for succeeding quarters. Our research indicates that our revenue assumptions for services and imaging segments may have been too cautious. Meanwhile, our assumptions for PCs, servers, storage, and networking require modest revisions lower. Net result is that our revenue estimates change little, but the EPS increases are meaningful.”

“Our new C2014 non-GAAP EPS estimate is $3.75. Considering our Dec-14 price target of $29, the implied P/E multiple is 7.7x, which trails the current peer group average of 10.6x. If HP can continue improving EPS and develop a clear path to YoY revenue growth, the stock's trading multiples stand to improve, in our view.”

Home Depot

Home Depot is expected to report second quarter EPS of $1.20 vs. $1.01 a year ago on revenue of $21.72 billion vs. $20.57 billion a year ago. The report is expected before the market open on Tuesday.

Deutsche Bank maintained their $80 price target and Hold rating heading into earnings. They are looking for Home Depot to raise guidance though.

“Consensus estimate for HD are $3.63 for the year on 4.8% comps, compared to current guidance of $3.52 and 4.0%. DB is at $3.58 and 4.8%. Guidance includes another $4.4b in buybacks on top of the $2.1b bought in 1Q13. DB is estimating another $5.2b, including $1.1b in 2Q13.”

“Consistency is the key for HD, with investors increasingly comfortable that HD is in control of their business regardless of the macro or competitive environment. Therefore we think any color around the potential impact of higher interest rates will be a key focus for investors. We also expect an update on the potential to add more debt this year and increase the buyback plan this year to above the already announced $6.5b.”

Target

Target is expected to report second quarter results on Wednesday before the bell. Analysts are looking for EPS of $0.99 vs. $1.06 a year ago on revenue of $17.33 billion vs. $16.78 billion a year ago.

J.P. Morgan recently downgraded the stock to Neutral and kept their price target at $74. “We are downgrading TGT to Neutral as the current stock price is just 3% below our December price target of $74 and there are significant pressure points on earnings ahead. First, the stock is trading at 16.5x our 2013 EPS estimate of $4.35 (vs. consensus of ~$4.32 and guidance of $4.25-$4.45 adjusted to include Canadian dilution of $0.45) and there is a lot of uncertainty regarding EPS growth into 2014.”

“Second, we believe the pressures on the low-end consumer persist with the 2% payroll tax increase nearly offsetting 2.9% YTD wage growth and mitigating the lift from TGT's merchandising efforts (e.g., REDcard and PFresh). Third, this backdrop affects the near-term outlook and that plus six fewer selling days between Thanksgiving and Christmas portend a promotional environment in 4Q while TGT continues to play catch up in ecommerce. Moreover, the comp lift from PFresh is estimated to fall from 130 bps last year to 70 bps this year and 40 bps in 2014.”

“Finally, as we look to 2014, the EPS contribution from Canada remains uncertain while representing the single largest driver of expected earnings growth YOY. We are modeling $0.08 of accretion vs. an estimated $0.45 drag in 2013 (representing 43% of our incremental earnings YOY). Over the last nine months, TGT is up 15% vs. the S&P 500 increase of 20%.”

Meanwhile, Piper Jaffray remains bullish heading into earnings. They have an Overweight rating and a $80 price target on Target.

“We remain positive on Target's ability to develop new and innovative programs to gain or maintain market share in key categories. The Beauty Concierge program appears to be a successful example, having expanded to a total of 200 stores in four markets this summer after debuting in 28 stores in one market last year. We believe the expanded Beauty Concierge program can deliver a couple cents of incremental EPS in 2014 and potentially up to $0.15 in 2015 if expanded to half the store base.”

“Beyond the beauty category, Target continues to test new concepts focused on individual categories, such as Ticket streaming video, a baby department with dedicated and trained staff, expansion of the organic food assortment and renovation of parts of the electronics department for the launch of new video game consoles – evidence, in our opinion, that Target is now evolving with the consumer.”

“Assuming base beauty sales in Beauty Concierge stores are currently $1.5M/ store ($2.7B in total), annual cost of $50,000 per concierge and a 40% gross margin, we estimate the potential EPS contribution to 2014 EPS is in the neighborhood of $0.01-0.02 assuming a 15-25% realized lift in the beauty category.”

“Because the markets Target is running the program in are some of the company's better markets, we believe the first 200 stores could be generating closer to $2.0M in annual sales, suggesting the range could be slightly higher at $0.02-0.03. If the program was expanded to half the U.S. store base during 2014, we estimate the contribution to 2015 EPS would be $0.05-0.15 based on initial sales of $1.5-2.0M per store.”

Key Economics Releases

On the economics calendar next week, the FOMC minutes will be in focus as investors fear tapering. Also, key housing indicators will be in focus.

Daily Schedule

Monday

• Earnings Expected From: Vanguard Health Systems VHS, Urban Outfitters URBN and Bob Evans Farms BOBE.


• Economic Releases Expected: the weekly 3- and 6-month bill auctions.

Tuesday

• Earnings Expected From: Home Depot HD, TJX TJX, Medtronic MDT, Intuit INTU and Analog Devices ADI.
• Economic Releases Expected: German PPI, the Chicago Fed National Activity Index, the weekly Redbook and a 4- and 52-week bill auction.

Wednesday

• Earnings Expected From: Hewlett-Packard HPQ, Target TGT, Lowe's LOW, Staples SPLS, Limited Brands LTD, J.M. Smucker SJM, American Eagle Outfitters AEO and Toll Brothers TOL.
• Economic Releases Expected: MBA Purchase Applications, Existing Home Sales and the FOMC Minutes.

Thursday

• Earnings Expected From: Cato CATO, Hormel Foods HRL, Dollar Tree DLTR, Gamestop GME, Abercrombie and Fitch ANF, Marvell Tech. MRVL and Autodesk ADSK.


• Economic Releases Expected: the flash Chinese, Eurozone, French, German, and British PMI's are due out (both services and manufacturing for all but China), Canadian retail sales, initial jobless claims, PMI flash manufacturing index, the FHFA Home Price Index, leading indicators, the KC Fed Manufacturing Index, a speech from Fed President Richard Fisher and China's FDI report.

Friday

• Earnings Expected From: Ann Inc. ANN.
• Economic Releases Expected: German GDP report, New Home Sales and a speech from Fed Vice-Chairman Janet Yellen.