Benzinga Weekly Preview: Fed Taper Decision Looming
The US Federal Reserve will steal the spotlight next week as the bank will likely make the much anticipated announcement that it will start cutting back on its $85 billion bond buying plan.
The Wall Street Journal surveyed economists and found that roughly two out of three are expecting the taper to start on Wednesday, however it won’t be certain until the bank announces its decision. Although the taper has been fairly priced into the market, weak data has created some uncertainty around the announcement.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports includingRite Aid Corporation (NYSE: RAD), Oracle Corporation (NASDAQ: ORCL), General Mills, Inc. (NYSE: GIS), ConAgra Foods, Inc. (NYSE: CAG), Fed Ex Corporation (NYSE: FDX) and Adobe Systems Incorporated (NASDAQ: ADBE).
Rite Aid Corporation
Rite Aid is expected to report a loss of $0.04 per share on revenue of $6.27 billion, compared to last year’s loss of $0.05 on revenue of $6.23 billion.
J.P. Morgan gave Rite Aid a Neutral rating this week and was optimistic about the company in the long run, but cited the economy and potential reimbursement pressure as obstacles to success in the near term.
“Investor focus remains on execution, and whether the company can continue to drive sustainable improvement in the same store sales trend and deliver the expected EBITDA contribution from ongoing restructuring and operational improvement initiatives. While we believe that the company could be successful in driving a turnaround over the longer term (possibly with the aid of some store divestitures to free up capital to invest in the store base), we believe the near term could continue to be bumpy due to the impact of the economy (which has partly contributed to weak same store sales trends in the past), potential reimbursement pressure, and the considerable amount of work to be done on executing the strategic plan.”
The analyst team at Goldman Sachs also gave the stock a Neutral rating at the beginning of August and adjusted their earnings forecast to reflect improved same-store sales expectations.
“We raise our 2Q13, 2013, 2014, and 2015 adjusted EBITDA estimates modestly on improved pharmacy same-store sales expectations. Our 2Q13 adjusted EBITDA estimate goes to $278mn from $269mn; 2013 goes to $1,120mn from $1,195mn; 2014 goes to $1,335mn from $1,320mn, and 2015 goes to $1,360mn from $1,345mn.”
Oracle is expected to report EPS of $0.56 on revenue of $8.48 billion, compared to last year’s EPS of $0.53 on revenue of $8.21 billion.
Morgan Stanley gave Oracle an Overweight rating with a price target of $36.00 on August 15, noting that Oracle is an excellent choice for long term investors due to the durability of its three long term core drivers; an expanding technology portfolio, a durable maintenance stream and a willingness to return profits to shareholders.
“While the debate on secular positioning will continue, history suggests Oracle remains a dominant software vendor for the foreseeable future and investors should garner comfort in the durability of EPS growth. At the low end of its valuation range and a ~25% discount to the S&P, current levels likely represents an attractive entry”
General Mills, Inc.
General Mills is expected to report EPS of $0.70 on revenue of $4.30 billion, compared to last year’s EPS of $0.70 on revenue of $4.05 billion.
On August 16, Jefferies downgraded General Mills from Hold to Underperform with a price target of $44.00, down from $45.00. The downgrade came as a result of the company’s decreased spending on advertising and media.
“We we make the case that GIS has used cuts to their advertising and media spending over the last two years to protect EBITDA margins from the inflationary pressure on gross margins. Intuitively we would assume that this could lead to pressure on volume growth and data from Campbell (CPB, $46.14, Hold) seems to support this intuition. We therefore are further reducing our volume outlook for GIS. At a 15x NTM P/E multiple (0.5x above the 5 year average) our target price of $44 no longer supports a Hold rating, hence the downgrade”
In an August 16 report on America’s food industry, Goldman Sachs noted that the company’s snacks and granola bars were beneficial, but that sales were disappointing even as the company introduced new products and expanded its distribution.
“GIS sales remain lackluster, with declines of 0.9% this period vs. +1.2% growth last period. Volume fell 0.8% and two-year stack trends also decelerated to -4.5% (from -3.5% last period). The overall sales weakness is particularly disappointing given that the company has committed to introduce several new products in 2H13 and is already expanding distribution (+3.9% this period vs. +2.8% last month). Some of the weakness does reflect a concerted effort to be more disciplined on promotion, across its portfolio promoted sales growth has decelerated to just 0.2% vs. 6.6% last month and +21.6% 3 months ago.”
ConAgra Foods, Inc.
ConAgra is expected to report EPS of $0.45 on revenue of $4.38 billion, compared to last year’s EPS of $0.44 on revenue of $3.31 billion.
This week, Bank of America Merrill Lynch maintained its Buy rating for ConAgra and lowered its price objective from $42.00 to $40.00. Although ConAgra pre-announced EPS of $0.37, lower than its original $0.44 guidance, Bank of America remained positive on the stock, saying tactical adjustments will help the company recover.
“We are reiterating our Buy rating despite the miss in F1Q14. The weaker than expected results were driven by the underlying CAG business not improving at the rate we expected. We believe tactical adjustments can correct this issue. We remain positive on CAG given: 1) significant private label opportunity; 2) acceleration of underlying RAH; 3) favorable valuation relative to peers; 4) cash flow and value created by paying down debt and buying back stock.”
Deutsche Bank was more conservative following the weaker than expected EPS and gave the stock a Hold rating with a price target of $37.00.
“Given the first quarter weakness, the company also adjusted its F2014 EPS expectations to a range of $2.34-$2.38 (below its prior $2.40 guidance). The full year reduction is below the 1Q shortfall as the company noted it is adjusting merchandising, promo and pricing on its Consumer Foods brands, while also stepping up cost savings vs. more benign input costs. With ConAgra not meetings its internal expectations (it is unclear whether this is branded and/or private label volume), it will be interesting to see how the industry and competition react to the company’s more aggressive efforts to drive volume in coming quarters.”
Fed Ex Corporation
Fed Ex is expected to report EPS of $1.52 on revenue of $11.00 billion, compared to last year’s EPS of $1.45 on revenue of $10.79 billion.
This week, Deutsche Bank gave Fed Ex a Buy rating with a price target of $123.00, citing the company’s long term earnings improvement potential as the economy picks up over the next few quarters. Deutsche Bank noted that falling fuel prices could be a catalyst for earnings in the future.
“Jet fuel prices have increased over 13% since troughing on May 31, 2013, creating a tough FQ1 earnings outlook as the price was essentially stable during the period April-June 2013. We note that the Express surcharge is based on a rounded average of spot jet fuel prices on a two-month lag. This will hurt FQ1 by roughly $0.20/share, but if fuel prices decline in FQ2 into seasonally strong volumes, we could see a fuel tailwind emerge.”
The analyst team at J.P. Morgan gave Fed Ex a Hold rating with a price target of $108.00 in mid August, citing soft international airfreight demand as obstacles in the medium term.
“On Wednesday last week we spent a day marketing with Jeff Smith, Staff Director in FDX’s Investor Relations group in Boston. Key points of discussion with investors were FDX’s operating improvement plan, trade down, and the variety of potential strategies FDX could pursue to drive upside in EPS performance and the stock. In our view, the meetings highlighted the near term pressures from soft international airfreight demand and trade down but also the attractive medium term potential for FDX to realize margin improvement in its Express business.”
Adobe Systems Incorporated
Adobe is expected to report EPS of $0.34 on revenue of $1.01 billion, compared to last year’s EPS of $0.58 on revenue of $1.08 billion.
This week, the analyst team at Goldman Sachs gave Adobe a Neutral rating with a $50.00 price target. Goldman forecast an increase of new subscribers to the Adobe Creative Cloud and noted that the company has been quite successful in transitioning to subscription, however recommended waiting for a better entry point.
“While the company continues to execute well on its transition to subscription, we remain on the sidelines and would await a better entry point. At around $47, Adobe is trading at 28X our CY14 non-GAAP EPS forecast of $1.69.”
Key Economic Releases
The Fed’s meeting will be the hot topic of the week, with investors scouring US data out ahead of the meeting for further clues about the Fed’s tapering plans. Most are expecting to see markets react to the Fed’s decision whether the bank decides to begin cutting back or not.
Investors are expecting to see the Fed pull back on its bond buying plan by $10 to $15 billion dollars. The composition of the taper will also be of interest, especially to bond markets. If the bank does cut back, many wonder whether it will be mortgage backed securities or treasury bonds that will be targeted.
- Earnings Releases Expected: Avid Technology, Inc. (NASDAQ: AVID)
- Economic Releases Expected: US industrial production, eurozone CPI, eurozone labor cost index, Italian trade balance, Norwegian trade balance
- Earnings Expected From: Adobe Systems Incorporated (NASDAQ: ADBE), Intercontinental Hotels Group (NYSE: IHG), Tower Group International, Ltd. (NASDAQ: TWGP)
- Economic Releases Expected: Chinese house prices, New Zealand current account, US core CPI, German ZEW economic sentiment, British CPI, eurozone current account
- Earnings Expected From: Fed EX Corporation (NYSE: FDX), Cracker Barrel Old Country Store, Inc. (CBRL), General Mills, Inc. (NYSE: GIS), Oracle Corporation (NYSE: ORCL)
- Economic Releases Expected: US FOMC meeting announcement
- Earnings Expected From: Cintas Corporation (NASDAQ: CTAS), ConAgra Foods, Inc. (NYSE: CAG), Rite Aid Corporation (NYSE: RAD), Scholastic Corporation (NASDAQ: SCHL)
- Economic Releases Expected: US existing home sales, US leading indicators, British mortgage approvals
- No Notable Earnings Expected
- Economic Releases Expected: Polish retail sales and unemployment data, Argentinean industrial production, Mexican unemployment data
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