Market Overview

Benzinga Weekly Preview: Geopolitical Tension Continuing To Weigh On Markets

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Geopolitical tension across the globe has been weighing on markets and next week will likely be no different.

Tension between Russia and Ukraine continued this week as pro-Russian separatists clashed with the Ukrainian military despite efforts to create a ceasefire agreement.

The White House said it may consider tightening sanctions on Russia if Moscow doesn't use its influence to persuade the separatists to lay down their weapons.

NATO foreign ministers are set to meet next week to discuss the situation on Monday, just days before Ukraine's newly elected leader Petro Poroshenko is set to sign a free-trade agreement with the EU on Friday.

Key Earnings Reports

Next week investors will be waiting for several key earnings reports including Walgreen (NYSE: WAG), Accenture (NYSE: ACN), Nike (NYSE: NKE), ConAgra Foods (NYSE: CAG) and General Mills (NYSE: GIS).

Walgreens

Walgreens is expected to report third quarter EPS of $0.94 on revenue of $19.30 billion, compared to last year's EPS of $0.85 on revenue of $18.31 billion.

On June 4, Credit Suisse maintained a Neutral rating on Walgreens with a $67.00 price target, cautioning that the reward the stock could provide may not be commensurate with the risk.

“Walgreens reported solid May sales, as better than expected front-end and script growth offset somewhat lower than expected drug price inflation. Total comps rose 4.4%, ahead of consensus of 4.1% and in line with our estimate of 4.4%. Front-end comp growth of 2.6% exceeded consensus of 1.7%, as the company’s recently improving trend continued. Customer traffic (-0.5%) and basket (+3.1%) both improved modestly on a 2-year basis. We believe promotional levels for WAG and competitors remained high. Sales strength in the pharmacy continued, with comps up 5.5%. While dollar comps were roughly in line with expectations, we believe script growth of 5.6% excluding the calendar shift was better than expected while inflation was somewhat lower than expected (both positive). We continue to rate WAG Neutral. While we appreciate the potential for greater earnings power than initially expected from the AB deal and fundamentals affecting all drug retailers should start to gradually improve from here, we struggle with the risk/reward following the stock’s strong run.”

On the first of June, Morgan Stanley was more optimistic with an Overweight rating, though still cautious about weakening store traffic.

“We expect a pharmacy script comp of 2.7% y/y, or 4.5% adjusted for calendar day shift impact, up from an adj. comp of 4.3% in April. Last month’s script comp had been negatively impacted by lower incidence of the flu (-0.2%) which should not be a factor this month. In addition, we will look to see evidence for Rx benefit from improved utilization related to ACA coverage expansion. For front-end sales, we expect a comp of 2.1% y/y, down from 8.2% in April, which benefited from Easter timing, but inline with the 2.1% comp for the combined March/April period. While the front-end sales comp has been in positive territory over the past 12 months (excluding March, which was impacted by Easter timing), traffic trends have recently been weak. Over the past 5 months (excluding April) y/y traffic trends have been in negative territory (-1.3% in Dec ’13, -2.2% in Jan ’14, -0.7% in Feb ’14 and -0.9% for the combined March/April ’14 period).”

On June 4, S&P Capital IQ maintained a Sell rating on Walgreens with a $66.00 price target. The analysts at S&P said that they see the stock staying inline with its peers in the Consumer Staples sector.

“We believe the stock's valuation will stay in line with the Consumer Staples sector as WAG integrates recent acquisitions and realizes increased synergies through its partnership with Alliance Boots. We see valuation benefits from rising demand following the implementation of the Patient Protection and Affordable Care Act on January 1, 2014, offset by non-pharmacy growth pressures from increased nontraditional competition and a less favorable generic drug environment.”

Accenture

Accenture is expected to report third quarter EPS of $1.21 on revenue of $7.54 billion, compared to last year's EPS of $1.14 on revenue of $7.20 billion.

On March 28, Merrill Lynch maintained a Neutral rating on Accenture with a $84.00 price objective. The firm noted that although the company was still on track for growth, it was facing pricing pressure in Europe.

“ACN shares were down 5% following a relatively in line 2Q due to negative commentary around pricing pressure. Bookings growth was solid (+11% YoY). Accenture is on track for revenue acceleration in FY14. We now forecast constant currency revenue growth to rise from 3.0% in 2Q to 3.7% in 3Q and 5.9% in 4Q. ACN noted pricing pressure due to competition in application services, vendor consolidation, and bill rate pushback in existing business. Application services has long been a highly competitive area. The trend of clients consolidating vendors (offering more volume at lower pricing) is also a long-term trend. Getting bill rate increases has never been easy. What is new, in our view, is increasing adoption of offshoring in continental Europe (34% of revenue). Newer entrants (e.g., Cognizant, TCS, Infosys) have made a string of acquisitions in the region. Given rising competition, pricing on new deals is likely to be stressed. For existing ACN clients choosing to offshore, lower offshore bill rates will result in revenue deflation. Accenture has multiple levers to offset a constrained pricing environment, but we expect offshoring adoption in continental Europe to be a long-lasting trend.”

On April 30, Credit Suisse was more optimistic with an Outperform rating and a $92.00 price target. The analysts at Credit Suisse noted that Accenture has the potential to lead the digital revolution as more companies incorporate digital technology into their business.

“Accenture hosted a call today to outline Accenture Digital and key themes from this year's Technology Vision. The key message is that companies of all sizes are embracing digital technologies to try and change the way they interact with customers and how they can improve consumer experiences. We think Accenture has the deepest resource base in the industry in this area and this should play a role in helping Accenture accelerating top line growth. A material revenue driver: The call contained little in the way of incremental data points. However, Accenture has 23,000 people inside Accenture Digital and in our recent note, Opportunity to Outperform, we estimate that it accounts for nearly 20% of group revenues. Accenture describes this is one of the most pervasive technologies they have seen for some time, and industry estimates suggest these technologies are growing at 20%+. This is supported by recent comments from Capgemini which indicates its SMAC revenues are growing at 25% per annum. Overall, this means that Accenture Digital alone could be capable of delivering 4% organic per annum growth.”

On June 14, S&P Capital IQ was more downbeat, maintaining a Sell rating on the stock with a $65.00 price target. The firm cited changes in demand, pricing, growth and execution as reason for their caution.

“We downgraded our opinion on the shares to Sell from Hold in April 2014, reflecting valuation. We have noted challenges related to demand, pricing, growth and execution, especially in the important consulting business. We believe clients, particularly those in developed markets, are looking for help in containing costs and improving their operations. We view ACN as well diversified across geographies as well, which we think constitutes a competitive advantage. However, we see the stock as overvalued at a recent 17X our calendar year 2014 EPS estimate.”

Nike

Nike is expected to report fourth quarter EPS of $0.75 on revenue of $7.34 billion, compared to last year's EPS of $0.76 on revenue of $6.70 billion.

Merrill Lynch maintained a Buy rating on Nike with an $88.00 price target on May 16, noting that the company is likely to continue gaining market share around the globe.

“Our $88 PO is 22x our F2015 EPS estimate of $3.95, which is a premium to the stock's absolute multiple over the last five years of 15-20x but is supported by Nike's global growth outlook given continued market share gains, price increases, accelerating futures orders, powerful footwear product engine, strong execution and global infrastructure, inventory management and continued expansion internationally. Risks are slower growth globally pressuring further top line deceleration particularly in China, a more muted GM outlook due to FX pressure in Europe, and a rotation out of NKE into consumer discretionary names with more earnings recovery potential.”

On June 14, S&P Capital IQ also maintained a Buy rating on Nike with an $82.00 price target, saying that the company has the potential to end the year with strong earnings growth.

“We view the shares as attractively valued at recent levels. After what we saw as very encouraging results for the first nine months of FY 14, we see the year ending on a strong note, with this summer's World Cup set to provide another catalyst for a continued high-single digit revenue growth in FY 15. Globally, we see NKE successfully leveraging its product innovation to drive consumer demand across various price points. We also see the company applying consumer insights from its DTC business to deliver the right assortments to its wholesale partners. In Greater China, we think NKE's focus on meeting the needs of discerning Chinese consumers is starting to gain traction.”

On April 8, Stifel upgraded Nike from Hold to Buy with an $87.00 price target, saying that since the company's shares corrected following first quarter results, the risk and reward is more attractive.

“While we have remained constructive on both NIKE’s near-term fundamentals and opportunity for long-term value creation, our near-term caution on NKE shares and Hold rating had been predicated on: 1) overly ambitious consensus estimates, 2) under-appreciated FX headwinds to earnings, and 3) an extended multiple premium vs. the S&P. Despite continued fundamental strength, NIKE shares have corrected -3.8% since the company’s 1Q14 report and are down -9.9% ytd. vs. the S&P performance of +9.1% and -0.2% respectively.”

ConAgra Foods

ConAgra Foods is expected to report fourth quarter EPS of $0.59 on revenue of $4.38 billion, compared to last year's EPS of $0.60 on revenue of $4.59 billion.

On June 19, Merrill Lynch downgraded ConAgra Foods from Buy to Underperform with a $30.00 price objective, saying that the company's stifled earnings growth and high debt will keep the ConAgra shares from performing as well as other companies in the same space.

“We are downgrading ConAgra Foods (CAG) from Buy to Underperform. While we continue to believe that there is potential for the company to create an advantaged Private Brands business model by delivering higher quality products at a lower cost, it is clear given yesterday’s announcement that it will take longer for the company to realize its full potential. Valuation is attractive but with muted earnings growth, relatively high debt levels and no dividend growth in the near term we expect the stock to underperform its peers over the next 12 months. We lower our FY15/FY16/FY17 estimates from $2.32/$2.58/$2.82 to $2.22/$2.30/$2.36; our revised forecasts reflect management comments reducing the company’s earnings outlook, driven by lower Private Brands profits and Consumer Foods. In addition, asset impairments (primarily in Private Brands) suggest lower forward earnings potential than we had previously anticipated. Our free cash flow forecast is $510mn for FY15 and we think the company will be able to service/reduce debt and pay the dividend, but the pace of balance sheet deleveraging is slower than we anticipated.”

On June 18, Credit Suisse was more positive and maintained a Neutral rating on the stock with a $31.00 price target, though still advising caution as the company has issued a profit warning.

“Today ConAgra issued a profit warning saying 4Q EPS would be $0.55 (versus consensus of $0.62). They also took an enormous 4Q impairment charge of $681M for Ralcorp and apparently Chef Boyardee as well. Management attributed the lower than expected results to continued volume weakness in the Consumer Foods segment and on-going challenges with the Ralcorp integration. The company also capitulated on their near term and longer term growth expectations saying FY15 EPS would only grow mid-single digits. This is the second profit warning since they bought Ralcorp in 2013. We do not recommend buying the stock on weakness. These results reinforce the fear we expressed following the company's presentation at CAGNY that the marriage of a private label and branded business will continue to prove difficult. In our view, the pendulum shift to private label has sucked management's attention and resources away from the stewardship of its brands. Management's claim that they can create value for retailers by taking an "agnostic" approach between branded and private label solutions sounds like a long shot at best. Perhaps these two businesses would be better off splitting apart.”

On June 18, Morgan Stanley echoed Credit Suisse's concerns and maintained an Equal-Weight rating on ConAgra with a $30.00 price target.

“CAG reduces Q4 guidance & mid-term outlook, takes impairment on Ralcorp: CAG this morning preannounced Q4 EPS of $0.55 (vs. MS/consensus $0.62), while lowering its 2015 and 2016-17 EPS growth outlooks to mid-single & high-single digits, respectively (consensus previously forecast ~6% growth in F15, and up 10%+ thereafter). Key Q4 headwinds included: (i) Weaker than expected Consumer Foods volume (-7%, vs. MSe -3% and scanner -4%); and (ii) Significant profit weakness in Private Brands (down ~60% YoY), due to pricing concession and integration issues. CAG will also take a $681 MM non-cash impairment associated with Ralcorp (we cannot recall another similarly large goodwill write-off being taken so soon after an acquisition) and selected retail brands (Chef Boyardee).”

General Mills

General Mills is expected to report fourth quarter EPS of $0.72 on revenue of $4.43 billion, compared to last year's EPS of $0.53 on revenue of $4.41 billion.

On June 19, Merrill Lynch maintained a Neutral rating on General Mills with a $56.00 price target, citing the company's strong growth prospects.

“Our 12-month price objective of $56 is based on 17.5x our CY15 EPS estimate of $3.18. Our target multiple is a premium to the packaged food group average. We believe GIS should trade at a premium to the group given its defensive nature, higher top-line and profit growth prospects, strong portfolio, limited private label penetration, and solid execution compared to its peers. Downside risks to General Mills achieving our price objective are consumers trading down to private label, higher-than-expected commodity cost inflation, greater-than-expected weakness in Bakeries and Foodservice, and weaker-than-expected International sales.”

On March 19, Credit Suisse maintained a Neutral rating on General Mills with a $51.00 price target following the company's pre-announcement, which held no surprises.

“Following last week's pre-announcement, today General Mills reported adjusted EPS of $0.62, in line with the communicated range. Management attributed the quarter's poor results to weather, dairy inflation, and increased spending on US yogurt. The weather issues primarily affected the cost side where plant operations and logistics were disrupted by winter storms. The company lost 62 days of production, which has not happened in decades. In addition, school and other institutional closures contributed to a 7% sales decline for the convenience and foodservice segment. While management reaffirmed the growth model for 2015, they emphasized that the recovery will be slow. As of now the company sees normal inflation in FY15 of 4% - 5% and feels confident that it can offset it with pricing and HMM savings. We maintain our estimates slightly below consensus ($2.87 and $3.06 for FY14 and FY15) because of our concerns related to US yogurt, which has now fallen short of management's expectations three years in a row.”

On June 14, S&P Capital IQ maintained a Hold rating on General Mills with a $51.00 price target, noting that the company would face increased competition from lower priced products.

“We think GIS's brand strength will help to provide some protection from competition from less expensive products. However, we expect overall EPS growth to be restricted by continued weak domestic demand, slowing international macro-economic growth, and increased marketing and merchandising investment within the yogurt business which we believe is needed to drive sales growth.”

Economic Releases

Next week's economic calendar will be a busy one with investors closely watching Japanese data for a better picture of how the nation's economy is adjusting to its sale tax hike. After trade data this week showed disappointing figures, Japanese retail sales will be closely watched for any signs that domestic demand is picking up. Eurozone data will also be in the spotlight as investors look to PMI and GPD data for an idea of how the region's recovery is progressing.

Daily Schedule

Monday

  • Earnings Releases Expected: Sonic (NASDAQ: SONC), Micron Technology (NASDAQ: MU)
  • Economic Releases Expected: US existing home sales, eurozone services and manufacturing PMI, German services and manufacturing PMI, French services and manufacturing PMI

Tuesday

  • Earnings Expected: Walgreens (NYSE: WAG), Apogee Enterprises (NASDAQ: APOG)
  • Economic Releases Expected: US new home sales, the US redbook, German current assesment, German Ifo business climate index

Wednesday

  • Earnings Expected: General Mills (NYSE: GIS), Apollo Group (NASDAQ: APOL), Monsanto (NYSE: MON), Barnes & Noble (NYSE: BKS)
  • Economic Releases Expected: German consumer climate, Italian retail sales, US durable goods orders, US oil inventory data, Italian consumer confidence

Thursday

  • Earnings Expected From: McCormick & Company (NYSE: MKC), ConAgra Foods (NYSE: CAG), Nike (NYSE: NKE)
  • Economic Releases Expected: Japanese retail sales, Japanese CPI, Japanese unemployment, British consumer confidence, Irish GDP, British GDP

Friday

  • Earnings Expected From: KB Home (NYSE: KBH), Commercial Metals Company (NYSE: CMC)
  • Economic Releases Expected: German CPI, eurozone industrial sentiment, eurozone business climate, eurozone consumer confidence, British GDP, Italian business confidence, French PPI, French GDP

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