Benzinga Weekly Preview: Earnings Season Continues With Geopolitical Tensions As A Backdrop
Earnings season continues next week, with several heavy hitters set to release earnings.
Microsoft (NASDAQ: MSFT) will be closely watched -- as the company recently announced that it is planning to lay off around 14 percent of its workforce in order to accommodate its Nokia acquisition.
In addition to several big-name company earnings, investors will also be keeping an eye on rising tensions between Russia and the West -- after the apparent shoot-down of Malaysian Airlines passenger jet on Thursday, in eastern Ukraine near the Russian border. While the details of what happened are still vague, the markets are on edge and waiting to see how Western leaders respond. Most believe that Moscow was tied to the missiles used.
Key Earnings Reports
Apple is expected to report a second quarter EPS of $1.22, compared to last year’s EPS of $1.07.
On July 15, Wells Fargo gave Apple a Market Perform rating, noting the company’s strategic partnership with IBM could benefit growth prospects.
“From our perspective, this is a strategic and relatively low-risk approach to improve penetration and drive usage of iOS devices in the enterprise," the company added. "While the bring your own device (BYOD) movement suggests there are already iPads and iPhones in the enterprise (Tim Cook noted that iOS already has a strong footprint in enterprise with over 98% of Fortune 500 and 92% of Global 500 using the devices), the partnership appears to be focused on selling the solution as a bundle (hardware included)."
"We believe that the initiative could potentially offer incremental upside to our FY2015 iPad and iPhone unit estimate (70.5MM and 165.6MM, respectively) with every 1MM incremental iPad units generating an additional $0.02 in EPS and every 1MM incremental iPhones $0.03, all else equal," it continued. "However, we believe the magnitude of upside potential will be driven by IBM’s ability to penetrate the market, which will be an unknown until the solutions come to market."
"It is also unclear whether Apple will benefit from some residual revenue from IBM aside from the hardware sale.”
On July 14, RBC Capital Markets gave Apple an Outperform rating with a $100.00 price target, noting that the company’s new product launch will have a big impact on the upcoming quarter."
“For the Jun-qtr, we believe Apple will report earnings in line with Street expectations. Furthermore, we think investors are largely going to focus on data-points or comments that provide clarity around the next iPhone refresh cycle and various other products/services that AAPL may launch this year. We think AAPL will likely guide Sep-qtr within Street expectations of $40.7B/$1.33 (although any upside could suggest timing of the launch and/or new products). We maintain our Outperform rating and $100 price target.”
This past Wednesday, Citigroup gave Apple a Buy rating, with a $110 price target, saying that the company is expected to benefit in from the release of the iPhone 6 during the fourth quarter.
“Upcoming fourth quarter results will look different for the wireless sector," it said. "We expect greater Smartphone sales from the iPhone 6 launch relative to the fourth quarter of 2013. We also expect much less dilution to headline OIBDA margin & EPS results that have historically accompanied strong 4Q Smartphone volume given the non-cash accounting benefits from 'unbundled' rate plans.”
On Friday, Morgan Stanley was optimistic about Apple’s future, saying the company’s iWatch sales cannot be accurately forecast based on the current lack of demand for such gadgets.
“We expect Apple's June quarter results at the high-end of company guidance as our AlphaWise Smartphone Tracker indicates 39M iPhone unit demand for the quarter," it said. "Our revised iPhone estimate increases revenue to $37.9B and gross margin to 37.9% in the June quarter, at the high-end of guidance for $36-38B and 37-38%. As a result, our EPS increases from $1.18 to $1.24."
"We also raise our CY15e EPS 11% above consensus to reflect our bullish view on iWatch," it continued. "We view the Apple 'halo effect' rather than the current watch market as the more accurate predictor of iWatch sales. We see a range of 30- 60M iWatch unit sales in the first 12 months of availability based on historical penetration of past iDevices.”
Facebook is expected to report a second quarter EPS of $0.26, compared to last year’s EPS of $0.13.
On July 9, Tigress Financial Partners downgraded Facebook from Buy to Neutral, citing worries about the company’s recent acquisitions and declining user base as reason for their caution.
“Concerns regarding FB’s monetization of WhasApp and Instagram may be an overhang for shares," it said. "We would become more optimistic of FB if the company can demonstrate success in monetizing Instagram, as we believe this would portend futures success in monetizing WhatsApp. FB’s $19 billion dollar acquisition of WhatsApp was widely lauded as a smart business decision; we believe FP paid peak valuations for the company in a defensive attempt to gain scale and active user growth.”
On Monday, however, Oppenheimer was more optimistic -- with an Outperform rating, with a $79.00 price target, saying the launch of Instagram ads looked promising.
“We believe there is upside to 2Q Street estimates based on strong user engagement and bullish channel checks. U.S. minutes increased 42 percent y/y for both desktop and mobile, compared to 43 percent in 1Q and our +41 percent estimate. Meanwhile, checks with social agencies suggests same client CPC growth of 5 percent -10 percent q/q and 50 percent y/y, with triple-digit y/y growth in total spending or 15 percent q/q."
Large performance advertisers are continuing to adopt Custom Audiences and brand advertisers are increasing spend, as organic reach is becoming more difficult due to algorithm changes and competition. We also see upside from the launch of Instagram ads.”
Coca-Cola is expected to report a second quarter EPS of $0.63, compared to last year’s EPS of $0.663.
On July 16, Nomura gave Coca-Cola a Buy rating and raised its target price to $54.00, saying revenue growth likely increased ahead of the World Cup.
“We estimate clean EPS of USD 0.63 (vs. USD 0.63 in 2Q13 and Bloomberg cons USD 0.63 and expect better organic revenue growth (+5 percent v +3 percent in 2013) helped by the shift of Easter into 2Q and sales ahead of the World Cup." it said. "For the FY, we continue to assume +4 percent organic revenue growth; our FY14 EPS estimate is increased by c.1 percent to reflect less negative FX, which results in our TP moving to USD 54.0 from USD 53.5."
"We believe the company will step back from the 2020 vision to double system revenues and will trigger a number of value creating strategies, mainly margin driven; and expect this to happen within the next 12 months. Valuation is not demanding even without the strategic moves; and estimate that the shares trade in line with the large global FMCG average (2014E P/E of 20.2x vs 19.8).”
Merrill Lynch gave Coca-Cola a Neutral rating, with a $49.00 price target on July 16th, and is also expecting to see a boost from the World Cup.
“We maintain 2Q14 EPS of $0.87, reflecting a 14 percent rise YoY," it said. Embedded in our 2Q forecasts is the following:
1) Overall sales+8 percent,as CCE laps -2.5 percent in 2Q13, this is made up of the following components: flat volumes despite a boost from Easter timing and the World Cup, net pricing +2.0 percent, mix flat, and FX up +6 percent;
2) We model overall gross margin of 35.3 percent impacted by flat volumes and stronger net pricing/case (FX neutral);
3) Operating profits of $336mn with EBIT growth of 6.9 percent;
4) We forecast net interest expense of $30mn, a tax rate of 27 percent, and diluted shares outstanding of 255.7mn.”
Microsoft is expected to report a second quarter EPS of $0.60, compared to last year’s EPS of $0.59.
On July 16, Citi gave Microsoft a Neutral rating, saying that most expect the company will revise its projections for this year lower as a result of cost cutting.
“We expect strong core trends (PC-related and enterprise) to be offset by Nokia dilution in Q4, driving EPS of $0.58 vs. street $0.62," it said. "There are many variables impacting FY15 and we expect street numbers to come down as deteriorating Nokia fundamentals are partially offset by cost cutting. We believe most investors are bracing for the guide down, but we expect management won’t be able to put a floor on gross margin, leading to uncertainty on earnings power beyond FY15."
"We expect a refocusing on challenges and required investments in D&C business could cool recent investor excitement focused on enterprise that has driven shares to 5+ year multiple high. This leaves us on the sidelines with our $41 price target unchanged.”
On July 15, Sterne Agee gave Microsoft a Neutral rating, saying the company is expected to remain inline with estimates after its Nokia acquisition.
“After reducing our MSFT EPS estimates due to the integration of Nokia Devices and Services segment, we expect constructive PC sale numbers and possible cost-cutting measures to improve difficult margins to support an in-line stock performance ahead of the print,” it said.
FBR Capital Markets & Co gave Microsoft an Outperform rating with a $49.00 price target on July 15th, noting that Microsoft is likely to remain focused on the growing parts of its business as other parts of its portfolio expand.
“We believe all eyes will be on guidance for the Nokia devices and services acquisition (closed April 25), as it represents a core component of Microsoft's mobile strategy," it noted.
"We have incorporated the acquisition into our estimates and expect approximately $0.15 in dilution for FY15 with gross margins around the mid-60 percent level (versus our 69 percent estimate for FY14). We continue to believe a key strategic focus surrounding the Nokia acquisition will be the proliferation of Windows on mobile devices, as the company looks to gain share in the smartphone space."
"For F4Q, we believe Microsoft made more progress on the cloud front with Office 365 and Azure likely gaining further traction as pillars of the company's cloud strategy, while ongoing challenges in the PC market continue to present growth headwinds for its bread and butter Windows franchise."
"We believe investors will be intently listening for further strategic updates after Satya Nadella's open email to employees last week indicating a continued focus on its cloud/mobile strategy and needed changes within the organization."
"That said, we expect cost-cutting initiatives on the horizon with Mr. Nadella looking to streamline operations, as holding operating margins near the 30 oercent threshold is key, especially while Microsoft goes through the absorption of Nokia and embarks on its next leg of growth around cloud and mobile."
"Overall, we maintain our Outperform rating and $49 price target (17x our CY15E EPS), as we believe Microsoft remains laser-focused on strong secular growth areas while incorporating other parts (e.g., collaboration, productivity tools, etc.) of its broad product portfolio into a more unified platform.”
On July 16, Morgan Stanley gave Microsoft an Equal-Weight rating, saying the company will likely have a strong fourth quarter, but that focus will remain on the changes needed to incorporate Nokia’s handset division.
“Better PCs, solid momentum around Surface 3 (off a low base) and a stable enterprise business points to solid FQ4 for core Microsoft (ex-Nokia)," it said.
"However, focus likely centers around:
1) CEO Satya Nadella's forward strategy for Microsoft,
2) organizational changes (including potential headcount reductions) alluded to in Nadella's recent letter to employees (see ““Exxeeccuutinng Too (Laarrgeely thee Saamee) Strraateegy”, 07/10/2014) and
3) the pace of investment (and dilutive impacts) of the Nokia acquisition."
"Satya will likely provide more details around his vision for Microsoft in FY15 and beyond, which will center around delivering productivity and platform services in a mobile/cloud world – similar to the broad strategic aims of the past few years, in our view. However, as alluded to in his letter, Satya likely outlines significant cultural and organizational changes intended to improve Microsoft's execution to this strategy."
"We believe additional investment is needed to change the trajectory of Lumia smartphone units. Said another way, without additional investments unit volumes likely continue to trend down – which makes achieving break-even for Nokia a difficult equation. However, we do see the potential for expense rationalization in the core Microsoft businesses through better focus, improved execution and potentially headcount reductions. With PCs stabilizing to improving, cloud assets starting to ramp, and the potential for a restructuring that could offset Nokia dilution, we lean more positively into FQ4 results.”
Boeing is expected to report a second quarter EPS of $2.01, compared to last year’s EPS of $1.67.
On July 14, Morgan Stanley gave Boeing an Overweigh rating, saying the company will benefit from the attractive aerospace outlook.
“Boeing is a key beneficiary of the commercial aerospace upcycle," it said. "The company will continue to leverage record-level backlogs in increasing production rates, which should drive higher return of capital to shareholders over the mid to long term. New aircraft introductions in 2013 have the potential to drive further growth in the backlog. We expect any defense-related overhang to be offset by the emerging cash returns story at the company thus rate the stock OW.”
US housing market data will be top bill on next week’s economic calendar -- as investors look for clues as to whether the nation’s economy has fully recovered and is ready for an interest rate hike. Existing home sales are expected to have risen to an eight-month high in June, but new home sales likely fell from recent highs.
- Earnings Releases Expected: Hasbro, Inc. (NASDAQ: HAS), Chipotle Mexican Grill, Inc. (NYSE: CMG), Netflix, Inc. (NASDAQ: NFLX)
- Economic Releases Expected: German PPI, Italian industrial sales
- Earnings Expected: Apple Inc., Coca-Cola Company, Microsoft Corporation, Harley-Davidson, Inc. (NYSE: HOG), Verizon Communications Inc. (NYSE: VZ), McDonalds Corporation (NYSE: MCD)
- Economic Releases Expected: Australian CPI, US existing home sales, U.S. redbook, U.S. CPI
- Earnings Expected: Facebook Inc., Boeing Company, Pepsico, Inc. (NYSE: PEP), Motorola, Inc. (NYSE: MSI), TripAdvisor, Inc. (NASDAQ: TRIP).
- Economic Releases Expected: Chinese manufacturing PMI, Japanese trade balance, U.S. oil inventory data
- Earnings Expected From: General Motors Company (NYSE: GM), Nokia Corporation (NYSE: NOK), Starbucks Corporation (NASDAQ: SBUX), 3M Company (NYSE: MMM), Bristol-Myers Squibb Company (NYSE: BMY)
- Economic Releases Expected: Japanese CPI, U.S. new home sales, U.S. manufacturing PMI, Italian consumer confidence, British retail sales, Eurozone services and manufacturing PMI, German services and manufacturing PMI and French services and manufacturing PMI.
- Earnings Expected From: Covidien plc (NYSE: COV), Xerox Corporation (NYSE: XRX)
- Economic Releases Expected: US durable goods, British GDP, German Ifo business climate index, German consumer climate
Latest Ratings for FB
|Jan 2015||Stifel Nicolaus||Maintains||Buy|
|Jan 2015||CRT Capital||Maintains||Buy|
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