Benzinga Weekly Preview: Geopolitical Tension, Economic Data To Drive Markets
This week will be a busy one with geopolitical factors, as well as economic data likely to influence the markets. The growing conflict in the Middle East will again dominate the headlines as the United States and its growing coalition of allies continue to pound Islamic militants via airstrikes.
The ECB is also set to hold its monthly policy meeting next Thursday, where President Mario Draghi will have to decide whether to live up to his pledge to do “whatever it takes” to revive the eurozone economy. Many believe Draghi will approve a large-scale asset buying program in order to further stimulate the economy, but the general consensus is that the bank will maintain its current policies this month and wait to announce any type of quantitative easing program.
Key Earnings Reports
Walgreen is expected to report fourth quarter EPS of $0.74 on revenue of $19.02 billion, compared to last year’s EPS of $0.73 on revenue of $17.94 billion.
On September 22, Barclays downgraded its rating for Walgreen to Equal Weight with a $68.00 price target, noting that economic headwinds could have a negative impact on the company over the next two to three years.
“We are downgrading WAG to an Equal Weight rating after completing an extensive analysis of the company's prospects for the next two to three years. Given the lack of information, or the conflicting information coming from WAG and Alliance Boots (AB), we were required to make a number of assumptions about the state of the US and global businesses, the impact of rising generic inflation, declines in Medicare Part D reimbursement and profitability, the profit pressure from growth in 90-day at retail, and profitability in WAG's front end. Our forecast also assumes more share repurchase than is in the company's guidance ($6.0bn vs. $3.0bn), which seems realistic given the recent addition to WAG's Board of two representatives from Jana Partners; Jana has been vocal about WAG optimizing the use of its balance sheet. The amount of stock the company can buy back is limited now given the relatively high level of pro forma lease-adjusted leverage (4.0x) resulting from the reduced EBITDA outlook and the cash outlays required to complete the purchase of AB. Our assumptions lead us to a FY16 adj. EPS estimate of $4.95 (vs. our prior $5.44, inclusive of higher buybacks). While this is above the company's new guidance of $4.25-$4.60, our independent analysis suggests that company guidance is not as conservative as it had at first seemed. It is also not high enough to maintain our Overweight rating. We are lowering our price target to $68 from the current $92.”
On September 16, Merrill Lynch gave Walgreens a Neutral rating with a $64.00 price objective, noting that the company’s acquisition of Alliance Boots will take its debt higher than originally believed.
“WAG filed an S-4 with comprehensive details of its pending acquisition(Step2)of the remaining 55% stake in Alliance Boots and a reorganization of the company into a holding company (Walgreens Boots Alliance) incorporated under Delaware rather than Illinois law. While it provided historical pro forma income statement and balance sheet data that included an update since March to the Alliance Boots metrics , it did not provide any forecasts , and we are maintaining our current earnings view at this time. However, we note higher debt (by $1.4 billion) than our prior assumption,plus plans to raise another $4 billion to finance the transaction. We are trimming our P.O. to $64 (from $65) on a higher invested capital base assumption,and our pessimism for the prospects for the combined company remains high.”
On September 4, Credit Suisse gave Walgreens a Neutral rating with a $57.00 target price, saying that lackluster script growth in pharmacy had a negative effect on the company’s sales.
“Walgreens reported August sales that came in somewhat below expectations, reflecting modestly weaker than expected script growth in the pharmacy. Total comps rose 3.7%, shy of our 4.3% estimate and consensus of 4.2%. Front-end comp growth of 1.4% was roughly in-line with consensus and our estimate of 1.5%. The decline in customer traffic (-1.7%) slowed sequentially and improved further on a 2-year basis, despite a pullback on select promotions. Customer basket (+3.1%) came down from the July level (+3.7%) and decelerated on the 2-year stack. The overall promotional environment remained competitive in August, although WAG has reduced promotions in certain traffic-driving areas such as soft drinks. Pharmacy sales again benefited from elevated levels of inflation, but were hampered by a fairly sharp deceleration in prescriptions. Dollar comps of 5.0% missed consensus and our estimate of ~5.8%. Script growth of 3.2% excluding the calendar shift slowed from 4.3% in July and the prior 3-month average of 4.8%. We continue to rate WAG Neutral. While expectations have come in following the company's guidance update last month, near- term fundamentals appear challenged and we question the prospects for organic growth at both WAG and Alliance Boots.”
On September 26, Morgan Stanley gave Walgreens an Overweight rating, but cautioned that the company could struggle with reimbursement pressure.
“Two potential sources of reimbursement pressure.The first is faster MAC-ing from PBMs who may be looking to lower reimbursement to reflect retailers better purchasing economics gained thru JVs and partnerships. We tested this hypothesis when we met with Express Scripts management this week. According to the Express team, retail contracts have a term of three years with predictable price resets every year counted against inflation and lower procurement. A second source of reimbursement pressure likely stems from an increased mix of Medicaid patients at lower reimbursement rates.”
On September 23, S&P Capital IQ gave Walgreens a Sell rating with a $57.00 price target, noting that the company’s acquisition of the remainder of Alliance Boots is expected to wrap up by March 2015.
“In August 2014, the company exercised its option to acquire the remaining 55% of Alliance Boots that it does not already own, pending shareholder and regulatory approvals. The acquisition price is $5.3 billion in cash and 144.3 million shares in WAG stock and is expected to close before the end of March 2015. The company chose to retain its U.S. domicile, forgoing potential tax benefits from a tax inversion. Despite the launching of a new $3 billion share repurchase program, we see EPS growth through FY 2016 restricted by rising margin pressures.”
CarMax is expected to report fourth quarter EPS of $0.67 on revenue of $3.57 billion, compared to last year’s EPS of $0.62 on revenue of $3.25 billion.
On September 23, Merrill Lynch gave CarMax a Buy rating with a $65.00 price objective. The analysts at Merrill Lynch see the company struggling as consumers shift their preferences to new vehicles.
“CarMax’s 2Q’s earnings miss highlighted what we believe maybe a trend of consumers trading up from used vehicles to new,given the weak performance in same-store sales growth from KMX and its higher average selling price compared to last year. With late-model used vehicle prices still near all-time highs, new vehicle financing rates near all time lows and new vehicle loan terms growing longer, the differential in monthly payment amounts for a new vehicle vers us a late model us ed vehicle is relatively smaller than it has been in the past. We believe that until used vehicle supply improves significantly and begins to drive down used vehicle pricing, consumers may continue to make this trade-off.”
On September 23, Credit Suisse gave CarMax an Outperform rating with a $58.00 target price, noting that the company’s plans for growth set it apart from its competitors.
“CarMax is in a small, and ever shrinking, class of retailers that possess a clear roadmap for growth. The company offers a unique and attractive value proposition that should only continue to resonate with consumers (we note both store and web traffic was up in the quarter, something few of our retailers can say). Even after more than doubling its store base from the 139 stores today to its targeted 300+, we estimate it will only have ~5% of the U.S. used car market. That speaks to plenty of room for market share gains, and we believe under President & CEO Tom Folliard's strong leadership, KMX will get more than its fair share.”
On September 23, Morgan Stanley gave CarMax an Overweigh rating, cautioning that declining used car sales could present a headwind for the company.
“KMX may still be best-in-class but 2Q results continue to demonstrate that modeling comps is very hard given the lack of visibility and KMX's ability to adjust volume/price/margins on the fly. None of the adjustments this quarter was able to offset weak comps...while management called out one fewer weekend this quarter, the 1% impact did not make up for the miss. 2Q results at other public dealers were characterized by weak used volumes, which many dealers attributed to pressure from the New car side. It does not look like KMX is immune either. We will look for more color behind the weak volumes on the call.”
On September 23, S&P Capital IQ gave Car Max a Hold rating with a $54.00 target price, saying that the company is well positioned among its peers.
“Based on our calendar 2014 EPS, price to free cash flow and total enterprise value to EBITDA estimates, KMX recently traded at a premium to the average of publicly traded automobile retailers. We think a premium is warranted given KMX's better-than-peers net margins. Rising investment in new facilities will likely limit capital available for other purposes, but we still see ongoing share repurchases.”
Synnex is expected to report third quarter EPS of $1.48 on revenue of $3.40 billion, compared to last year’s EPS of $1.24 on revenue of $2.73 billion.
On September 16, Stifel upgraded its rating for Synnex from Hold to Buy with a $71.00 price target, saying that the recent sell off has been overdone.
“We are upgrading our investment rating on shares of IT distributor Synnex to Buy from Hold, as we believe the recent sell-off in shares has been overdone, creating a compelling risk-reward scenario. Shares are down roughly 9% YTD and 15% in the last two weeks (vs. up 7% YTD and roughly flat for the S&P 500), and now trade at 9.6x forward P/E, in-line to slightly below its peers. The stock appears to be pricing in an earnings miss, but we expect August-quarter earnings to be in-line to slightly better than Consensus.”
On July 31, Merrill Lynch gave Synnex a Buy rating with an $85.00 price objective, noting that the company’s investor meetings resulted in a positive outlook for the long term.
“We came away positive from investor meetings with Synnex's Kevin Murai, CEO, and Marshall Witt, CFO. Management guided conservatively for F3Q14, and we believe the companywill benefit longer term from growth in Concentrix (Global Business Services) and Tech Solutions (TS; distribution; including Hyve). Also, op. margin should also expand intoF2015,especially as investments/IBM-CRM integration wane, getting Concentrix margin back to 10%+. We maintain our above Street F2015 EPS estimate and reiterate our Buy rating and $85 PO.”
On September 23, S&P Capital IQ gave Synnex a Strong Buy rating with a $81.00 target price, citing the company’s future opportunities due to the acquisition of IBM’s customer care business.
“We upgraded our opinion on the shares to Strong Buy from Hold in July 2014, after a notable decline. We see considerable benefits and opportunities associated with the January acquisition of IBM's customer care business that has become part of SNX's Concentrix subsidiary. We believe SNX will benefit from a healthy global economic backdrop, and note significant exposure to the relatively strong continent of North America, and strength in certain areas of the distribution business.”
Constellation Brands is expected to report second quarter EPS of $1.16 on revenue of $1.64 billion, compared to last year’s EPS of $0.96 on revenue of $1.46 billion.
On September 12, Merrill Lynch gave Constellation Brands a Buy rating with a $97.00 price objective, saying that the company has the potential to expand over the next year.
“STZ will need to decide on additional capacity expansion plans over the next year, recent trends suggest it could m ax out existing/planned capacity by FY19. This would elevate capex and push out free cash flow growth. Beer margins are pacing towards management “mid-30’s” goal but not likely to move meaningfully from current levels until FY17 when brewery expansion is complete.”
On August 14, Credit Suisse gave Constellation Brands a Neutral rating with a $90.00 price target, saying that the company’s upside potential is limited.
“STZ continues to generate some of the most impressive growth rates in the U.S. alcoholic beverage industry, based on strong volumes in beer and mix-driven growth in wine and spirits. However, we think that, following the company's recent upward revision of its growth outlook for FY15, investor expectations largely reflect this. In addition, given the stock currently trades at a sector- leading P/E multiple of 20.2X FY15 consensus estimates, we think the upside potential from here is now more limited. We initiate coverage of STZ with a Neutral rating and a $90 target price.”
On September 23, S&P Capital IQ gave Constellation Brands a Strong Buy rating with a $106.00 price target, saying the company will likely gain market share due to the integration of Crown imports.
“We view the shares as very attractive as we see significant market shares being achieved through the integration of Crown Imports. In June 2012, STZ signed an agreement with Anheuser Busch InBev SA/NV (A-B InBev) to buy the remaining 50% interest in Crown Imports LLC that it does not already own for $1.85 bil- lion. To address anti-trust concerns from the Department of Justice (DOJ), A-B InBev agreed to sell STZ the rights in perpetuity to Grupo Modelo brands distributed by Crown in the U.S. and a state-of-the-art Mexican brewery for an additional cost of $2.9 billion. The acquisition closed in June 2013.”
Next week will be a busy one for economic releases with the European Central Bank’s policy meeting taking top bill. US nonfarm payrolls will also be in the spotlight as investors look for more clues about whether or not the US economy is ready for a rate hike. The report is expected to show that US employers added more jobs in September and that the unemployment rate remained constant at 6.1 percent.
- Earnings Releases Expected: Cantel Medical Corp (NASDAQ: CTAS), Synnex Corporation (NYSE: SNX), Cintas Corporation (NASDAQ: CTAS)
- Economic Releases Expected: Japanese retail sales, Japanese industrial production, Japanese unemployment rate, British consumer confidence, US pending home sales, German CPI, eurozone business climate.
- Earnings Expected: Walgreen, Landec Corporation (NASDAQ: LNDC), CarMax, AAR Corp. (NYSE: AIR).
- Economic Releases Expected: Japanese manufacturing PMI, Australian retail sales, US consumer confidence, US redbook, eurozone unemployment rate, eurozone CPI, British GDP, British current account, German unemployment rate, Japanese housing starts.
- Earnings Expected: Texas Industries, Inc. (NYSE: TXI), Pizza Inn Holdings, Inc. (NASDAQ: PZZI), Acuity Brands Inc. (NYSE: AYI).
- Economic Releases Expected: Australian trade balance, US inventory data, US manufacturing PMI, US construction spending, eurozone manufacturing PMI, British manufacturing PMI, French manufacturing PMI, Italian manufacturing PMI, Spanish manufacturing PMI.
- Earnings Expected From: Constellation Brands, McCormick & Company, Inc. (NYSE: MKC), Global Payments Inc. (NYSE: GPN), Actuant Corporation (NYSE: ATU).
- Economic Releases Expected: US factory orders, eurozone PPI, British construction PMI.
- Earnings Expected From: USA Technologies, Inc. (NASDAQ: USAT), Avid Technology, Inc. (NASDAQ: AVID).
- Economic Releases Expected: US Markit composite PMI, US services PMI, US unemployment rate, US trade balance, US nonfarm payrolls, eurozone retail sales, British services PMI, eurozone market composite PMI, eurozone services PMI, German services PMI, French services PMI, Italian services PMI, Spanish services PMI.
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