The global economy will take center stage again next week as the International Monetary Fund continues its annual meetings, but investors will be turning their attention to Wall Street as earnings season begins again.
The market has seen some volatility recently as worries about the Fed’s future plans and whether or not the market can weather a rate hike have injected doubt into investors’ minds. With several large companies set to report third quarter earnings, there will be plenty to trade on in the week ahead.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including General Electric Company GE, Verizon Communications Inc. VZ, International Business Machines Corp. IBM, eBay Inc EBAY and Netflix, Inc. NFLX.
General Electric Company
General Electric is expected to report third quarter EPS of $0.38, compared to last year’s EPS of $0.40 on revenue of $36.8 billion.
On September 30, Morgan Stanley gave GE an Equal-Weight rating with a $28.00 price target, noting that there is growing risk to 2015 consensus estimates.
“We are introducing our initial 2015 EPS bridge where we incorporate the major moving pieces in what should be a transitional year for GE driven by major M&A (Synchrony and Appliances out, Alstom in) and the associated noise around gains, cash redeployment and restructuring. Net net, we see about 5 to 10c of risk to the current consensus estimate of $1.83 with the annual meeting in December a potential forum to drive negative EPS revisions. Further, our bridge is sensitive to assumptions around restructuring, net of gains and deal timing. Therefore, we’ll be keen to details ahead of the expected close of Alstom and Appliances in 1H15.”
On October 9, Credit Suisse gave General Electric an Outperform rating with a $30.00 price target, saying that the company’s earnings will likely grow in 2015.
“Given the paucity of EPS growth this year, and our strong sense that 2015 is again a 'transition year', we have been somewhat concerned that our $1.76 EPS estimate for FY15 (Street is at $1.83) is too high. The company affirmed today though that EPS should grow next year, despite the ongoing portfolio changes, helped by the big restructuring spend (in excess of gains) this year.”
Verizon Communications
Verizon is expected to report third quarter EPS of $0.93, compared to last year’s EPS of $0.77 on revenue of $30.28 billion.
On September 18, Merrill Lynch gave Verizon a Buy rating with a $55.00 price objective after an encouraging phone conference with the company’s Executive Vice President Francis Shammo.
“Recent commentary from all wireless carriers suggests that pockets of strength exist throughout the sector with respect to 3Q net adds. In response, Mr.Shammo reiterated comments from Verizon that it had greater than 40% Y/Y net add growth with ‘more than firm’ phone net adds. Mr. Shammo elaborated that the 3Q mix will be similar to 2Q between tablets and phones. The company made price moves in 1Q in response to being ‘off market’ at the beginning of the year, but right now sees no reason to make incremental moves despite more aggressive promotions from TMUS and Sprint. Mr. Shammo expects prices to actually rise after the promotional period before perhaps seeing another competitive wave around the holiday season. As time passes, competitive pricing strategies are inconsistent with continued investment in their networks and VZ is very comfortable with its network capability, spending, and access to content that will increasingly differentiate it going forward.”
On July 22, Credit Suisse gave Verizon a Neutral rating with a $52.00 price target, noting that the coming quarter likely holds no surprises.
“Management continues to believe that it can deliver a robust non-linear content product without having to own the content assets. With it still early in the negotiating process, we wouldn't rule out a potential acquisition, but believe Verizon will continue to strive for reasonable commercial agreements, only considering ownership should reasonable rights agreements remain out of reach.”
International Business Machines
IBM is expected to report third quarter EPS of $4.32 on revenue of $23.43 billion, compared to last year’s EPS of $3.99 on revenue of $23.72 billion.
On October 9, Jefferies gave IBM an Underperform rating with a $163.00 price target, saying that the company has long term potential, but will likely struggle in the near-term.
“We like IBM’s big data solutions and the company has many lasting franchises like mainframes and a sticky services business; however, we believe the company will take a few years to pivot the organization to address a rapidly changing IT environment. Further, we are concerned about IBM's long-term earnings trajectory as a significant portion of the company’s earnings growth has come from buybacks and cost cuts.”
On July 18, Merrill Lynch gave IBM a Neutral rating with at $200.00 price target, noting that the company hasn’t been able to meet its 2014 EPS estimates.
“EPS of $4.32 was slightly better than our/Street $4.22/4.31 and was cleaner from the standpoint that tax and/or one-time, non-operational issues did not impact the results. In addition, 2014 EPS guidance remains$18+. That said,Services backlog/bookings (excluding the divestiture to Synnex) were disappointing and point to revenue/EPS challenges going forward and we are modestly cutting EPS estimates. We remain Neutral, as we are concerned with IBM’s ability to deliver on its 2014 EPS target(ex one-time items),given the back-end loaded expectations.”
On October 10, Credit Suisse gave IBM an Underperform rating with a $160.00 price target, noting that the company will likely see muted growth in the near-term.
“Last quarter saw a continued revenue shift to transactional business from longer- term contracts and deterioration in total backlog, driven primarily by mix towards ST signings. Recent news flow in services has been mixed, with Accenture reporting lighter than expected signings growth from declining Outsourcing bookings. We estimate 3Q services revenue decline of 1.7% (-2.5% GTS and flat GBS) with a GM of 37.4% (vs. 37% F3Q13). For software, we estimate y/y revenue growth of 2.1%; we remain concerned on inorganic declines, while the promised ELA cycle remains to be seen.”
eBay Inc
eBay is expected to report third quarter EPS of $0.67 on revenue of $4.37 billion, compared to last year’s EPS of $0.64 on revenue of $3.89 billion.
On October 1, JMP Securities downgraded eBay from Market Outperform to Market Perform and maintained a $58.00 price target, saying that the company’s shares look fairly valued.
“While we view eBay’s announcement yesterday to spin-off PayPal as the right thing to do long-term, given continued operational challenges within Marketplaces due in part to the security breach announced in May, we believe the shares will be range-bound until operations improve or we get closer to the PayPal spin, which is forecast a year away. eBay expects the tax-free spin to be completed by the back-half of 2015, and eBay also announced that Dan Schulman would be PayPal’s new CEO, and Devin Wenig would be promoted to CEO of eBay as both units prepare to be public companies. Interestingly, current CEO, John Donohoe, and CFO, Bob Swan, will be stepping down from their roles post the spin. Our sum-of-the-parts model for eBay suggests that the shares could be worth ~$62 based on 2016E EBITDA multiples across Marketplaces, PayPal, and eBay Enterprise, suggesting less than 10% upside potential to current levels. To be clear, we continue to believe that eBay’s PayPal will remain the leader in online payments, and that Marketplaces can sustainably grow in line with eCommerce growth rates longer-term, but we are stepping to the sidelines on the shares of eBay given valuation, and until we believe operations within Marketplaces are improving. For 2014, we project revenue of $18.1 billion, +13% Y/Y, and PF EPS of $3.01. Our prior $58 price target was based on ~17x our 2015E PF EPS of $3.33, adjusted for eBay’s $3.5 billion debt issuance.”
Also on October 1, JP Morgan downgraded eBay to Neutral, citing the company’s decision to spin off its PayPal division.
“We are downgrading shares of eBay from Overweight to Neutral following the announced separation of eBay and PayPal into independently traded companies in 2H15. We are encouraged by the spin as we believe that each company may be able to operate more efficiently and optimize their capital structures, while also maintaining important relationships and synergies through operating agreements.”
On October 8, Merrill Lynch was more optimistic and gave eBay a Buy rating with a $62.00 price objective, saying that the firm expects to see improvement in the fourth quarter.
“While we are cautious on reaction to 4Q guidance, we think Marketplace weakness has been telegraphed, FX pressure should be known, and we expect an improvement in trends as 4Q progresses and the breach impact subsides. We expect the stock to see valuation support on a sum of parts basis, with potential for new buyers in January that see the 2015 PayPal spin as a catalyst. We maintain our $62 PO based on our sum-of-parts valuation framework.”
Netflix, Inc.
Netflix is expected to report third quarter EPS of $0.93 on revenue of $1.41 billion, compared to last year’s EPS of $0.52 on revenue of $1.11 billion.
On October 7, Merrill Lynch gave Netflix an Underperform rating, cautioning that the company could face difficulty expanding internationally.
“We think International expansion will be more difficult to grow than the US due to: 1) there are multiple SVOD competitors in most markets that have first mover advantage; 2) television viewing hours are lower in many countries when compared to the US; and 3) local content is popular which could be costly for Netflix to acquire, and may limit the value of Netflix’s original content. We expect downward revision estimates at the quarter as investors digest the cost of the new European expansion and Netflix guidance into their model. Overall, we continue to remain cautious on the stock due high subscriber growth expectations built into the stock at these levels.”
On July 22, Credit Suisse gave Netflix a Neutral rating, saying that the company’s international expansion will likely take time to become profitable.
“To no surprise, Netflix announced the launch of its services in Germany in France – the company also added Austria, Switzerland, Belgium, and Luxembourg. As we have noted before, this is a playbook Netflix has already executed in other Western European as well as LatAm markets, and this should ultimately lead to margin expansion and higher FCF dollars starting in FY16 as the subscriber base in the newly launched markets scale beyond this period of investment. We maintain our Neutral rating on valuation.”
Economic Releases
After the Federal Reserve’s meeting minutes showed that the bank is more conservative about a rate hike than investors had anticipated, all eyes will be on US data with retail sales and industrial production figures set to be released. Retail sales are expected to have fallen in September despite posting a large increase in August, while industrial production likely moved in the opposite direction.
Daily Schedule
Monday
- Earnings Releases Expected: No notable earnings releases
- Economic Releases Expected: Australian business confidence
Tuesday
Earnings Expected: Wells Fargo & Company, JP Morgan Chase & Co, Intel Corporation, Domino’s Pizza Inc., CSX Corporation and Citigroup Inc.
- Economic Releases Expected: French CPI, Spanish CPI, Italian CPI, British CPI, British PPI, German economic sentiment, eurozone industrial production
Wednesday
- Earnings Expected: Xlinx, Inc., US Bancorp, Stanley Black & Decker, Inc., PNC Financial Services Group, Inc., Netflix, Inc., Mattel, Inc., Kinder Morgan, Inc., eBay Inc, BlackRock, Inc., Bank of America Corporation
- Economic Releases Expected: Japanese industrial production, German CPI, Spanish current account, British unemployment rate, US retail sales, US PPI, US redbook
Thursday
- Earnings Expected From:Verizon Communications Inc., UnitedHealth Group Incorporated, Schlumberger N.V. , PPG Industries, Inc. PPG, Philip Morris International Inc., Goldman Sachs Group, Inc., Google Inc., Chipotle Mexican Grill, Inc.
- Economic Releases Expected: Italian trade balance, eurozone CPI, US manufacturing production, US industrial production, US oil inventory data
Friday
- Earnings Expected From:Morgan Stanley, Genuine Parts Company, Honeywell International Inc., Schlumberger N.V.
- Economic Releases Expected: Canadian CPI, US consumer sentiment
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