Weekly Preview: Alcoa Kicks Off Earnings Season

In the upcoming week, second quarter earnings season formally kicks off with the much-anticipated earnings report from Alcoa AA.

Also, JP Morgan Chase JPM kicks off financials earnings while Yum! Brands' YUM earnings report will be closely watched for comments on its Chinese operations.

Key Earnings

In the coming weak, key earnings from Alcoa, J.P. Morgan Chase, Yum! Brands will be watched closely as the three market bellwethers all report earnings in the coming week.

Alcoa

Alcoa is expected to report second quarter results after the close on Monday. Analysts expect the company to report EPS of $0.08 vs. $0.06 in the second quarter of 2012. Revenue is expected to have fallen slightly to $5.92 billion from $5.96 billion in Q2 2012.

The analyst team at JP Morgan weighed in ahead of earnings. The bank last week downgraded the stock to neutral from overweight and lowered its price target to $9 from $12.

“Alcoa has clearly taken steps to lower its costs in its upstream segments and to grow its downstream businesses. However, we believe these efforts will be largely overshadowed by a persistently weak aluminum price environment, which should weigh on AA's earnings and stock price. Additionally, outside of aluminum prices materially increasing or investor sentiment on the sector significantly improving, we see few catalysts for Alcoa's stock in the near term.”

Deutsche Bank is also cautious ahead of the earnings report, reiterating its neutral rating and $9 price target for Alcoa. “We expect Alcoa to report adjusted diluted EPS of 5c in 2Q13, below the FactSet consensus of 7c (down 4c over past 4 weeks). Our EPS estimate is 6c lower than 1Q13, largely due to softer aluminum price realizations on weaker LME benchmark and lower premia.”

“Market likely to focus on Alcoa's forecasts for global aluminum trends, progress towards the Ma'aden smelter and rolling mill launch targeted for 4Q13, as well as direction of Alcoa's net debt position (DBe at $7.7bn, +$280m QoQ).”

Meanwhile, Bank of America Merrill Lynch is also cautious on the stock into earnings, as the bank also reiterated a neutral rating and $9 price target ahead of earnings. “We forecast EPS of $0.06, below consensus of $0.08 and last qtr's $0.11 largely due to a 8% q/q drop in 15 day- lagged LME pricing offsetting seasonal improvement in its mid- and downstream segments.”

“To lessen cash burn in a weal Al price scenario AA can: 1) cut its $550M of growth capex, 2) pay pension costs with stock vs. cash, 3) sell non-core assets, and 4) enhance productivity gains and cost cutting, i.e. close high-cost facilities. A Moody's downgrade to junk in late May should have minimal impact as less than $1B debt matures over the next four years and a revolver matures in 2017E.”

Lastly, Goldman Sachs also reiterated a neutral rating and $8 6-month price target on Alcoa into earnings. “We have marked to market our second quarter estimates for Alcoa to reflect the actual realized LME aluminum price of $0.84/lb compared to our estimate of $0.91, which reduces our 2Q13 estimate for AA to $0.05 from $0.13. We also lower our full year 2013 estimate to $0.35 from $0.42.”

“For the 2Q conference call, investors' focus will likely be on the balance sheet and cash burn - including a possible equity issuance to shore up the balance sheet - in addition to portfolio restructuring, market outlook, and growth projects like aluminum-lithium and auto aluminum rolling facility.”

J.P. Morgan Chase

”Fortress Dimon” is expected to report second quarter results on Friday. The company is expected to report second quarter EPS of $1.43 vs. $1.15 a year ago on revenue of $24.942 billion vs. $22.18 billion a year ago.

Sterne Agee in June raised its price target on JP Morgan to $64 from $54 and raised its estimates for earnings. The bank maintained its buy rating on the stock.

“Although top-line growth will remain challenging heading into '14, better-than- expected capital markets, lower environmental related costs and ongoing credit leverage will likely offset lackluster revenues. And, heavy reserve release in consumer/community banking and resilient FICC trading results should continue to help offset slowing mortgage banking.”

“For 2013, our operating estimate increases to $5.80 from $5.50, while our 2014 estimate increases to $6.15 from $5.85. After a relatively soft and erratic April, capital markets activity, consumer confidence, and housing have thus far registered ahead of expectations this quarter.”

“In addition, credit quality improvement continues to outpace expectations following the severity of the financial downturn, suggesting that the magnitude and duration of credit leverage in the industry is likely far greater than current expectations. Conversely, loan growth remains weak, mortgage banking is slowing and pressure on margins is mounting.”

“Notwithstanding the challenges, with JPM trading at a discounted ~8.5-9x forward earnings, we believe the shares are poised for multiple expansion given the tailwinds tied to housing, employment and our sense of a diminishing regulatory overhang heading into 2014. Accordingly, we are increasing our 12-month price target to $64 from $54, which implies about 10.4x our revised 2014 estimate of $6.15 and 1.4x our estimated 2014 tangible book value.”

Yum! Brands

Restaurant operator Yum! Brands is expected to report second quarter earnings on Wednesday. The company is expected to report second quarter EPS of $0.54 vs. $0.67 a year ago on revenue of $2.916 billion vs. $3.168 billion.

Morgan Stanley analysts are positive heading into the report, maintaining an Overweight rating and a $75 price target. “We are constructive into 2Q results given our view that June China [same store sales] will show continued improvement as the avian flu subsides. China margins remain the biggest concern and negative macro is becoming an issue, but we think YUM's LT opportunity remains intact.”

“We also view strength at China Pizza Hut (+12% in May) as evidence that underlying consumer demand trends are solid. We estimate 3Q13 and 4Q13 China SSS of -6% and +5%, vs. the consensus of -8% and +3%.” Morgan Stanley expects EPS of $0.52.

Meanwhile, Goldman Sachs is rather more cautious heading into earnings here. Goldman has a neutral rating and a 12-month of price target of $70 on the stock.

“YUM reported May China SSS of -19%, inline with consensus. In terms of composition, KFC came in at -25% (from the ongoing impact of Avian Flu), while Pizza Hut was solid at +12% despite some recent macro choppiness. While solidly negative, these figures represent a sequential improvement from April's -29% SSS run rate (KFC -36% vs. Pizza Hut +5%), and YUM reiterated its expectation of a return to positive China SSS by 4Q13.”

“We raise our 2013-2015 EPS estimates to $3.02/$3.63/$4.13 from $3.00/$3.57/$4.07. While China SSS were inline with expectations, our updated estimates now reflect food cost deflation in China, a weaker USD and lower interest rates. We raise our P/E and DCF-based 12 month price target by $1 to $70 to reflect the higher estimates.”

Meanwhile, Bank of America Merrill Lynch is much more bearish than its two competitors here. BAML has an Underperform rating and a $60 price objective on Yum! stock.

“While sales came in roughly where we expected, given the stock price moves into the release we believe sales probably had to come in closer to down 10%-15% to meet current investor expectations. Yum shares advanced sharply [in the beginning of June] due to reports of an independent survey that indicated KFC China's May comps may have been halved (or even more than halved) from the down 36% in April.”

“We continue to rate YUM shares Underperform with a $60 price objective. We remain cautious on the earnings implications for 2013 and 2014 from the triple header of sales issues that began with negative 4Q12 comps related to brand specific marketing and promotions decisions and continued into 1Q13 and 2Q13 with antibiotic chicken issues and H7N9 avian flu concerns, respectively. While we believe the long-term potential for YUM is still significant, the market seems complacent about YUM's ability to get back to its normal earnings trajectory in 2014 as if current sales trends are irrelevant.”

Key Economics Releases

The economic calendar is rather light next week in a stark departure from the week that just ended. However, the FOMC minutes due out on Wednesday and a speech from Federal Reserve Chairman Ben Bernanke highlight the week in economics.

Daily Schedule

Monday>

• Earnings Expected From: Alcoa AA and WD-40 Company WDFC.


• Economic Releases Expected: Swiss unemployment rate, German industrial production, the weekly 3- and 6-month bill auctions, the TD Ameritrade Investor Movement Index, consumer credit, and the Chinese inflation report.

• Earnings Expected From: Alcoa AA and WD-40 Company WDFC.


• Economic Releases Expected: Swiss unemployment rate, German industrial production, the weekly 3- and 6-month bill auctions, the TD Ameritrade Investor Movement Index, consumer credit, and the Chinese inflation report.

Tuesday

• Earnings Expected From: ADTRAN ADTN, Healthcare Services Group HCSG, and Wolverine World Wide WWW.


• Economic Releases Expected: British industrial production, NFIB Small Business Optimism Index, the weekly Redbook, and a 4-week and 3-year Treasury auction.

• Earnings Expected From: ADTRAN ADTN, Healthcare Services Group HCSG, and Wolverine World Wide WWW.


• Economic Releases Expected: British industrial production, NFIB Small Business Optimism Index, the weekly Redbook, and a 4-week and 3-year Treasury auction.

Wednesday

• Earnings Expected From: Fastenal FAST, Family Dollar FDO, PriceSmart PSMT, Ruby Tuesday RT, and Yum! Brands YUM.


• Economic Releases Expected: MBA Purchase Applications, Wholesale Trade, a 10-year Treasury note auction, the FOMC minutes, and a speech from Fed Chairman Ben Bernanke.

• Earnings Expected From: Fastenal FAST, Family Dollar FDO, PriceSmart PSMT, Ruby Tuesday RT, and Yum! Brands YUM.


• Economic Releases Expected: MBA Purchase Applications, Wholesale Trade, a 10-year Treasury note auction, the FOMC minutes, and a speech from Fed Chairman Ben Bernanke.

Thursday

• Earnings Expected From:


• Commerce Bancshares CBSH, Progressive Corp. PGR, and Peregrine Pharmaceuticals PPHM.Economic Releases Expected: The Australian employment report, weekly jobless claims, import and export prices, and a speech from Fed Governor Daniel Tarullo.

• Earnings Expected From:


• Commerce Bancshares CBSH, Progressive Corp. PGR, and Peregrine Pharmaceuticals PPHM.Economic Releases Expected: The Australian employment report, weekly jobless claims, import and export prices, and a speech from Fed Governor Daniel Tarullo.

Friday

• Earnings Expected From: Infosys INFY, J.P. Morgan Chase JPM, Webster Financial WBS, and Wells Fargo WFC.


• Economic Releases Expected: Eurozone industrial production, producer price index, Reuters/UofM Consumer Confidence Index, and speeches from Fed members James Bullard and John Williams.

• Earnings Expected From: Infosys INFY, J.P. Morgan Chase JPM, Webster Financial WBS, and Wells Fargo WFC.


• Economic Releases Expected: Eurozone industrial production, producer price index, Reuters/UofM Consumer Confidence Index, and speeches from Fed members James Bullard and John Williams.