After four days with no resolution in sight, Democrats and Republicans in Washington are still locked in a heated debate over the terms of a negotiation that will restart Federal government operations.
The fact that congress can’t make any progress on an emergency spending bill doesn’t bode well for upcoming negotiations about the US debt ceiling, which, if not resolved, would cause an unprecedented sovereign debt default.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including Lindsay Corporation LNN,RPM International Inc. RPM, ADTRAN, Inc. ADTN, and Del Frisco’s Restaurant Group, Inc DFRG
Lindsay Corporation
Lindsay Corporation is expected to report fourth quarter EPS of $0.91 on revenue of $155.69 million, compared to last year’s EPS of $0.68 on revenue of $127.82 million.
The analyst team at Piper Jaffray gave Lindsay Corporation a Neutral rating with an $89.00 price target. In a report on October 4th, Piper Jaffray cited Ukraine’s decision to install irrigation as a possible opportunity for Lindsay, but ultimately believed that the company’s shares are fairly priced.
“This week, Ukraine's Ag Minister announced plans to borrow $3 billion from China to install irrigation to bolster the country's grain production. This move continues the recent agricultural collaboration between the two countries. Of the $3bil outlay, half is expected to be spent on irrigation equipment commencing in 2014 - which presents a large market opportunity for Lindsay and its competitors in the region. Next year, Lindsay will also benefit from the Golden Gate Bridge movable barrier project and the accretion from the Claude Laval acquisition. When combining these factors with surprisingly stable commentary from U.S. irrigation dealers about demand and orders, we believe that 2014 earnings are likely to hold up reasonably well considering the sharp decline in grain prices.”
The team at Wedbush took a similar stance and gave Lindsay a Neutral rating as well with a price target of $80.00. Wedbush noted the role that weather conditions have played in the past year and said that improving weather conditions could increase demand as well.
“Weather plays a significant factor on crop prices and the demand for center pivot irrigation and severe droughts or floods can impact crop planting, production, and crop prices. All of these can impact net farm income, which ultimately drives demand for center pivot irrigation. Drought conditions drove a spike in corn prices this year; and a reversal in recent trends could put downward pressure on expectations for farm income and LNN shares. Meanwhile, recent drought conditions had a meaningful impact on the quarter and may overstate demand, in effect borrowing sales from future periods. If weather conditions improve, future demand may also decrease. “
RPM International Inc.
RPM International Inc is expected to report first quarter EPS of $0.71 on revenue of $1.13 billion, compared to last year’s EPS of $0.64 on revenue of $1.05 billion.
On October 3rd, Morgan Stanley gave RPM an Overweight rating with a price target of $39.00. Morgan Stanley noted that its optimistic outlook for RPM was partially attributed to the NeverWet product’s success.
“We are raising our estimate for the F1Q14 quarter ended August 31 from $0.67 to $0.69, compared to consensus $0.71. Our estimate includes an assumption for 12% organic growth in the Consumer segment – while this may appear optimistic, we feel comfortable with the assumption, given that the NeverWet product launch alone (which began at the beginning of the quarter) could have added between 2-7% of growth to the segment. This represents the largest upside risk to the quarter, in our view”
In mid-September, Piper Jaffray also gave the stock an Overweight rating, but with a $43.00 price target. Piper Jaffray based its rating on a consumer survey which indicated that consumers were planning to spend more on future progress.
“We maintain our Overweight rating and $43 price target on shares of RPM following an analysis of responses in our most recent consumer survey. Consistent with previously collected sentiment data, the consumers we surveyed indicated that they intend to spend more in the future on projects than they had over the past 12 months (slightly under half of respondents have plans to remodel, versus 35% having engaged in are modeling project in the past 12 months). Importantly, we believe that the willingness on behalf of consumers to take on larger-ticket projects (notably kitchens & bathrooms) is increasing. We view both the inclination to start remodeling projects as well as the potential for larger projects as positives for RPM, and both support the assumptions embedded in our model.”
ADTRAN, Inc.
ADTRAN is expected to report third quarter EPS of $0.11 on revenue of $175.10 million, compared to last year’s EPS of $0.15 on revenue of $162.12 million.
Goldman Sachs gave ADTRAN a Buy rating with a 12 month price target of $30.00, citing a stronger tier-1 carrier spending environment and strong earnings results from Ciena and Finisar.
“After several years of access equipment under-investment, we believe larger global carriers are beginning a multi-year investment cycle catalyzed by faster broadband speeds required to compete with Google Fiber and DOCSIS 3.0. We view Adtran as best positioned to capitalize on this trend, given its exposure to global tier-1 carriers, including large wins at AT&T and Deutsche Telecom. We also think Adtran is positioned to gain market share among tier-2/3 North American carriers and should benefit from a positive inflection in gross margins. In contrast, our Sell-rating for Calix is driven by 1) normalizing tier-3 spending following the 2013 recovery, with tier-3 carriers driving 50-60% of Calix’s sales, 2) declining tier-2 capex and potential share loss to Adtran, and 3) a wind down of Broadband Stimulus (BBS) revenues into 2015.”
On October 4th, Merrill Lynch gave ADTRAN an Underperform rating with a $19.00 price objective. The firm took more conservative stance, saying that the company’s share price accounts for optimistically high growth.
“We believe FY14 is shaping up as a strong year for Adtran, driven by DT, a $200mn opportunity over 3 years, and the start of the ramp at AT&T (through Ericsson), which could be more meaningful than DT spanning over several years. While FY14/15 consensus revs of $719mn/$777mn have been revised up by 7%/15% vs. 6 months ago, we believe both have yet to reflect the full benefits from both opportunities, which could support the stock in the intermediate term. That said, we maintain our Underperform rating as we believe current valuation implies a bull case scenario for peak cycle EPS of ~$2.50 (refer to Table 1), which we view as optimistic as we see a return to normal GM level of mid 50s, as unlikely given competitive pressures. We believe a best case scenario for GM long term is the high 40s, hence peak cycle EPS for Adtran would be 15-20% below what the bull case is implying in the current share price.”
Del Frisco’s Restaurant Group, Inc
Del Frisco’s is expected to report EPS of $0.11 on revenue of $55.07 million, compared to last year’s EPS of $0.10 on revenue of $47.89 million.
Piper Jaffray gave Del Frisco’s an Overweight rating with a price target of $23.00 in mid-September. The firm cited favorable pricing of prime beef products for its optimistic rating.
“Through August we are encouraged by relatively favorable levels of prime beef pricing which was down approximately 18% on a YTD YoY basis. We recognize that these favorable prices are more so being driven by relatively favorable YoY comparisons as we lap the high prices of 1H12 vs. true beef price deflation. Pricing favorability on choice cuts has lagged to date vs. prime but could catch up as we start to lap the higher prices experienced in 2H12. As we look to CY14, increasingly favorable pricing outlooks for grains lead us to believe that beef prices should be relatively manageable. We believe Del Frisco's remains well-positioned to handle this cost environment given its strong operational focus at the restaurant-level and its natural hedging capability vis-a-vis its portfolio of restaurants. We maintain our Overweight rating and $23 price target on DFRG shares (based on 21x our FY14E EPS).”
Also in mid-September, Deutsche Bank gave Del Frisco’s a Buy rating with a $24.00 price target. Although the firm noted sluggish industry sales trends, it maintained its Buy rating for Del Frisco’s for three reasons:
“1) new stores, which are a key driver of the story, continue to open well, and DFRG remains one of the few restaurant cos. with multi-yr. visibility on double-digit annual unit growth. 2) 3Q is the least important qtr. of the yr., representing ~20% of annual revs. and ~10% of annual EPS. 3) the combination of easing compares (incl. lapping Hurricane Sandy) and a 1-2% planned menu price increase (likely in early Oct.) provide support to the 4Q SSS outlook. Maintain Buy & $24 PT.”
Economic Releases
If the US government shutdown persists and economic data is again delayed, markets will likely respond negatively as a full picture of the US’ economic health won’t be available. An agreement on an emergency spending bill will ease some of the worries, however the deadline for the US budget ceiling is also quickly approaching.
The Bank of England will hold its policy meeting next week where it is seen maintaining interest rates and using forward guidance to manage expectations.
Daily Schedule
Monday
- Earnings Releases Expected: Tower Group, Inc. TWGP
- Economic Releases Expected: Japanese leading economic index and trade balance, eurozone investor confidence, New Zealand business confidence, British housing price balance, US consumer credit change
Tuesday
- Earnings Expected From: No notable economic releases expected
- Economic Releases Expected: Chinese Services PMI, German trade balance and factory orders, Canadian housing starts, US trade balance, Bank of Japan policy meeting minutes
Wednesday
- Earnings Expected From: RPM International Inc. RPM, Ruby Tuesday, Inc. RT, ADTRAN, Inc. ADTN, Del Frisco’s Restaurant DFRG
- Economic Releases Expected: Chinese new loans, British industrial and manufacturing production and trade balance, British GDP estimate
Thursday
- Earnings Expected From: Lindsay Corporation LNN, Emmis Communications Corporation EMMS, API Technologies Corp. ATNY
- Economic Releases Expected: Australian unemployment rate, Japanese consumer confidence, French industrial output, Italian industrial output, Bank of England interest rate decision, US initial and continuing jobless claims
Friday
- Earnings Expected From: No notable earnings expected
- Economic Releases Expected: eurozone CPI, US nonfarm payrolls, business inventories and retail sales
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