Benzinga Weekly Preview: Markets Anxiously Await Fed Meeting

Next week the US Federal Reserve will be in the spotlight as investors anxiously wait to see whether or not the US central bank will begin to taper its bond buying plan.

Recent jobs reports coupled with Washington’s bipartisan budget deal have both supported the Fed’s case to taper sooner rather than later. With that said, many are skeptical about a taper as housing data has been lack luster and the Fed may be hesitant to cut back at the end of the year.

Key Earnings Reports

Next week, investors will be waiting for several key earnings reports including Oracle Corporation ORCL, Nike, Inc. NKE, BlackBerry BBRY, Rite Aid Corporation RAD, and FedEx Corporation FDX.

Oracle Corporation

Oracle is expected to release second quarter EPS of $0.67 on revenue of $9.8 billion, compared to last year’s EPS of $0.64 on revenue of $9.11 billion.

The analyst team at BMO has Oracle with an Outperform rating with a $42.00 target price and said the company is well positioned to continue growing and gaining market share.

“Oracle, as a leading provider of database, middleware, and applications solutions, in our view, is positioned for continued growth and market share gains through leveraging its installed base (cross-sell/up-sell), favorable product refresh cycles, and surrounding the competition in customer environments. We see multiple company-specific drivers: increasing specialized sales force (+3,000), traction of engineered systems and pull-through of related software, and an apps business that is primed for long-term growth. Oracle also appears positioned for continued margin expansion through prudent spending and cost economies of scale in both its core and Sun business.”

On December 12, Morgan Stanley has Oracle with an Equal-weight rating, saying the company lacked any major catalysts for growth.

“ORCL now trades near our price target and, in our view, lacks an incremental catalyst to drive the multiple higher. After taking a fresh look at the four key debates on apps, data mgmt and hardware and capital returns that we laid out six months ago, we are hard-pressed to find conviction in further upside to our ests/multiple assumptions over the next year. In particular, our fourth deep-dive customer survey on Fusion Apps indicates momentum is continuing to weaken as competitive drums beat louder, while Engineered Systems growth has faded more rapidly than we expected. Net, until we see signs of product and sales investments yielding stronger returns, ORCL looks fairly valued at ~12x NTM P/E, in line with EPS growth and approaching long-term averages.”

Also on December 12, RBC Capital Markets has Oracle with a Sector Perform rating with a $35.00 price target. The analysts at RBC said its reduced rating was attributed to Oracle’s share price nearing the firm’s Price target.

“ORCL now trades near our price target and, in our view, lacks an incremental catalyst to drive the multiple higher. After taking a fresh look at the four key debates on apps, data mgmt and hardware and capital returns that we laid out six months ago, we are hard-pressed to find conviction in further upside to our ests/multiple assumptions over the next year. In particular, our fourth deep-dive customer survey on Fusion Apps indicates momentum is continuing to weaken as competitive drums beat louder, while Engineered Systems growth has faded more rapidly than we expected. Net, until we see signs of product and sales investments yielding stronger returns, ORCL looks fairly valued at ~12x NTM P/E, in line with EPS growth and approaching long-term averages.”

Nike, Inc.

Nike is expected to release second quarter EPS of $0.58 on revenue of $6.44 billion, compared to last year’s EPS of $0.57 on revenue of $5.96 billion.

In mid-September, Piper Jaffray has Nike with a Neutral rating with a $71.00 price target, saying the company’s outlook in the near term was more positive than its competitors.

“We believe the next several weeks potentially offer a compelling trade opportunity for NKE shares on the long side. The following events over the next four weeks could all be positive catalysts for NKE shares: Dick's Sporting Goods analyst day on September 18th, Nike's FQ1 earnings in late September, Nike's analyst day on October 9 and NKE shares being added to the DJIA on September 23. Furthermore, we believe product innovation such as Flyknit, mildly improving macroeconomic conditions in China and several global sporting events in 2014 provide a favorable backdrop. Lastly, NKE's earnings multiple relative to UA is approaching its historic low, which has typically been a good indicator of NKE's relative outperformance. We have raised our 12-month price target from $64 to $71, but are maintaining our Neutral rating given valuation.”

JP Morgan has Nike with an Overweight rating with an $80.00 price target on October 1. The analysts at JP Morgan noted several risks to Nike’s success, including the current employment figures in the US, which could stifle consumer spending.

“The economic climate, particularly the employment picture, can affect consumer spending and the department store industry. A greater than expected downturn in household spending could cause sales trends to decelerate below our current assumptions, rendering our estimates too high. Conversely, an improvement in the economy could render our estimates too low.”

BlackBerry

BlackBerry is expected to report a loss of $0.43 per share on revenue of $1.58 billion, compared to last year’s loss of $0.22 on revenue of $2.73 billion.

CIBC has BlackBerry with a Sector Underperform rating with a $5.00 price target on November 4. The analysts at CIBC said that although BlackBerry’s balance sheet is improving, the company faces a long road to recovery.

“BB's balance sheet is now in good shape. Pro-forma cash (convert & restructuring) is $3.1B or ~$5/share. BB's survival was an issue for many enterprises who have watched the downward spiral. Today's cash up should alleviate the financial concerns, but competitive ones remain. BB's long-term strategy is a return to focus to the enterprise market. There are many issues with BB, but the largest one is BYOD led by iPhone and Samsung's Galaxy. Today it's not clear what a realistic BB response is. Establishing BB's competitive edge here is the largest unknown. We lower our rating to SU and PT to $5 from $12. Our prior thesis was the shares could only be bought for this sale process that has now failed. Current fundamentals are quite weak (Q3 market share 1% vs. 2.7% Q2, 4.3% Q3 LY) and yield a lower price, hence our downgrade to SU.”

On the 15 of November, Macquarie also has BlackBerry with an Underperform rating with a price target of $5.50. The analysts at Macquarie noted that although the company’s CEO has been praised, they found several red flags upon closer inspection.

“While we have heard very good things about Mr. Chen from his days at Sybase, we are concerned that he is not relocating to Waterloo and that he is not the permanent CEO. Furthermore, a review of the filings suggests that Mr. Chen appears to be incentivized to sell the company as one entity, which would accelerate his vesting on 13mm RSUs upon a change in control, with a further $6mm cash termination payment. We believe investors would prefer Mr. Chen's long-term compensation package to be tied to profitability thresholds and/or share price performance relative to the market or peers.”

On the November 5, Societe Generale was more positive about BlackBerry and has a Hold rating with a $7.00 price target. The firm’s optimism came from news that BlackBerry had decided not to sell itself.

“Blackberry announced yesterday that it has abandoned plans to sell itself to an investor consortium (which includes its largest shareholder Fairfax) for $9 per share. Instead, a consortium of investors (again including Fairfax) will invest $1bn in Blackberry in the form of convertible debentures. The investment should be completed within the next two weeks. The debentures will have a coupon of 6% and will be convertible into shares at $10 per share. The debentures have a term of seven years. Assuming all $1bn of the debentures are converted, the debenture holders would own 16% of the enlarged share capital. In addition to the financial transaction, it was also announced that the current CEO will resign as CEO from the board once the deal has closed. Peter Chen, the ex-CEO of Sybase, will join the board as the Interim CEO pending the completion of a search for a new CEO.”

Rite Aid Corporation

Rite Aid is expected to release third quarter EPS of $0.04 on revenue of $6.29 billion, compared to last year’s EPS of $0.07 on revenue of $6.24 billion.

BTIG has Rite Aid with a Buy rating with a $6.00 price target on October 3. The analyst team at BTIG saw a bright long term future for Rite Aid based on changes to healthcare policies in the US.

“We have reason to believe that results will improve from here over the longer term. While second half guidance was strong, it already incorporates the threat of increased reimbursement pressures and the weakness in new generics. What the guidance omits is any positive impact in the second half from the launch of the exchanges associated with the Affordable Care Act – even though that guidance already incorporates the cost of paying for more than two thousand consultants working in RAD’s locations to help existing and prospective RAD customers to sign up for ACA coverage.”

On October 7, Jefferies has Rite Aid with a Hold rating with a $5.30 price target, noting that although the company has made progress, it faces several headwinds in the future.

“Rite Aid has made progress in its turnaround, but we see declining EBITDA in the near-term as the company faces a fading generic drug wave, and some attrition from the Express Scripts customer wins from last year. Given Rite Aid's financial leverage, and its 30-40% lower store productivity vs. CVS and WAG, we believe the current EV/EBITDA discount vs. these peers is justified.”

FedEx Corporation

FedEx is expected to release second quarter EPS of $1.62 on revenue of $11. 43 billion, compared to last year’s EPS of $1.39 on revenue of $11.11 billion.

JP Morgan revised its estimate for FedEx from Neutral to Overweight with a price target of $154.00 on October 22. The analysts at JP Morgan noted that FedEx’s buyback announcement instilled some confidence in the company.

“What has changed to drive our upgrade to OW? We have been cautious on FDX for the past four months due primarily to concerns regarding the headwind from trade down and excess international airfreight capacity. While we still have concerns about trade down, we now believe that the combination of FDX’s Asia / U.S. air capacity reductions and its initial steps to flow IE into commercial lift provide the ability for FDX to absorb trade down pressures. We also read FDX’s large and uncharacteristic buyback announcement last week as indicating they are being aggressive and they are willing to change to drive improvement.”

Citi’s analysts were also optimistic and has FedEx with a Buy rating with a price target of $170.00 on December 10.

“We believe further upside in FedEx shares remains, as the current investor base appears to be playing for a meaningful improvement in profitability, led by cost efforts underway at the company's Express segment. Sentiment is firming around FedEx's ability to produce profit improvement and coupled with accretion from the buyback and help from improving volumes, $10 of earnings power should enter the discussion for F15. We are increasing our target to $170 and reiterate our Buy”

Economic Releases

Although the Fed will be on everyone’s mind next week, European PMI data is also due out and will be closely watched. Last month’s figures were slightly weaker, but still indicated growth. Most are expecting to see similar figures out this week. France’s PMI last month showed a disappointing contraction and if this month’s figures follow the same trend, it will signal that last month’s data was not a fluke and instead that the nation has fallen off track.

Daily Schedule

Monday

• Earnings Releases Expected: No notable releases expected
• Economic Releases Expected:  US industrial production, Italian trade balance, eurozone manufacturing and services PMI

Tuesday

• Earnings Expected From: Jabil Circuit, Inc. CSPI, Verifone Systems, Inc. PAY
• Economic Releases Expected: Japanese trade balance, New Zealand current account, US current account, US CPI

Wednesday

• Earnings Expected From: General Mills, Inc. GIS, Lennar Corporation LEN, FedEx Corporation FDX, Oracle Corporation ORCL
• Economic Releases Expected: US FOMC meeting announcement, US housing starts, US building permits, British unemployment rate, Indian interest rate decision.

Thursday

• Earnings Expected From: Accenture plc. ACN, Pier 1 Imports, Inc. PIR, ConAgra Foods, Inc. CAG, Rite Aid Corporation RAD, Nike, Inc. NKE, Red Hat, Inc. RHT
• Economic Releases Expected: British consumer confidence, US existing home sales, British retail sales, British mortgage approvals, eurozone current account, Swiss trade balance.

Friday

• Earnings Expected From:  BlackBerry BBRY, CarMax Inc. KMX, Walgreen Co. WAG, The Finish Line, Inc. FINL
• Economic Releases Expected:  eurozone consumer confidence, US GDP, US consumer spending, Italian trade balance