Benzinga Weekly Preview: Earnings Season Kicks Into High Gear
Earnings season is in full swing next week with almost a third of S&P 500 companies set to report.
Markets will be alive as investors look to big names for news which could propel stocks and end Wall Street’s recent weakness.
Thomson Reuters data showed that S&P 500 companies’ first quarter earnings are forecast to increase by 1.7 percent from last year’s results, making next week’s releases even more appealing to markets.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports, including Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), Procter & Gamble Company (NYSE: PG), Microsoft Corporation (NASDAQ: MSFT), and Boeing Company (NYSE: BA).
Apple is expected to report first quarter EPS of $10.17 on revenue of $43.55 billion, compared to last year’s EPS of $10.09 on revenue of $43.60 billion.
Wells Fargo gave Apple a Market Perform rating on April 11, saying that the company’s potential upsides are balanced by the possibility of downside risks.
“We believe the positives of potential near-term "s" cycle gross margin improvements and new products are balanced against potential gross margin pressure later in the year, limited amount of incremental market cap opportunity in the existing product segments, and a potential balance of power shift back to wireless operators from handset vendors.”
JP Morgan gave Apple an Overweight rating on April 8, citing the company’s new technology, including iAnywhere, as a possible catalyst for growth.
“In our first major note on Apple since assuming coverage we update and extend our iAnywhere thesis. Our view is that Apple is likely to cannibalize its MacBook Air line in the next 12 months and possibly in 2014 by adding a keyboard/mouse centric user interface to iOS while also keeping a touch friendly UI.”
AT&T is expected to report first quarter EPS of $0.68 on revenue of $32.27 billion, compared to last year’s EPS of $0.64 on revenue of $31.36 billion.
Merrill Lynch gave AT&T a Neutral rating with a $35.00 price objective on April 7. The analysts at Merrill Lynch noted that the company’s NEXT plan may account for 37 percent of smartphone sales in 2014 and increased their first quarter 2014 EPS estimate from $0.70 to $0.74.
“Our EPS revision related to NEXT plan accounting is non-cash and results from AT&T recognizing nearly the full cost of a phone up front for accounting purchases while cash receipts are recovered through time. As a larger percentage of device sales take place under the Next program, AT&T recognizes more and more revenue up front relative to what they would ordinarily book for the traditional subsidized plan. This up-front revenue recognition flows down through EBITDA and into EPS.”
On April 14, Morgan Stanley gave AT&T an Equal-weight rating and said they expect to see the updated guidance from management due to the company’s recent LEAP acquisition.
“AT&T made several changes to their price plans in the first quarter, most notably offering 10 GB for $100 + $15 per smartphone. It will be important to see how the increased competition affects quarterly results – in particular, we are focused on postpaid net adds (MSe: 224k), churn (MSe: 1.07%), and what percentage of smartphone sales are on the Next program (at 35%, we expect an 8c impact to EPS). Meanwhile, AT&T will update guidance to include the recent LEAP acquisition, and we will be looking for commentary regarding the prepaid strategy.”
On April 12, S&P Capital IQ gave AT&T a Buy rating with a $38.00 price target. The firm cited increasing revenue expectations in 2014 and 2015 for its optimism.
“After an increase to $129 billion in 2013, we look for revenues to be up 2.4% in 2014 and 1.4% in 2015.We expect gains in consumer wireless and broadband to continue to offset some wireline voice pressure. While the competitive environment remains intense and should remain so following pending industry consolidation, T has been adding spectrum, and we see ample liquidity to grow. We look for wireless revenue to advance on customer additions and faster growth in wireless data services. Meanwhile, we believe business revenues will continue to be impacted by an uncertain economy.”
Procter & Gamble Company
Procter & Gamble is expected to report first quarter EPS of $1.02 on revenue of $20.73 billion, compared to last year’s EPS of $0.99 on revenue of $20.60 billion.
On April 14, Morgan Stanley gave Procter & Gamble an Equal-weight rating, nothing that there were few near-term catalysts to propel the company’s shares.
“We forecast 3.2% PG organic sales growth in Q3 on a +3.0% prior-year comp, with tepid PG results limited by continued beauty weakness and softer US/EM consumer spending. A +3.3% increase in volume should drive growth, with 0.8% pricing offset by -0.8% mix. We anticipate Q3 operating margin will increase ~30 bps y-o-y, driven by a ~30-bp decrease in SG&A as a % of sales given cost savings, with GM flat on an easy 20 bp comparison and moderate commodities, offset by negative mix. What to look for: (1) market share trends in key categories, (2) contribution from new products, particularly in laundry, (3) an update on cost savings, and (4) developed vs. emerging market trends.”
Merrill Lynch gave Procter & Gamble a Buy rating with a $90.00 price objective on April 9, citing the company’s plans to sell the majority of its pet portfolio as a reason for the optimism.
“P&G announced this morning that it will sell its Pet Food businesses in North America, Latin America and other selected countries to Mars for $2.9bil, valuing the transaction at ~2.3x sales (P&G had acquired the Iams business in 1999 for $2.3bil). In FY13, Pet sales were $1.6bil, -5% y/y, and pretax profit was $62mil, dragged down by the impact of pet food recalls (for comparison, pretax profit was $160mil in FY12). The businesses to be sold account for roughly 80% of P&G’s pet portfolio with 10% of the remaining sales in countries where Mars has the option to acquire and 10% in European Union countries where antitrust concerns are likely an impediment to the deal; P&G’s intent is to sell the remainder of the business it will still own. Brands included in the sale are Iams, Eukanuba and Natura. The transaction is all cash and is expected to close in 2H14, subject to regulatory approval.”
S&P Capital IQ gave Procter & Gamble a Hold rating with an $88.00 price target on April 12. The analysts at S&P noted that the company will be heavily focused on product innovation, which could improve EPS in the second half of 2014.
“A key focus for PG, in our view, will be driving growth through product innovation and improving execution in developed markets.We estimate FY 14 (Jun.) sales of $85.1 billion, a 1.2% increase from $84.2 billion in FY 13, as unfavorable currency translation offsets the impact of unit volume growth and slightly higher pricing. We project about 3.5% organic sales growth, excluding currency, acquisitions and divestitures.”
Microsoft is expected to report first quarter EPS of $0.63 on revenue of $20.38 billion, compared to last year’s EPS of $0.72 on revenue of $20.49 billion.
Merrill Lynch gave Microsoft an Underperform rating with a $35.00 price objective on April 3, citing concern about the value of Windows for their caution.
“Microsoft announced Windows will be free for any form factor under 9”, and we believe verifies our concern about the diminishing value of Windows which we published in Office or Windows: who is in charge? The near-term financial impact is limited on the Windows Phone side, as there were ~6mn non-Nokia Windows Phones shipments in 2013. At $25 / phone, the impact would be ~$120mn in op profit (assuming 80% op margins). The impact on Windows Embedded is harder to ascertain, but a quick example with the auto industry suggests a limited impact: with the 15mn cars sold in the US at $4 / car, the impact would be ~$48mn in op profit. While there are other devices, the auto segment is a significant portion of Embedded. With this move, we believe MSFT is attempting to use Windows to push the benefits of Azure as a platform for all devices.”
However on April 9, Credit Suisse gave Microsoft an Outperform rating with a $42.50 target price due to encouraging PC trends.
“Gartner released preliminary Q1 2014 PC market data after the close—estimating that worldwide PC unit shipments declined 1.7% year over year and 7.6% quarter to quarter, driven by weakness in non-Japan APAC. Although PC shipments continued to decline year over year, this March quarter marked the slowest quarter-to-quarter decline of the past eight March quarters and also the lowest year-over-year decline in the past eight quarters. The end of XP support in April played a role in the easing decline. Nonetheless, the U.S. market, which is Windows' highest ASP geography with the lowest levels of piracy, showed the fourth consecutive quarter of shipment growth, which suggests the U.S. has passed the worst stages of the decline in shipments after having been the first region to be significantly impacted by the growth in tablets. Furthermore, EMEA saw positive growth of 0.3% year over year, the first quarter of growth in eight quarters.”
Deutsche Bank gave Microsoft a Hold rating with a $42.00 price target on April 13, citing uncertainty about Windows adoption as one reason for caution.
“The Nokia deal should close any day now and in our view Street EPS estimates will be biased down. MSFT guided to a neutral adjusted EPS impact from Nokia in FY15, but given weak Nokia handset unit sales, MSFT has its work cut out for it to hit this target. The commercial Office and Windows segments posted 10% growth last quarter on the back of stabilizing business PC sales and a mix shift to higher-priced Windows SKUs, but we worry that business PC momentum could moderate post XP migrations and that Windows pricing pressure will continue. In enterprise software, we like the positioning of MSFT’s cheaper product suite, but we wonder if MSFT’s internal push to raise its software maintenance attach rate and to bundle more products into multi-year ELA-like deals has played-out to the point that the gap between MSFT’s Server product growth (9%-12%) and its peers (more like zero-5%) could begin to narrow. MSFT’s FCF is down 18% over the last six months, in contrast to the 7% FCF growth rate reported by ORCL.”
Boeing is expected to report first quarter EPS of $1.56 on revenue of $20.39 billion, compared to last year’s EPS of $1.73 on revenue of $18.89 billion.
Merrill Lynch gave Boeing a Buy rating with a $154.00 price objective on April 3. The firm cited an increase in commercial aircraft deliveries as reason for optimism.
“We are updating our model to incorporate Boeing’s recently released 1Q14 deliveries of 161 commercial aircraft. This compares to BofAML’s forecast of 177 aircraft. The deliveries were split as follows: 115 737s (vs. BofAMLe 114), 4 747s (vs. BofAMLe 5), 24 777s (vs. BofAMLe 25) and 18 787s (vs. BofAMLe 28). There were no 767 deliveries (vs. BofAMLe 5). The delay in 787 deliveries can be attributed to modest interruption in the manufacturing line due to quality concerns regarding the wings supplied by Mitsubishi Heavy Industries. We are maintaining our delivery forecast for the full year of 726 aircraft (480 737s, 18 747s, 18 767s, 100 777s, and 110 787s) as we expect Boeing to slowly recover from lower than expected 1Q14 deliveries in the next two quarters and to have a stronger 4Q14.”
On April 14, Morgan Stanley gave Boeing an Overweight rating with a $150.00 price target, noting that the outlook for global traffic and new orders looks positive.
“Boeing is a key beneficiary of the commercial aerospace upcycle. The company will continue to leverage record-level backlogs in increasing production rates, which should drive higher return of capital to shareholders over the mid to long term. New aircraft introductions in 2013 have the potential to drive further growth in the backlog. We expect any defense-related overhang to be offset by the emerging cash returns story at the company thus rate the stock OW.”
On April 12, S&P Capital IQ gave Boeing a Buy rating with a $156.00 target price, citing an sales increase in 2014 and 2015 for their optimism.
“We project sales to rise 5% in 2014 and 4% in 2015, driven by the Commercial Airplanes segment, where we estimate 12% growth in 2014 on increased production of the B737 and B787, stepping down to 8% in 2015. On the Defense, Space & Security side of BA's business, we expect revenue to decline 6% in 2014 and 3% in 2015, on the impact of lower overall U.S. defense spending and the effects of sequestration partly offset by rising international sales.”
PMI data will be the focus of next week’s economic calendar as investors look for clues about how some of the world’s largest economies are progressing. Eurozone services and manufacturing PMI data will be closely watched as investors try to get a clear picture of the bloc’s progress at the start of the second quarter.
- Earnings Releases Expected: Netflix, Inc. (NASDAQ: NFLX), United Health Group Incorporated (NYSE: UNH), SunTrust Banks, Inc. (NYSE: STI), Hasbro, Inc. (NASDAQ: HAS), Halliburton Company (NYSE: HAL), Kimberly- Clark Corporation (NYSE: KMB)
- Economic Releases Expected: No notable releases expected
- Earnings Expected: The Travelers Companies, Inc. (NYSE: TRV), United Technologies Corporation (NYSE: UTX), Lockheed Martin Corporation (NYSE: LMT), Caterpillar, Inc. (NYSE: CAT), Xerox Corporation (NYSE: XRX), McDonald’s Corporation (NYSE: MCD)
- Economic Releases Expected: Chinese manufacturing PMI, US existing home sales, eurozone consumer confidence
- Earnings Expected: Procter & Gamble Company (NYSE: PG), RPC, Inc. (NYSE: RES), Boeing Company (NYSE: BA), Delta Air Lines Inc. (NYSE: DAL), Facebook (NASDAQ: FB)
- Economic Releases Expected: South Korean GDP, US crude oil inventory data, US new home sales, US manufacturing PMI, eurozone services PMI, eurozone manufacturing PMI
- Earnings Expected From: Verizon Communications Inc. (NYSE: VZ), Caterpillar, Inc. (NYSE: CAT), Dunkin’ Brands Group, Inc. (NASDAQ: DNKN), Microsoft Corp (NASDAQ: MSFT)
- Economic Releases Expected: Japanese CPI, US durable goods orders, British retail sales, German Ifo business climate index
- Earnings Expected From: Exxon Mobil Corporation (NYSE: XOM), Chevron Corporation (NYSE: CVX)
- Economic Releases Expected: British retail sales, US services PMI
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