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Benzinga Weekly Preview: Earnings Season Kicks Into High Gear

Benzinga Weekly Preview: Earnings Season Kicks Into High Gear
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With earnings season in full swing, markets will be bombarded with data to trade on.

The week will also bring a host of economic data including China’s GDP and US retail sales. While Chinese growth is expected to have remained tepid, US retail sales likely grew in June.

Investors will also keep an eye on the Fed next week as Chair Janet Yellen is scheduled to speak before congress to shine a light on the bank’s predictions for the US economy.

Key Earnings Reports

Next week investors will be waiting for several key earnings reports including Google (NASDAQ: GOOG), General Electric (NYSE: GE), JP Morgan Chase & Co. (NYSE: JPM) and Goldman Sachs (NYSE: GS).


Google is expected to report second quarter EPS of $5.16, compared to last year’s EPS of $3.88.

On June 27, Jefferies gave Google a Buy rating with a $700.00 price target, citing the company’s future plans to penetrate new markets like wearables and automobiles.

“At Google I/O, Google unveiled its vision to extend Android beyond the smartphone and into cars, TVs, and wearables with Android Auto, TV, and Wear programs. While these won’t move the needle in the near-term, Android looks best positioned against these longer-term trends. Our belief is reinforced by the fact Android has 1B active users (up from 530MM last yr), extending its already dominant market share lead.”

On June 26, CRT Capital also gave Google a Buy rating with a $650 price target, noting that the company is keeping pace with Apple and growing its user base rapidly.

“In our view, the most important takeaways from I/O keynote included: 1) Android TV – GOOGL is extending the Android platform for smart TVs and set-top boxes; we view Android TV’s functionality (particularly voice search) and partner strategy (Sony, Smart, pay TV providers and streaming device manufacturers) as differentiated from competitors Apple and Amazon and believe that GOOGL now has a winning formula to conquer the living room – with meaningful monetization likely to follow over the longer term; 2) Android Auto – GOOGL unveiled its answer to Apple’s CarPlay, an open SDK for audio and messaging that should catalyze the nascent platform, and buy-in from 25 car brands, and 3) Android now has more than 1 billion monthly active users and GOOGL is focused on its next billion users by accelerating smartphone adoption in the developing world. We continue to view GOOGL as among our top three large-cap Internet picks and reiterate our Buy rating and $650 price target.”

On June 25, Nomura took a similar stance and gave Google a Buy rating with a $675 price target, saying that recent criticism of Google’s increased spending were overplayed.

“Last Friday it was announced that Dropcam, maker of the popular Wi-Fi home-monitoring video camera, would be acquired by Nest Labs. We believe there are some common threads to Google’s recent M&A activity: Internet of Things, Internet Access, and Content. Concerns about Google’s spending due to an increase in the pace of its M&A in 2014 are overdone. We believe that GOOG is a must-own core long-term holding, but we continue to monitor trends in capital allocation. Also, our early checks with internet marketers strengthen our confidence in our 2Q forecast of +18% YoY growth in gross ad revenue. Our $675 TP is based on 21x 2015E EPS, a conservative discount to its peer group, implying 44x 2015E P/FCF. FY14E Non-GAAP EPS at $26.06; FY15E Non-GAAP EPS at $32.07.”

General Electric

General Electric is expected to report second quarter EPS of $0.39 on revenue of $36.30 billion, compared to last year’s EPS of $0.36 on revenue of $35.12 billion.

Merrill Lynch gave General Electric a Buy rating with a $29.00 price objective on July 2 following an visit with GE’s Global Research Center. The analysts at Merrill Lynch noted that GE has the ability to sell across multiple markets, which will ultimately help with the company’s development of new technology.

“Our key observation is that while GTF offers a mechanically driven path to performance, GE chose a more conservative approach due to concern about the ultimate reliability of the geared architecture choosing instead evolutionary approach to build on its robust and reliable CFM56 design relying on advanced materials technology to drive the performance improvement. GE’s scale in adjacent businesses like Transportation, Oil & Gas, and Power & Water, allows the company to scale new technology to the extent that is not available to its competitors which in our view also explains why GE chose advanced materials technology path over a mechanical solution.”

On May 21, Credit Suisse was positive about GE’s prospects after CEO Jeff Immelt presented at the EPG Conference. The analysts at Credit Suisse had the following takeaways:

“■ Near-term demand: The US economy is improving across segments such as consumer, rail and power, while Europe Healthcare is a little better (Power remains very tough).

■ Industrial margins: GE aims to grow Industrial margins by 130bps over 2014-16. Low inflation is supporting the Value Gap (around ~$0.2bn of EBIT tailwind in 2014), and restructuring efforts ($1-1.5bn of charges this year) should help contribute to margins by ~100bps in 2014. The SG&A / sales ratio is on track to shrink to 12% in 2016 against 15.9% in 2013.

■ Portfolio change accelerating: GE's focus on its Infrastructure businesses is increasing, and it expects Industrial to comprise 75% of profits in 2016. Within Industrial, Power / Energy / Oil & Gas markets form over half of sales. GECC Ending Net Investment (ENI) is now shrinking to $300bn by next year (prior target $350bn), against $370bn currently. The target to raise $4bn+ in proceeds from Industrial divestments was reiterated (no new details were provided), which should support margin expansion.

■ New gas turbine; more services: In Power & Water, GE is introducing two new models, with the first new large frame turbines to ship in 2016, with decent customer uptake (in markets such as the US and Asia).”

On July 11, Morgan Stanley was more cautious with an Equal-Weight rating and a $28.00 price target, saying that the company is fairly valued at the moment.

“We sit broadly in line with consensus on the key metrics and overall see few incremental positive or negative catalysts around the quarter. With the stock trading broadly in line with both SotP (Ex 39) and with sub-10% total return vs. our $28 PT, we continue to look for a better entry point.”

JP Morgan Chase & Co.

JP Morgan is expected to report second quarter EPS of $1.30, compared to last year’s EPS of $1.60.

On May 23, Credit Suisse gave JPMorgan an Outperform rating with a $70 price target. The analysts at Credit Suisse came away from a meeting with JPMorgan’s Chief Financial Officer with a positive view of the company’s future.

“We met with JPMorgan's Chief Financial Officer, Marianne Lake, yesterday to discuss key industry and company topics. Overall, the meeting was positive as she believes JPMorgan is well on its way to meeting capital and growth objectives. While challenges remain from weak revenues and high regulatory costs, we believe JPM has made significant strides improving capital, funding and settling litigation issues and enhancing compliance. We are reiterating our outperform rating. We believe that JPMorgan is addressing the major capital and regulatory hurdles somewhat more rapidly than was originally contemplated. Ms. Lake indicated that she believes that the company is on target with the plan laid out at the Investor Day three months ago, which called for these hurdles to be met by the end of 2014 or early 2015.”

On July 6, Credit Suisse maintained its Outperform rating and $70 price target, noting that revenue will likely decline by around 17 percent.

“Trading & Investment Banking. We forecast core trading revenues of $4.4Bn, a decline 17% y/y (-12% q/q). We are projecting core fixed income trading of $3.3Bn down 18% y/y and core equities trading of $1.1Bn, down 15% y/y. Our model assumes investment banking fees of $1.7Bn, up 18% q/q and down 1% y/y, driven by equity underwriting (35% q/q) and debt underwriting (27q/q) and partially offset by advisory (-15% q/q). We forecast spread income to decline 2% q/q. We expect the real estate portfolio to shrink to $7Bn q/q (-1%). We expect $1.2Bn of credit losses, down 9% q/q, including $125mm of mortgage losses. We forecast a $0.3Bn reserve release in the C&CB segment helped by reserve bleed in mortgages and we factored in $0.1Bn reserve release in Card, Merchant & Auto.”

On July 3, Morgan Stanley gave JP Morgan an overweight rating with a $64 price target, noting that higher fees will likely be offset by higher expenses, including the company’s legal costs.

“We’re in-line with consensus, our higher fees are offset by higher expenses which include $750mn in legal costs. Stock will React to: (1) Markets revenue: We expect markets revenue down 21% y/y in-line with guidance (equities down 8% y/y with FICC -25% y/y); (2) Expenses: We expect core expenses (ex legal and foreclosure related costs) flat q/q at $14.6bn in 2Q14. Expect mgmt gives us more details on JPM’s ability to drive down comp in a weak FICC environment; (3) Litigation Charges: MS models $750mn in 2Q14, vs. $850m in 4Q13 and $700m in 2Q13.”

On July 5, S&P Capital IQ gave JP Morgan a Buy rating with a $66 price target, saying that the recovery in Europe will likely benefit JP Morgan’s business.

“We expect JPM's capital markets business to benefit from a European recovery, and to take global market share from European banks, which operate in an even stronger regulatory climate. We see JPM's asset management business remaining strong. JPM's consumer banking should be able to take U.S. market share, based on investments JPM has made in its branch network.We also think legal costs peaked in 2013, at $19 billion, and that JPM's remaining legal reserve, after these costs, is $10 billion, as compared to JPM's possible remaining mortgage securitization and servicing legal liabilities, which could range from $8 billion to $16 billion, in our view. Following the 2014 CCAR stress test results, JPM is increasing its common stock dividend to $0.40, from $0.38, and is embarking on a $6.5 billion common stock repurchase program.”

Goldman Sachs

Goldman Sachs is expected to report second quarter EPS of $3.07, compared to last year’s EPS of $3.70.

On July 7, Credit Suisse gave Goldman Sachs an Outperform rating with a $185 price target. The analysts at Credit Suisse trimmed their second quarter estimates for Goldman mostly due to rising expenses.

“For Goldman Sachs, we lower our 2Q EPS estimate to $2.95 (old: $3.11) as higher than expected expenses (mainly litigation related) and weak fixed income more than offset better than expected Investing & Lending and i-banking revenues. We expect 2Q topline to be down 8% yr/yr as muted operating conditions for sales & trading (-17% yr/yr) are only partially offset by solid trends in Investment Banking & Investing & Lending. Top-line aside, we anticipate GS to remain disciplined and active on the expense (43% comp ratio, stable non-comp ex litigation) front and expect further progress to toward achieving SLR requirements (aided by $2Bn in preferred equity issued during the quarter).”

On July 6, Morgan Stanley gave Goldman Sachs an Equal-Weight rating, noting that the Vlocker Rule could have an effect on the firm’s growth potential.

“Stock will React to: 1) Indications of larger share buyback in 2014 (we’re modeling net buybacks of $4.4b in 2014); 2) Lower expenses, esp if comp ratio falls below 42% (not expected); 3) Better than expected trading revenue: we’re modeling FICC -13% y/y (-26% q/q) and core equities revenue -4% y/y (+10% q/q) and advisory/IB fees +10% y/y (-4% q/q)

Key Questions for the Call: Outlook for M&A, underwriting and trading environment (including rates and volatility), impact of FICC environment on comp and headcount, impact of Volcker Rule on investing and lending activities, outlook for replacing I&L revenues as pre-Volcker funds wind down, potential for greater RWA mitigation, impact of SEFs and Clearing on FICC, outlook for capital mgmt.”

On July 5, S&P Capital IQ gave Goldman Sachs a Hold rating with a $160 price target. The analysts at S&P see the firm’s growth declining modestly in 2014, though they expect to see favorable trends in investment banking and asset management.

“In our view, the growth drivers for GS appear to be shifting from trading to investment banking and investment management. Key areas for growth are investment advisory services like M&A and IPOs where the firm is a market leader. We believe GS stands to benefit from a strengthening US economy and market share gain in Europe's market which is relatively weak. Overall, we see GS as one of the best positioned for any upturn in investment advisory services.”

Economic Releases

Chinese data will be the star of next week’s economic calendar as investors look to see whether or not the nation’s economy picked up in the second quarter. Most are anticipating that the data will show that Chinese GDP was steady at 7.4 percent. China has seen improving economic data recently, suggesting that Beijing’s “mini-stimulus” package was taking effect. However, many believe that the People’s Bank of China could step in again with further easing if growth remains sluggish.

Daily Schedule


  • Earnings Releases Expected:  Citigroup Inc. (NYSE: C), Saratoga Investment Corp. (NYSE: SAR), Bank of the Ozarks (NASDAQ: OZRK)
  • Economic Releases Expected: Japanese industrial production, eurozone industrial production


  • Earnings Expected: Intel Corporation (NASDAQ: INTC), CSX Corporation (NYSE: CSX), Yahoo! Inc. (NASDAQ: YHOO), Johnson & Johnson (NYSE: JNJ)
  • Economic Releases Expected: Chinese GDP, Chinese retail sales, Chinese industrial production, US Redbook, US retail sales, German ZEW economic sentiment, British CPI, British PPI, Italian CPI


  • Earnings Expected: Abbott Laboratories (NYSE: ABT), US Bancorp (NYSE: USB), St. Jude Medical, Inc. (NYSE: STJ), Bank of America Corporation (NYSE: BAC), PNC Financial Services Group, Inc. (NYSE: PNC), BlackRock Inc. (NYSE: BLK), eBay Inc. (NYSE: EBAY), Yum! Brands, Inc. (NYSE: YUM), JP Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS)
  • Economic Releases Expected:  US industrial production, US PPI, US oil inventory data, British unemployment rate, Italian trade balance


  • Earnings Expected From: SAP AG (NYSE: SAP), Novartis AG (NYSE: NVS), UnitedHealth Group Incorporated (NYSE: UNH), Mattel, Inc, (NASDAQ: MAT), Key Corp (NYSE: KEY), Philip Morris International (NYSE: PM), Morgan Stanley (NYSE: MS), PPG Industries, Inc (NYSE: PPG), The Blackstone Group L.P. (NYSE: BX), Schlumberger N.V. (NYSE: SLB), International Business Machines (NYSE: IBM), Google Inc. (NASDAQ: GOOG)
  • Economic Releases Expected:  Chinese house prices, US housing starts, eurozone CPI, Hong Kong’s unemployment rate


  • Earnings Expected From: Ericsson (NASDAQ: ERIC), General Electric Company (NYSE: GE), Honeywell International Inc. (NYSE: HON), Johnson Controls, Inc. (NYSE: JCI)
  • Economic Releases Expected:  Dutch consumer confidence, eurozone current account

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