Benzinga Weekly Preview: Earnings Season Is In Full Swing
Earnings season will be in full swing next week, but economic data will likely overshadow big companies’ earnings as investors look for any indication that the global economy is on the road to repair.
Plunging oil prices and disappointing data have created some worry around Wall Street, something next week’s economic data may fuel.
Chinese GDP is expected to show that the nation’s economy grew at its slowest pace since 1999 in the third quarter. If it meets expectations, the figure will likely prompt some speculation about whether or not Beijing will do more to stimulate the nation’s sputtering economy.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including Unilever NV (NYSE: UN), Apple Inc. (NASDAQ: AAPL), Ford Motor Company (NYSE: F), AT&T Inc. (NYSE: T) and Microsoft Corporation (NASDAQ: MSFT).
Unilever is expected to report EPS of $1.60 on revenue of $62.70 billion, compared to last year’s revenue of $66.11 billion.
On October 17, Merrill Lynch gave Unilever an Underperform rating with a $40.70 price objective, noting that weak growth in Europe will weigh on the company’s revenue.
“Unilever reports Q3 sales on Thursday 23 October, 7am UK. We expect €12,570m in sales and +3.6% underlying sales growth (USG) with +1.4% vol / +2.2% price, in- line with consensus (€12,623m sales, +3.7% USG with +1.8% vol / +1.9% price); [...]. Market forecasts for H2 USG have come down materially since July (to+3.7% from +4.8%), closing the gap to our more bearish expectations. However, we continue to see the balance of risk as skewed to the downside: deflation in Europe and weak consumer demand continue to be significant challenges.”
On October 11, S&P Capital IQ gave Unilever a Sell rating with a $39.00 price target, noting that the company’s reliance on emerging markets for sales growth could prove problematic.
“We think Unilever has been successful in boosting its sales and brand franchises in recent years with higher levels of innovation and marketing, strengthening its pricing power as well as adding incremental volumes. However, emerging markets now account for around 57% of total sales and it has come to rely on growth from these regions in recent years to drive its overall sales, in our view. With developed markets struggling for growth, the recent slowdown in UN's growth in emerging markets is likely to weigh on investors' sentiment towards the shares, in our view."
Apple is expected to report fourth quarter EPS of $1.29 on revenue of $39.63 billion, compared to last year’s EPS of $1.18 on revenue of $37.47 billion.
On October 16, Wells Fargo gave Apple Market Perform rating, saying that the company’s product refreshes were in line with expectations.
“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.”
On October 14, Morgan Stanley gave Apple an Overweight rating with a $101.06 price target, forecasting a bullish fourth quarter.
“Our AlphaWise Smartphone Tracker points to 37M iPhone unit demand for the quarter, in-line with our shipment estimate (Exhibit 1). Modest inventory build will likely result in reported units in line with consensus estimate of 38M. As supply improves in the December quarter, we see upside to our iPhone unit estimates and believe this upgrade cycle may last well into 2016. Our consumer surveys in the US, Australia and China point to average iPhone share gains of 19 points, which implies consensus only models about 130M iPhone upgrades in 2015, despite 250M users owning 4s or older generation iPhones. What's more, any meaningful success of Apple Pay (launches later this month) and Apple Watch (only iPhone 5 or newer) could increase the number of upgrades relative to past cycles.”
On October 17, Credit Suisse gave Apple a Neutral rating with a $110.00 price target, noting that the company’s latest iPad refresh will do little to stem falling growth in that segment.
“We currently assume iPad volumes to fall y/y to -4%/-3%, or 68.3mn/66.1mn units, in FY14/15. While we believe the upgrade is decent, we remain of the view that the vast range of low priced competitors (while inferior) are likely continue to drive the shift to $100 or below price points. We maintain our view that market share will drop to around 20% in FY14 from over 32% last year. However, equally we believe Apple retains advantages in terms of wider compute offering and higher levels of usage.”
On October 16, S&P Capital IQ gave Apple a Hold rating with a $103.00 target price, noting the company’s favorable market position.
“We note AAPL's significant market position in key areas, and what we view as high customer satisfaction and switching costs. Higher volumes, a focus on common components, and a greater emphasis on software and services should aid profitability, in our view. We believe the balance sheet will be increasingly employed for dividends and stock repurchases, as well M&A. In August 2014, AAPL purchased Beats Electronics and Beats Music, we think to enhance its accessories and music services offerings and businesses, for $3 billion. In September 2014, the company announced new iPhones, a payments service, and Apple Watch."
Ford Motor Company
Ford is expected to report third quarter EPS of $0.22 on revenue of $33.66 billion, compared to last year’s EPS of $0.45 on revenue of $33.86 billion.
On October 17, Merrill Lynch gave Ford a Buy rating with a $20.00 price objective, but cautioned that a slower than expected recovery in the US economy had the potential to put a damper on the company’s progress.
“Our $20 PO is based on an 2015 EV/EBITDA multiple of roughly 4.5x, around the middle of the company's historical range given the continued recovery in NA and the beginning of recovery in F's international markets. Our PO implies a P/E of 12x our 2015e EPS, toward the higher end of the historical range, but is only 9x 2015e EPS after adjusting for non-cash taxes. Downside risks to our PO: 1) slower-than-anticipated recovery in the US market, 2) a sharp and sustained rise in input costs, 3) disruption in the supply base, 4) significant increase in gas prices, 5) new vehicle pricing deteriorates, 6) market share losses pressure results, 7) unwillingness of dealers to shoulder inventory risk, 8) suppliers gain significant pricing power, 9) stress in capital markets makes borrowing more expensive, 10) key members of mgmt leave F, 11) dealership network is impaired and unable to sell F vehicles.”
On October 2, Credit Suisse gave Ford a Neutral rating with a $15.50 price target, noting that the company will likely move in the opposite direction of General Motors (NYSE: GM).
“GM share of 18.0% was up 150bps Y/Y (versus a weak Sept 2013) and 20bps above YTD levels, partially due to an incentive spend increase of 4.2% sequentially. Ford share of 14.2% was down 180bps Y/Y and 60bps below YTD levels with a sequential incentive spend decrease of 1.5%. YTD share of both companies were in line with our mid-term forecasts. All Ford segments remain flat-to- down Y/Y on a 2014 YTD basis, besides Lux Car and SUV (i.e., Explorer, Expedition).”
On September 30, Sterne Agee gave Ford a Buy rating with a $20.00 price target following the company’s investor meeting.
“Ford hosted an investor meeting in Detroit on September 29, 2014. The company reduced expectations for 2014 and it provided a more conservative than expected outlook for 2015. Longer term, the company provided a glimpse of plans for 2020, including continued industry growth, its global product strategy and a more favorable capital allocation scenario for shareholders. We have reduced our earnings assumptions but our $20 per share price target is unchanged and we rate Ford Buy.”
On October 11, S&P Capital IQ gave Ford a Buy rating with a $20.00 price target, saying that the company’s internal shake up is unlikely to affect its corporate culture or direction.
“We expect a smooth CEO transition, reflecting much continuity of strategy and culture. We view positively Ford's increased annual capital spending plans for mid-decade to $7.5 billion, up from $6 billion, as we believe this reflects improved sales prospects. We believe gains will come from both international and U.S. volumes. We have favorable expectations regard-ing dividend growth and share repurchases."
AT&T is expected to report third quarter EPS of $0.64, compared to last year’s EPS of $0.66 on revenue of $32.16 billion.
On October 1, Merrill Lynch gave AT&T a Neutral rating with a $35.00 price objective, noting that the company’s growth into car and home automation provides ample opportunities.
“We view the next phase of wireless industry growth emerging along two lines – the number of ‘things’ connected to the wireless network and the amount of data throughput generated per thing, led by video content over time. On the subject of the connected thing, AT&T hosted an analyst and investor day in Atlanta on Tuesday to showcase its highest profile initiatives including AT&T’s Digital Life connected home and the AT&T Drive connected car platform. We believe the purpose of the day was to highlight the complexity of developing these markets, the opportunity if successfully accomplished, and AT&T’s success to date.”
On October 2, Credit Suisse gave AT&T an Outperform rating with a $41.00 target price. The analysts at Credit Suisse see some potential with the company’s new Digital Life platform.
“AT&T has nearly 2M connected car customers, including approximately 500k added in 3Q14. The company expects to reach 10M connected cars in 2017. With 10M customers, we estimate AT&T could generate nearly $1B in annual revenue (wholesale ARPU is low single digit; retail is about $10). The company has 140k Digital Life customers with roughly half coming over the last two quarters. If we assume the company adds approximately 35k/quarter, Digital Life could generate about $200M of annual revenue in 2017. Given the low penetration of home security and automation and AT&T's nationwide coverage, we think this could be conservative. Management believes that they can scale these products globally, but the company doesn't need local network assets to go global.”
On October 14, Morgan Stanley gave AT&T an Equal-Weight rating with a $36.00 price target, noting that the company’s acquisition of DirecTV remains an important factor.
“The acquisition of DirecTV remains on track, with approvals from the telecom regulator in Brazil and DirecTV shareholders, while DirecTV has renewed exclusive rights to carry NFL Sunday Ticket. However, regulatory approval in the U.S. remains several months away. Meanwhile, we estimate that AT&T will spend ~$6 billion for 20 MHz of spectrum in the upcoming AWS-3 spectrum auction, although there is the risk that carriers are aggressive in the auction."
On October 11, S&P Capital IQ gave AT&T a Buy rating with a $41.00 target price, saying that the firm expects AT&T’s subscriber growth to remain positive.
"Our Buy recommendation primarily reflects valuation and belief that subscriber growth will remain healthy. While we acknowledge increasing competitive pressures and potential risks to margins, we think T is well-positioned with its product offerings and superior network. We expect T to focus on transitioning towards a more no subsidy driven business model on the wireless side, which we believe is improving churn but impacting pricing. We remain optimistic about opportunities from the pending DirecTV (DTV 85 Hold) deal and view the dividend of over 5% as attractive and safe."
Microsoft is expected to report first quarter EPS of $0.49 on revenue of $22.02 billion, compared to last year’s EPS of $0.62 on revenue of $18.53 billion.
On September 30, Merrill Lynch gave Microsoft a Neutral rating with a $47.00 price objective following a preview of Windows 10.
“MSFT gave a preview to the new Windows, Windows10, in San Francisco today to a small group of press. Terry Myers, head of Windows, announced that the product is expected to ship in the latter part of 2015. The name alludes to the comprehensiveness of the system that will 1) support write-once- and-run-anywhere approach, 2) one app store to run all applications, and 3) one tailored experience for each PC, tablet or phone. We see this preview mainly announced to excite developers, as developers can now just write an application code once, upload it in the app store, and push it across any device that will support Windows 10.”
On October 8, Credit Suisse gave Microsoft an Outperform rating with a $50.00 price target, saying that the company is expected to see improved EPS growth in the near term.
“We believe that Outperform-rated Microsoft can return to double-digit EPS growth and that multiple nearer-term options exist for Satya Nadella and Amy Hood to unlock shareholder value, including (1) rationalizing the cost structure of the company (which management is already undertaking), (2) potentially divesting/exiting underperforming/non-core businesses, (3) optimizing the capital structure (e.g., raising debt against off-shore stockpiles of cash), (4) increasing the level of buybacks/dividends, and/or (5) accelerating the shift to Office 365 (i.e., "pull a full Adobe"). If Microsoft were to enact the aforementioned financial/strategic changes, our target valuation could be biased at least into the $50s.”
On October 13, Morgan Stanley gave Microsoft an Equal-Weight rating with a $51.00 price target, noting that long term growth due to the company’s cloud services will be a major focus for investors.
“Better PCs, a stable enterprise business and a full quarter of Surface Pro 3 contribution point to solid FQ1 for core Microsoft. However, investors' focus likely centers more on the long-term – data points that provide support for Microsoft well executing on its strategy around delivering productivity and platform services in a mobile/cloud world. We believe FQ1 should illustrate a solid enterprise business, a stabilizing consumer business and the continued shift towards more attractive cloud assets. At the same time, greater focus and stronger expense management should provide support for sustained EPS growth. Near-term results will be impacted by some Nokia dilution, but we think FQ1 results and forward commentary (ex Nokia) could illuminate a path towards a 12-14% return profile for MSFT. Still trading at a slight premium to the S&P, this return profile may already be somewhat baked into the MSFT share price, but we do see some room for the stock to move modestly higher to our $51 price target. There are several factors we'll look for to get more aggressive on MSFT at these levels, including: 1) greater scale in Microsoft's Commercial Cloud business, which may warrant a higher multiple; 2) the degree to which Cloud growth is incremental to versus at the expense of Commercial licensing business; 3) a more aggressive return of cash to shareholders; and/or 4) traction in some of the consumer and devices businesses, such as mobile.”
On October 11, S&P Capital IQ gave Microsoft a Hold rating with a $48.00 price target, saying that the company has limited growth potential.
“Our Hold opinion reflects what we see as limited overall growth potential, notwithstanding new CEO Satya Nadella's focus on a "mobile- first, cloud-first" strategy. As part of this approach, MSFT introduced Office for iPad in March 2014 and indicated an interest in pursuing a single operating system that would be de- ployed across a variety of hardware platforms. In 2013, MSFT announced a restructuring with a new focus on devices and services, and roughly a year later the company announced another significant streamlining to reduce the size and importance of the NDS business."
Next week will be a busy week for economic data as investors closely monitor the declining global economy for any signs of improvement. The week will kick off with several important readings from China, where recent data has been shaky over the past few weeks. The eurozone will also release important indicators next week, including PMI and unemployment figures.
Investors will also be looking to U.S. housing data, with a report expected to show that the sales of existing homes increased in September while new home sales dropped during the same month.
- Earnings Releases Expected: Apple Inc. (NASDAQ: AAPL), Chipotle Mexican Grill, Inc. (NYSE: CMG), Halliburton Company (NYSE: HAL), Hasbro, Inc. (NASDAQ: HAS), SAP AG (NYSE: SAP)
- Economic Releases Expected: Italian industrial sales, eurozone current account, Chinese GDP, Chinese retail sales, Chinese industrial production
- Earnings Expected: CSX Corporation (NYSE: CSX), Johnson & Johnson (NYSE: JNJ), Coca-Cola Company (NYSE: KO), Yahoo! Corp (NASDAQ: YHOO)
- Economic Releases Expected: Greek current account, U.S. Redbook, U.S. existing home sales, Japanese trade balance, Australian CPI
- Earnings Expected: Abbott Laboratories (NYSE: ABT), GlaxoSmithKline PLC (NYSE: GSK), Morningstar, Inc. (NASDAQ: MORN), Stanley Black & Decker, Inc. (NYSE: SWK), AT&T Inc. (NYSE: T), Wyndham Worldwide Company (NYSE: WYN)
- Economic Releases Expected: U.S. CPI, Japanese manufacturing PMI, Chinese HSBC manufacturing PMI
- Earnings Expected From: Caterpillar, Inc. (NYSE: CAT), Celgene Corporation (NASDAQ: CELG), Comcast Corporation (NASDAQ: CMCSA), Credit Suisse Group (NYSE: CS), Dunkin’ Brands Group, Inc. (NASDAQ: DNKN), Dow Chemical Company (NYSE: DOW), Eli Lilly Company (NYSE: LLY), Southwest Airlines Company (NYSE: LUV), 3M Company (NYSE: MMM), Microsoft Corporation (NASDAQ: MSFT), Unilever NV (NYSE: UN), Xerox Corporation (NYSE: XRX)
- Economic Releases Expected: French manufacturing PMI, French services PMI, German manufacturing PMI, German services PMI, Spanish unemployment rate, eurozone services PMI, eurozone manufacturing PMI, British retail sales, U.S. manufacturing PMI, eurozone consumer confidence
- Earnings Expected From: Bristol-Myers Squibb Company (NYSE: BMY), Colgate-Palmolive Company (NYSE: CL), Cabot Oil & Gas Corporation (NYSE: COG), Ford Motor Company (NYSE: F), Ericsson (NASDAQ: ERIC), Moody’s Corporation (NYSE: MCO), Procter & Gamble Company (NYSE: PG), Shire plc (NASDAQ: SHPG)
- Economic Releases Expected: German consumer confidence, Italian retail sales, British GDP, U.S. new home sales
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