Next week will be a short, but action packed week with earnings season underway and several central bankers set to speak. Many countries’ markets will be closed on Friday, April 18th for the Good Friday holiday, but in the four days prior the banking sector will steal the spotlight with Citigroup to kick off a host of big bank earnings releases on Monday.
Investors will also be focused on the Fed and the European Central bank as both Janet Yellen and Mario Draghi are expected to speak this week. Both banks have been sending mixed signals about their future plans, so their comments will be closely analyzed as investors try to shed light on the banks’ easing plans.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including Coca-Cola Company KO, General Electric Company GE, International Business Machines IBM, Johnson & Johnson JNJ and Google GOOG
Coca-Cola Company
Coca-Cola is expected to report first quarter EPS of $0.45 on revenue of $10.61 billion, compared to last year’s EPS of $0.46 on revenue of $11.04 billion.
S&P Capital IQ gave Coca-Cola a hold rating with a $39.00 price target on April 5th, noting the company’s potential for higher sales in 2014.
“We look for growth in volumes of 3% to 4% for the next couple of years, with carbonated volumes increasing at a low single digit rate and non-carbonated volumes rising at a high single digit rate. As a result, we see sales rising 2.6% to $48.090 billion in 2014, up from $46.854 billion in 2013.We see sales comparisons easing in 2014 as 2013 sales were pressured by negative foreign exchange and the deconsolidation of certain bottlers to reflect recently completed transactions.”
On April 8th, Morgan Stanley gave Coca-Cola an equal weight rating, citing the company’s uncompelling valuation and EPS risk.
“Sentiment on KO is very negative and expectations are low around the company’s ability to generate improved topline growth with higher marketing. However, we still struggle to get excited about the stock as we believe long-term trends will be limited by slower category growth, near-term consensus EPS estimates look high, and more attractive valuation with relative multiple compression still does not look compelling. Despite our concerns, we think much easier comparisons in 2Q-4Q could buoy the stock (after 1Q is digested) as even a short-term topline rebound would likely be well received.”
On March 31st, Merrill Lynch gave Coca-Cola a buy rating with a $45.00 price objective, noting some compensation changes outlined in a proxy statement released in mid-March.
“Ironically, the proxy statement addresses previous criticisms related to its prior compensation plans. The proposed 2014 plan includes several new features, including: 1) Setting specific annual growth targets that are in line with the company’s long-term growth goals (3%-4% volume, 6%-8% operating profit and 7%-9% EPS), 2) The addition of operating income growth as a metric (previously just volume and EPS), 3) Incorporating total shareholder return as a performance modifier and 4) Clearer communication of the targets and the formulas used to calculate compensation awards. The 2014 Plan will effectively consolidate several legacy plans, including those taken on when KO acquired the North American franchise from CCE.”
At the end of February, Credit Suisse gave Coca-Cola an outperform rating with a $46.00 price target. The analysts at Credit Suisse were positive about the company’s $1 billion cost savings program and said it could help fund several important projects within the company.
“While refranchising in the US will likely take time, we welcome the incremental investments behind growth initiatives. The $1bn savings program is in line with what we have argued for some time - although many investors question whether even this goes far enough. KO appear to have conducted extensive scenario analysis on how and where to reinvest savings to optimise returns, and hence appear confident that 2014 will see stronger top line growth in key markets.”
General Electric Company
General Electric is expected to report first quarter EPS of $0.32 on revenue of $34.55 billion, compared to last year’s EPS of $0.39 on revenue of $35.01 billion.
On April 10th, Morgan Stanley gave General Electric an equal weight rating with a $28.00 price target and pointed out that margins and capital allocation will be a focal point for investors.
“Margins will be a huge focus, given the negative reaction to the 10bps (4bps ex-M&A) miss to the 70bps segment margin expansion target last year and the debate about how the 4ppts G&A reduction target marries with potential mix offsets through 2016. We expect 20bps expansion to 13.1% this quarter, as productivity is offset by Wind mix headwinds and narrower price/cost benefits; note that we have heard some discussion for a weaker outcome than this. See pages 3-5 for our detailed estimates. Capital allocation and balance sheet efficiency will be another area of focus, given GE’s net cash position. However with the bulk of the cash overseas, a principal pension plan deficit of $12.3bn (most peers are now fully funded) on top of the $13-14bn of B/S debt and the GECC support agreement, we see less scope for a material levering event. Note that we model a $2.5bn increase in net debt this quarter on $1bn M&A and $2.2bn dividend.”
S&P Capital IQ gave General Electric a buy rating with a $30.00 price target on April 5th. The firm cited increasing sales through 2015 for its optimism.
“We see GE's sales up 3% in 2014 and 2015. In 2014, we see industrial growth accelerating to around 7% (6% organic) from 1% in 2013 led by growth in Power &Water (+9%), Oil & Gas (+11%) and Aviation (+10%).We expect slower growth in Energy Management (+4%), Healthcare (+2) and Home and Business Solutions (+3%) and a decline in Transportation sales (-2%) driven by weak mining demand. We see GE Capital (GECC) revenues down around 4% in 2014, as GE continues to dispose of finance assets. Backlog rose to $244 billion at year-end from $229 billion at the end of third quarter and $210 billion as of the end of 2012 driven by solid expansions across both equipment and service businesses.”
International Business Machines
IBM is expected to report first quarter EPS of $2.54 on revenue of $22.94 billion, compared to last year’s EPS of $3.00 on revenue of $23.41 billion.
S&P Capital IQ gave IBM a buy rating with a $196.00 price target on April 5th and pointed out that the company’s primary growth will come from its software and services sector.
“Revenue declined 4.6% in 2013, although we look for increases of 0.5% in 2014 and 1.5% in 2015. IBM is experiencing weakness in its Systems & Technology segment. There are multiple issues there, including a cyclical decline in the mainframe business and increasing competition and pricing pressures in other areas. We note that hardware sales in China remain poor, and we do not expect any improvement for a couple more quarters. Sales of software and services will be the primary growth drivers. In the former, sales of key branded middleware are improving. In the latter, we look for low single digit growth in Global Business Services. Unfavorable foreign exchange will likely be a notable headwind in 2014.”
Deutsche Bank gave IBM a hold rating with a $200.00 price target on April 10th, citing uncertainty about the company’s revenue growth.
“We view cost take outs and improving mix as a positive for margin expansion for IBM over the next few years. In addition, the company continues to reduce its share count through buybacks, benefitting EPS. Despite these positives, we view growth as challenged for IBM, given its size and limited exposure to growth segments. Given the lack of growth, we expect shares to be range bound and expect the stock to trade modestly below historical multiples. With shares trading near these levels, we rate IBM a Hold.”
On April 11th, Credit Suisse gave IBM an underperform rating with a $160.00 price target, saying that the company is plagued by deteriorating growth and continued restructuring.
“Significant PTI growth ex-restructuring required in 1Q. IBM plans to take ~$1bn of restructuring charges in 1Q14, which will depress current period earnings. Backing out the impact of the charges, adjusted PTI must grow 10.1% y/y, the fastest since 2Q11. The gain on the sale of the customer care business to Synnex provides a modest offset, but the underlying growth may prove challenging in what remains a difficult IT spending environment. Concerning services datapoints. Recent newsflow in the services market has been concerning, both for IBM as well as competitors in the space. Deal sizes continue to trend downward, as highlighted by the recent renewal of IBM's contract with Bharti Airtel in India. Reportedly, the renewed value of the contract has fallen to $100mn/yr over five years from $250mn-$300mn/yr over ten years previously. Additionally, weak results from Accenture and a downward revision in 2014 guidance from CACI further illustrate the challenges faced by the industry at large.”
Johnson & Johnson
Johnson & Johnson is expected to report first quarter EPS of $1.48 on revenue of $18.00 billion, compared to last year’s EPS of $1.44 on revenue of $17.50 billion.
S&P Capital IQ gave Johnson & Johnson a buy rating with a $106.00 price target on April 5th, citing high sales expectations, especially within the pharmaceutical space.
“We expect sales to advance about 4% in 2014, from 2013's $71.3 billion. In our opinion, the key growth engine should be pharmaceuticals, fueled by gains in newer drugs such as Xarelto blood thinning agent and Invokana for type 2 diabetes. We also see robust gains for JNJ's expanding oncology portfolio, which includes Zytiga for prostate cancer, Velcade for multiple myeloma, and Imbruvica for leukemia. Helped by expansion in emerging markets and new products, most medical device lines should show modest growth, in our view. Consumer sales should benefit from the ongoing return of suspended products to the market.”
Google is expected to report first quarter EPS of $0.23 on revenue of $526.41 million, compared to last year’s EPS of $0.23 on revenue of $503.85 million.
On April 3rd, Nomura gave Google a buy rating with a $700 price target, noting the company’s issuance of a Class C stock on April 2nd.
“On April 2, Google issued a non-voting Class C stock dividend, distributed on a 1:1 basis for each Class A and Class B share, which will begin trading today. Consequently, there will be twice as many shares outstanding, and as a result, our EPS estimates and target price have been halved. The rest of our estimates are unchanged. Buy maintained.FY14E EPS at $26.57; FY15E EPS at $32.47.”
Morgan Stanley gave Google an overweight rating with a $645 price target on April 10th. The firm noted that the company’s growth outside of the search business will help propel share prices.
“We see Google share price appreciation driven by consistent execution coupled with multiple expansion, as investors grow more confident with Google’s investments in non-search businesses. We believe that YouTube may be Google’s most underappreciated asset, and integration with TVs could give YouTube an advantage in offering traditional TV advertisers a high degree of ad targeting precision. Additionally, we are optimistic about Google’s ability to grow share in TV advertising, due to recent deals with comScore and Nielsen to improve video ad measurement, a current bottleneck for big brands looking to transition ad spend from offline to online.”
Merrill Lynch gave Google a buy rating on April 11th, citing the company’s stable user growth as a reason for their optimism.
“Google’s user traffic trended up m/m as total Google Sites users improved flat vs. down 1% last month, Homepage users improved to flat from down 3%, and Web Search users improved to up 1% from down 2%. Gmail traffic improved to up 12% from up 8%. Yahoo users were flat y/y compared to down 2% last month with Home page users down 20% vs. down 17% and Web Search users up 1% vs. up 2%. Given m/m changes in comScore’s algorithm it appears that Google’s search trends were relatively unchanged while Yahoo traffic seems to have slowed.”
On April 10th, S&P Capital IQ also gave Google a buy rating with a $650.00 price target. The firm said it sees a 17 percent increase in revenue in 2014 as well as an 18 percent rise in 2015.
“We believe revenues will rise 17% in 2014 and 18% in 2015. Our estimates do not reflect the pending sale of Motorola announced in January 2014. In April 2013, GOOGL sold Motorola's Home unit to Arris (ARRS 27, Strong Buy), in a transaction valued at $2.4 billion in cash and stock.We project growth in the Google segment of 19% in both 2014 and 2015, owing to growth in online advertising and increasing traction for GOOGL's display offerings.”
Economic Releases
Fed Chair Janet Yellen and ECB chief Mario Draghi will likely be the highlight of the economic calendar next week as investors try to work out the two banks’ future plans. Chinese data will also be on the radar as analysts are expecting that the nation will report a decline in first quarter growth due to the government’s efforts to control its record debt level.
Daily Schedule
Monday
- Earnings Releases Expected: Citigroup Inc. C, J.B. Hunt Transport Services, Inc. JBHT
- Economic Releases Expected: Eurozone industrial production, US retail sales, US business inventories
Tuesday
- Earnings Expected: Coca-Cola Company KO, Johnson & Johnson JNJ, Pep Boys-Manny, Moe & Jack PBY, Intel Corporation INTC
- Economic Releases Expected: British CPI, British PPI, German ZEW survey, US CPI, US redbook, New Zealand CPI, Chinese GDP, Chinese retail sales, Chinese industrial production
Wednesday
- Earnings Expected: PNC Financial Services Group PNC, Bank of America Corporation BAC, Goldman Sachs Group, Inc. GS, Google, Inc GOOG, International Business Machines IBM
- Economic Releases Expected: Japanese industrial production, Italian trade balance, British unemployment rate, Eurozone CPI, US housing starts, US industrial production, US crude inventory data
Thursday
- Earnings Expected From: United Health Group Incorporated UNH, Mattel, Inc. MAT, General Electric Company GE, Fifth Third Bancorp FITB, Philip Morris Inc PM, Pepsico, Inc. PEP, Goldman Sachs Group, Inc. GS, Chipotle Mexican Grill, Inc. CMG, American Express Company AXP
- Economic Releases Expected: German PPI, Canadian CPI, Chinese house price data
Friday
- Earnings Expected From: No notable releases expected
- Economic Releases Expected: Dutch consumer confidence, Italian industrial sales
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