Next week will be a busy week for earnings releases as well as economic data. Federal reserve meeting minutes as well as Bank of England meeting minutes will be heavily anticipated as investors look for clues about central banks’ movements in the future.
Investors will also be tuned in to the ongoing crisis in Ukraine as the nation’s May 25 presidential elections approach. Geopolitical tension elsewhere will also be on the radar, as defense ministers from the Association of Southeast Asian nations meet to discuss territorial disputes in the South China Sea.
Meanwhile US and EU officials will meet for their fifth round of talks to create the proposed Trans-Atlantic Trade and Investment Partnership. If it is carried out, the partnership would be the largest free-trade agreement in history. Next week, the negotiations will center around digital trade, energy and food safety issues.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including Hewlett-Packard HPQ, Home Depot HD, Lowe’s Companies LOW, Best Buy BBY and Staples SPLS.
Best Buy Co., Inc.
Best Buy is expected to report EPS of $0.20, compared to last year’s EPS of $0.32 on May 22.
On May 1, Merrill Lynch gave Best Buy a Buy rating with a $38.00 price objective, citing the company’s recent partnership deals with Samsung and Sony.
“Best Buy announced today two major partnerships with Samsung and Sony that will open 500 Samsung and 350 Sony 4K store-in-stores to BBY locations (Sony in May, Samsung date not announced). This follows store-in-store partnerships established last year with Microsoft and Samsung Mobile. While we are not surprised to see Samsung add another store-in-store given the success of the mobile format, this is the first partnership with Sony and in our opinion, it reinforces our belief that vendors view BBY as the destination for leading edge CE.”
Wedbush was more conservative on May 15, giving Best Buy an Underperform rating with an $18.00 price target. The analysts at Wedbush expect the company’s first quarter earnings and revenue to fall below expectations as the industry faced several headwinds.
“Q1 revenues and earnings are likely to be at or below consensus estimates. We expect revenue of $9.24 billion and EPS of $0.20, vs. consensus for revenue of $9.20 billion and EPS of $0.20. We expect comps to be at or below our estimate of down 1.3% (domestic down 1.1%, international down 2.8%). Several electronic retailers have cited several headwinds during the quarter driving negative comparable-store sales growth. Aaron Rents and hhgregg both pointed to extreme weather in January, February, and the beginning of March as negatively impacting traffic and operating performance during the quarter. Additionally, hhgregg comparable-store sales results for consumer electronics (down 18.9%) and computing and wireless (down 22.6%) categories were horrendous, suggesting to us that Best Buy suffered a similar experience.”
S&P Capital IQ gave Best Buy a Hold rating with a $29.00 price target on May 10, noting that cost-cutting would be a key factor in the company’s success.
“We see BBY taking action to improve service and reduce costs in an attempt to compete profitably with Internet retailers as the consumer electronics category migrates online. We expect mixed results in light of an intensely competitive environment, and we think necessary price investments and ongoing deflation in certain categories will limit the beneficial impact of effective cost management.”
Hewlett-Packard Company
Hewlett-Packard is expected to report EPS of $0.88 on revenue of $27.42 billion, compared to last year’s EPS of $0.87 on revenue of $27.58 billion.
On April 10, Deutsche Bank gave Hewlett-Packard a Buy rating with a $40.00 price target, noting that the company is well positioned to take advantage of Big Data, which many believe is the next big IT trend.
“HP is mid-way through a 5-year turnaround, and thus far has done a good job of stabilizing the business. Now the company needs to prove it can expand. While the company does have a higher mix of declining segments like PCs and printers, we believe HP’s IT hardware portfolio is well positioned for the next phase of IT, with strength in converged infrastructure and Big Data. Given its strong product portfolio, we believe shares should trade more in line with historical averages and in line with peer IBM who has similar growth rates. With shares trading below these levels, we rate HPQ a Buy.”
Also on April 10, Morgan Stanley gave Hewlett-Packard an Overweight rating with a $36.00 price target. The analysts at Morgan Stanley are expecting HP to expand its Enterprise Services Margin through FY16.
“(There are) three factors driving higher services margins. We don’t believe HP needs revenue growth to drive meaningful ES margin improvement. We see upside from: 1) planned restructuring savings post large account run-off, 2) potential incremental cost savings, and 3) renegotiation of underperforming deals. We see the potential for long-term margin upside to the low-teens in a scenario of modest revenue growth and post cost realignment and underperforming deal run-off.”
The analyst team at Wells Fargo gave Hewlett-Packard an Outperform rating on April 30, citing the company’s decision to launch a new line of servers designed for cloud services.
“HP and Foxconn announce a non equity joint venture (strategic commercial agreement) to create a new line of ''cloud optimized'' servers targeting cloud service providers. We believe this move makes sense as there has been a trend by large hyper scale companies to purchase low end, low cost, fast servers from ODM's directly. With this new product, HP will be able to address a specialized SKU in the server market that had been going directly to ODMs. While we do not expect this to be material near term (servers account for 11% of HP revenue), we believe there is opportunity for HPQ to take market share given the market for these hyper scale servers tend, in our opinion, to have low loyalty. We see this venture as a low cost way to competitively enter the market. We reiterate our Outperform rating.”
The Home Depot, Inc.
Home Depot is expected to report first quarter EPS of $1.01 on revenue of $20.15 billion, compared to last year’s EPS of $0.83 on revenue of $19.12 billion.
On May 12, Merrill Lynch gave Home Depot a Buy rating with a $96.00 price objective. The firm noted that Home Depot has the capacity to accommodate more buybacks or dividends over the next few years.
“We reiterate our Buy ratings on HD and LOW as we believe both companies will continue to drive solid comp and earnings growth as well return value through buybacks and dividend increases. Over the next three years we expect $23.4bn (22% of market cap) in buybacks/dividends from HD and $14.4bn from LOW (31% of market cap). While LOW is essentially at its leverage ceiling, we estimate HD could accommodate another $4-5bn in debt for additional buybacks before reaching its leverage target of 2.0x.”
Jefferies gave Home Depot a Buy rating on May 14, noting that poor weather kept a lid on home improvement companies in the first quarter.
“It’s no big secret that weather was a factor earlier this quarter with lower traffic trends affecting sales. However, as weather began to break in April, we believe trends improved, even after the Easter shift was considered. We think home improvement was one of the exceptions as HD and LOW faced tough comparisons in April. Even with strength in April considered, we are adjusting our estimates down for KSS, DLTR, HD and LOW.”
On April 21, BMO Capital Markets raised its estimate for Home Depot to an Outperform rating after meeting with the company’s chairman and CEO, Frank Blake.
“Positive(s): 1) Management remains comfortable with its 2014 sales and earnings plan and housing outlook despite a later-than-expected start to the spring selling season; 2) we believe sales trends are running at or above plan in non-weather affected areas; 3) even in the face of a weak start to the L&G season, we believe comps are positive and any shortfall in 1Q14 could be recouped in a compressed 2Q14 selling season; 4) we sense overall cost trends are favorable to potentially better than plan giving us added confidence in our estimates; and 5) the meeting further affirmed a stronger business model when compared with prior cycles.”
Lowe’s Companies, Inc.
Lowe’s is expected to report first quarter EPS of $0.61 on revenue of $13.91 billion, compared to last year’s EPS of $0.49 on revenue of $13.09 billion.
On May 12, Merrill Lynch gave Lowe’s a Buy rating with a $59.00 price objective. The firm cited improvement throughout the home improvement sector as a reason for its optimism.
“We remain optimistic on the home improvement sector (as well as other big ticket names including WHR and TPX) despite temporary headwinds from weather and a slightly buoyant housing market. While a slowdown in indicators including lowering housing turnover and housing starts is not ideal, we do not see it as the most important driver of demand for HD and LOW. In our opinion, multi-year comp growth will be supported by meaningful pent up demand for remodeling and renovation after years of stagnation (particularly important given an aging housing stock) as well as a consumer that is shifting purchasing towards bigger ticket and home related items. If housing formation were to improve for younger and first time home buyers, this could also provide upside.”
On March 6, Wedbush downgraded its rating for Lowe’s from Outperform to Neutral and lowered its price target to $50.00. The revised, more pessimistic rating was based on the company’s evaluation of the housing market’s outlook.
“Housing slowdown to clip comp growth. Based on evidence over the past few months and our views on housing affordability, accessibility and normalized demand, we expect home price growth to slow markedly in 2014—to the lowsingle- digit range—and we expect housing turnover to decelerate to a similar level. We believe this may clip housing’s contribution to LOW’s comp in 2014 by 50-100 bps more than anticipated, with the impact largely in the back half of the year given the typical lag effect of housing market impacts to home improvement sales. See our industry report published today, Hope Springs Eternal or Housing May Not Blossom This Spring?, for more detailed analysis on housing. Whether the economy picks up steam to offset the impact of decelerating housing trends remains an outstanding question, as well.”
S&P Capital IQ gave Lowe’s a Hold rating with a $52.00 price target on May 10, also citing the firms opinion about the housing market outlook.
“With our view of LOW's strong balance sheet and impressive free cash flow generation, we think the shares are reasonably valued relative to expected near term growth. We think housing turnover has bottomed, but we do not anticipate a strong recovery over the next 12 months, particularly in single-family homes, as bank lending standards remain tight. In addition, with home refinancings and home equity loans likely to be somewhat sparse in the near term, we expect home remodeling activity, particularly on big projects, to be rather lackluster. Other macro headwinds, including a weak labor market, also challenge this industry, in our view.”
Staples, Inc.
Staples is expected to report first quarter EPS of $0.21 on revenue of $5.62 billion, compared to last year’s EPS of $0.26 on revenue of $5.81 billion.
On April 2, Merrill Lynch gave Staples a price objective of $10.00, noting that the company had a limited near term upside.
“We value Staples at a PO of $10, representing a 9x the midpoint of our 2014-15 EPS estimates. This represents a discount to its five-year median of 15x and, in our opinion, reflects continuing macro challenges and industry headwinds. Barring an unlikely improvement in the macro, we think near-term upside is limited as we expect earnings and multiples will be under pressure. Upside risks are higher levels of employment, further synergies resulting from Corporate Express, and faster-than-expected growth in high-margin services. Downside risks are budget cuts, continued high unemployment, further deterioration in the small-to-medium customer base, worse-than-expected macro or currency weakness in Europe and slower-than-expected take-up of services.”
On May 10, S&P Capital IQ gave Staples a Hold rating with a $12.00 price target, saying the company has potential to improve its sales and profitability over the next few years.
“Despite near-term challenges, we think the reinvestment of cost savings, the downsizing of its retail footprint, and product offering expansion will drive improved sales and profitability over the next few years.We also favor SPLS's management, what we view as its strong balance sheet, and significant cash generation. We think potential industry supply reductions following the merger of two competitors could improve the overall economics of the office supply retail industry, benefiting SPLS.”
Economic Releases
Next week will be a busy week for economic releases as several nations are set to report services and manufacturing PMI data. US home sales data will also be closely watched as the Fed has warned that the US housing sector remains a concern for the nation’s recovery. Meanwhile, eurozone data including PMI, retail sales and consumer confidence data will all play into predictions about the ECB’s next policy move in June.
Daily Schedule
Monday
- Earnings Releases Expected: Urban Outfitters, Inc. URBN, Valspar Corporation VAL, Campbell Soup Company CPB
- Economic Releases Expected: Hong Kong unemployment rate, South Korean PPI, Singaporean GDP, Russian industrial production
Tuesday
- Earnings Expected: Home Depot HD, Staples, Inc. SPLS, Medtronic, Inc. MDT, Intuit Inc, INTU, Salesforce.com Inc CRM
- Economic Releases Expected: German PPI, Italian industrial sales, British PPI, British CPI, US redbook, Japanese trade balance
Wednesday
- Earnings Expected: Tiffany & Co. TIF, Target Corporation TGT, Lowe’s Companies, Inc. LOW, Hormel Foods Corporation HRL
- Economic Releases Expected: Eurozone current account, British retail sales, eurozone consumer confidence, US crude oil inventory data, Russian unemployment, Chinese HSBC manufacturing PMI
Thursday
- Earnings Expected From: Gamestop Corporation GME, Hewlett-Packard Company HPQ, Best Buy Co., Inc. BBY, Ross Stores, Inc. ROST
- Economic Releases Expected: French services and manufacturing PMI, German services and manufacturing PMI, eurozone services and manufacturing PMI, British GDP, US manufacturing PMI, US existing home sales
Friday
- Earnings Expected From: Footlocker Inc. FL, Hibbett Sports, Inc. HIBB
- Economic Releases Expected: German GDP, Italian retail sales, German Ifo business climate index, US new home sales.
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