Next week eurozone finance ministers will hammer out the details of the eurozone’s proposed banking union in an attempt to solidify plans for the project before the end of the year.
Bridging the deep divide among the bloc’s members over how to set up a resolution mechanism for failing banks will be top priority.
Key Earnings Reports
Next week, investors will be waiting for several key earnings reports including Toll Brothers Inc. TOL, Adobe Systems Incorporated ADBE, AutoZone, Inc AZO, Costco Wholesale Corporation COST and H&R Block, Inc. HRB.
Toll Brothers Inc.
Toll Brothers is expected to report fourth quarter EPS of $0.41 on revenue of $981.62 million, compared to last year’s EPS of $2.35 on revenue of $632.83 million.
Merrill Lynch has a Buy rating on Toll Brothers with a $42.00 price objective at the beginning of November. The analysts at Merrill Lynch cited Toll Brother’s successful deal to acquire Shapell Homes in Southern California as part of the reason for their optimism.
“As announced by TOL late last night, the company was successful in its bid to acquire Shapell Homes, a high-end private California home developer controlling around 5,200 lots in coastal Northern and Southern California. The total cost of the transaction was around $1.6bn or roughly $307K per lot, not all too surprising given the location of the lots and the expensive entitlement process (97.5% of lots to be purchased are already entitled). Overall we view the transaction as positive as the acquisition affords TOL a platform for continued growth in California, a state experiencing strong housing growth, and where TOL has been land constrained. In the near-term, gross margins are likely to be a little below TOL’s given the step-up in land basis due to purchase accounting. Over time gross margins should approach TOL’s standalone gross margins as TOL potentially sells some lower priced lots as part of its targeted $500mn land divestiture (more below). That said, operating margins are likely to exceed TOL’s given operating efficiencies associated with Shapell’s master planned communities. As a result of the transaction, TOL’s debt/capital will increase to ~55% versus 45% in F3Q with the company intending to use cash on hand from Shapell (~$100mn), cash from operations (~$150mn), and targeted land sales (mostly in CA) of ~$500mn (~1,350 lots) over the next 12-18 months to delever. Based on incremental sales of 400 homes in F14, assuming an 18% gross margin, additional headcount from Shapell and adjusting for incremental interest expense and shares, our initial estimate of F14 EPS accretion is around $0.15-0.25 pre-transaction fees (around $0.05-0.15 post-transaction fees).”
International Strategy & Investment Group had a similar outlook on Toll Brothers and has a Buy rating with a $52.00 price target on December 1st. ISI noted that it expects Toll Brothers to provide optimistic commentary regarding ongoing trends within the company. ISM revised its fourth quarter EPS estimates to reflect Toll Brothers’ pre-released revenues and orders.
“With the pre-announcement, we have moved our F4Q 2013 EPS estimate and our 2014 estimate. We have moved our F4Q estimate to $0.47, up from $0.40. Consensus is $0.42, but contains a mix of estimates before and after the pre-announcement. The higher earnings is primarily from higher Closings numbers, which also helps the SG&A leverage. Our 2014 estimate is $1.72, up from $1.65. That obviously will be revised as we get better acquisition visibility from management.”
Following the acquisition announcement, Goldman Sachs was more conservative and has a Neutral rating on Toll Brothers. Goldman Sachs noted that although the deal was likely solid, more details were necessary.
“The deal was not entirely a surprise since it was reported in the press several months ago that Toll was one of the leading bidders. Since the recovery began, California has been one of the most difficult markets in which to buy land. With this deal Toll, which is heavily weighted to the east coast, should see a step function move higher in West coast sales. We would note Shappell, which builds homes at an average price of $791K year-to-date, fits well with Toll’s luxury focus. On the company’s call today we will look for details around expected margins on the land and returns. While the proposed acquisition seems to have a strategic fit, given the intense competition to buy land in California, we want to better understand the economics.”
Sterne Agee has an Underperform rating on Toll Brothers with a $25.00 price target on November 7th, noting that although the Shapell acquisition added value, the near-term impact on EPS would likely be small.
“We are raising our FY13E EPS to $0.89 from $0.83 based on the F4Q13 preannouncement and raising FY15E EPS to $2.45 from $2.42 to reflect today's stock offering and the Shapell transaction. We are trimming FY14E EPS to reflect transaction costs and a negative gross margin influence from the acquired Shapell neighborhoods. Reiterate our Underperform rating and $25 PT.”
Adobe Systems Incorporated
Adobe is expected to report third quarter EPS of $0.32 on revenue of $1.03 billion, compared to last year’s EPS of $0.61 on revenue of $1.15 billion.
Goldman Sachs has a Neutral rating on Adobe with a $57.00 price target on December 2nd, noting that the company’s Creative Cloud was likely to pay a large role in Adobe’s outlook.
“Investors will likely once again focus on Creative Cloud adoption. We are forecasting 344k net new subscribers in F4Q13, up from 331k last quarter, at an ARPU of $36 per month, down from $37 last quarter. Thus, we are forecasting subscription revenue of $129mn, up from $95mn in F3Q13. For F1Q14, we expect the company to guide revenue to bracket consensus of $1.019bn (GSe $1.029bn), or a range of $1.00bn-1.05bn. Our expected guidance range assumes normal seasonality of up 2% qoq excluding product cycle launches plus a roughly $30mn sequential headwind from the shift to subscription, and November quarter results around the midpoint of its forecasted range.”
AutoZone, Inc
Autozone is expected to report third quarter EPS of $6.29 on revenue of $2.11 billion, compared to last year’s EPS of $5.41 on revenue of $1. 99 billion.
Goldman Sachs reduced its rating on AutoZone on November 26 from Buy to Neutral and raised its 12 month price target to $500.00, noting that the stock’s recent rise was cause for caution.
“We remove AZO from the Buy List, and rate the shares Neutral. The stock has approached our prior 12-month $470 target, rising with a strong market despite sluggish recent fundamentals. We are guarded on the aftermarket sector given fading demand drivers, namely in the DIY sub-segment, where AZO sharply over-indexes vs. peers. In our view, the company continues to execute well, but lofty returns appear to serve as impediment to a full-on commitment to growing commercial. Also, ROC looks poised to fall from powerful peak levels.”
JP Morgan has an Overweight rating on AutoZone with a $515.00 price target on December 4th and noted that the future was looking bright for the company.
“While we have been disappointed with AZO’s results, we believe the business should see improved trends in subsequent quarters given expectations for a cold and snowy winter (the first in three years, particularly in the Northeast) and the lapping of the payroll tax increase on Jan 1.”
International Strategy & Investment Group LLC was more aggressive and a Strong Buy rating on AutoZone with a price target of $461.00. ISI cited a particularly positive meeting with CEO Bill Rhodes as part of the reason for the optimism.
“Our AZO HQ visit with CEO Bill Rhodes on 11/7 confirmed consistency and execution are key levers to drive shareholder value. Strategic focus remains steady with augmented inventory/ potential AAP-GPI disruption to boost comps. AZO management remains committed to DIY, with profitable commercial growth, and steady shareholder returns key ingredients to long term value creation. Opportunity remains for share grab with inevitable AAP-GPI merger disruption. Longer term initiatives to close a 40-50% DIFM productivity gap vs. peers are critical. We believe enhanced inventory availability initiatives (rolling out chain-wide over 3-4 quarters) will be a focus, along with hub expansion strategy.”
Costco Wholesale Corporation
Costco is expected to report third quarter EPS of $1.04 on revenue of $25.47 billion, compared to last year’s EPS of $0.95 on revenue of $23.72 billion.
JP Morgan has an Overweight rating on Costco with a price target of $128.00 on the 5th of December. The analysts at JP Morgan noted that although deep discounts in November may have cut into the company’s profits, better trends are expected in the future.
“The two and three year trend in most metrics, including core comps and traffic, softened as Costco may have been impacted by November’s highly promotional environment where the consumer was attracted to deep discounts at other retailers. Indeed, at the category level, the sequential deceleration in traffic (+4.25% vs. +6.0% in October) was seen mostly in discretionary categories with Softlines slowing to MTHSD from LDD and hardlines turning to negative MSD from flat (and seasonal was down).Electronics remained negative for the fifth straight month as the weak backdrop was compounded by competitors’ aggressive price cuts for the holidays. Once the deep discounts pass and COST gets through tough compares in December in these categories, we expect a better trend to emerge. Today’s release also supports our view that sales growth has been muted so far this holiday season.Finally, gas prices and FX were a larger drag on total comps (-200 vs., -120e) and this will pressure sales growth (and leverage) should prices remain at these levels.”
On December 6th, Goldman Sachs was more conservative with a Neutral rating and a $126.00 price target. Goldman Sachs also noted how Black Friday sales likely impacted the company.
“COST’s November sales tracked light of our expectations, as aggressive promotional activity by competitors around Black Friday diverted consumer focus and traffic. This effect was most pronounced in hardlines categories – particularly in consumer electronics, toys, and seasonal items – that were emphasized in holiday promotions at key competitors. Given COST’s everyday low price model, we are not particularly concerned by its November results and consider this slowing as a one-off, as opposed to a shift in underlying trends.”
Jefferies also noted Costco’s struggling sales due to Black Friday discounts and Thanksgiving Day promotions and has a Hold rating with a $103.00 price target on December 5th.
“The company indicated to us that competitors opening early on Thanksgiving and promotions running early in the week likely had a negative impact on business. This may be construed as a temporary impact, but after several months of softer electronic sales, we think that area of the business could be seeing some share shift to competitors that appear to be faring better.”
Deutsche Bank was more aggressive on Costco with a Buy rating with a $132.00 price target on December 5th. Deutsche Bank noted that the company has been experiencing solid traffic at its stores.
“Impressively, traffic was up a little over 4.25%, slightly ahead of our +4.0% forecast, which while a deceleration from the standout performance in October (+6%), is still relatively in line with the T6M avg. of +4.8%. On ticket, it was down a little more than 2.0% as a result of the FX drag and gasoline deflation.”
H&R Block, Inc.
H&R Block is expected to report a third quarter loss of $0.37 per share on revenue of $137.85 million, compared to last year’s loss of $0.37 on revenue of $137.26 million.
Barrington Research has an Outperform rating on H&R Block as of December 6th, noting that Obamacare provides a new opportunity for tax preparation next year.
“The tax preparation industry will be among the most important cogs in the ObamaCare machine and the potential for revenue growth by H&RBlock and other tax prep firms is tremendous. On September 4, H&R Block announced a deal with online insurance company GoHealth to provide HRB customers with the option of buying health insurance over the Internet. HRB also has a pilot program in 30 offices in Phoenix where it has licensed insurance professionals in each office available to discuss what is available on Arizona’s Marketplace. While the ACA impact will not be material until fiscal 2015 at the soonest, we view the opportunity as potential for upside, as it is not currently factored into our estimates.”
Morgan Stanley has an Overweight rating on on H&R Block as of October 23rd, citing the filing delay for the 2014 tax season as a barrier to success.
“F14 delay negative but likely already anticipated by tax companies. The filing delay for the 2014 tax season will make lives more difficult for the tax companies as they again risk the loss of customers who can’t file early in the year and “forget” to file later. This year we had a similar delay and IRS data through May 11 shows total returns filed are still down 80bps y/y. While 2013 had the added negative impact of changes to Earned Income Tax Credit (EITC) forms, HRB and INTU (covered by MS analyst Jennifer Swanson Lowe) have already issued conservative guidance of only ~1% market growth in 2014, at the low-end of historical 1-2% growth.”
As of October 25th, Oppenheimer has an Outperform rating on H&R Block with a $32.00 price target off the back of a meeting with the company’s CFO Gregory Macfarlane.
“We recently conducted meetings with CFO Gregory Macfarlane. HRB appears well positioned to benefit over coming years as the Affordable Care Act (ACA) implementation is closely linked to the tax filing process. An additional catalyst exists as investors anticipate announcement in coming quarters of a transaction that would alleviate HRB of its (regulation-laden) bank charter/allow for continuation of HRB's financial offerings (e.g. debit cards) via partnership/free-up capital likely to be returned to investors. HRB's stock has appropriately re-rated higher, though we see potential for incremental upside. Tempering FY15E EPS to $2.06 (+25% y/y) from $2.10 on increased bank transaction timing uncertainty, we're introducing FY16E EPS of $2.32 (+13% y/y)/reiterating our Outperform rating/increasing our PT from $30 to $32.”
Economic Releases
Europe’s industrial production figures will be closely watched next week as investors look for clues about where the bloc’s economy is heading in the final quarter of the year. Some see the data showing a modest improvement in November, which would indicate soft growth in the fourth quarter. However, individual members’ data could raise concerns about the growing gap between eurozone nations as countries like France are expected to put out poor figures.
Daily Schedule
Monday
- Earnings Releases Expected: Vail Resorts, Inc. MTN, ABM Industries Incorporated ABM
- Economic Releases Expected: German trade balance, Australian GDP, Eurozone investor confidence,
German industrial production,
Tuesday
- Earnings Expected From: Toll Brothers Inc. TOL, AutoZone, Inc. AZO, H&R Block, Inc. HRB
- Economic Releases Expected: French industrial production, Italian industrial production, British industrial production, British trade balance, British manufacturing production, US Federal Budget Balance
Wednesday
- Earnings Expected From: Costco Wholesale Corporation COST, Joy Global Inc. JOY, Vera Bradley, Inc. VRA
- Economic Releases Expected: German CPI, French current account, New Zealand interest rate decision, Australian unemployment rate
Thursday
- Earnings Expected From: CIENA Corporation CIEN, lululemon athletic inc. LULU, Adobe Systems Incorporated ADBE
- Economic Releases Expected: French CPI, eurozone industrial production, Irish CPI, Brazilian retail sales, US retail sales, US business inventory data
Friday
- Earnings Expected From: No notable earnings releases expected
- Economic Releases Expected: eurozone employment change, US PPI, Spanish CPI
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