Benzinga Weekly Preview: FOMC In Focus As Earnings Season Progresses

Laura Brodbeck
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The U.S. Federal Open Market Committee is set to have a two-day policy meeting next week against a backdrop of geopolitical tension and the U.S. earnings season.

The Fed meeting has investors speculating about whether the bank will provide any insight into its plans to raise interest rates, with most betting that the region’s recent string of positive data will prompt the bank to implement a rate hike sooner than expected.

Next week investors will be waiting for several key earnings reports including Pfizer, Inc. (NYSE: PFE), Procter & Gamble Company (NYSE: PG) and Exxon Mobil Corporation (NYSE: XOM)

Exxon Mobil

Exxon Mobil is expected to report second quarter EPS of $1.84 on revenue of $107.13 billion, compared to last year’s EPS of $1.55 on revenue of $106.47 billion.

On July 21, Merrill Lynch gave Exxon Mobil a Buy rating with a $114.00 price objective, saying that the company is expected to ramp up production in the coming months.

“We expect oil and gas production of ~4MMboepd, -3% YoY largely on the loss of contact volumes in the UAE, the partial sale of West Qurna offset by start-up of several projects including the early start of PnG LNG (6 months early)," the company said. "We anticipate a robust update on the production outlook with the continued ramp up of oil sands production at Kearl and, likely, progress post start-up of PnG LNG and the a solid outlook for 2H14 with several smaller developments due onstream (Lucius in the U.S. GoM, CLOV Angola).”

On July 17, Credit Suisse noted that Exxon Mobile will likely see rising margins on production.

“The market likely go overexcited by 1Q results, when XOM enjoyed a strong gas sale premium in its upstream margin the the U.S. and internationally," it said.

"That said, the trends toward rising margins at XOM are intact," it added. "XOM is reducing its exposure to lower margin U.S. gas and focusing on oil/liquids investments. The share of US and Canadian liquids production is set to rise from below 20 percent to over 30 percent.

"Margins on this production are typically higher than existing CF margins," it continued. "A 2-3 percent increase in production p.a. from the 2014 base plus some margin expansion, plus the completion of capital spending on mega projects, should drive free cash flow higher, to fund the dividend and continue buybacks. Strategically, with around 1.5 billion BOE of production to replace each year, XOM does not need to convince that its R&D investments in shale (1.5 million acres in the Permian) and in global exploration will pay off.

"Much of the earnings call focus will likely be on progress derisking global shale. We'd note that in 2H14 we'll hear some of the first news from the giant Kara Sea exploration opportunity in the Russian Arctic, also."

On June 19, S&P Capital gave Exxon Mobil a Hold rating with a $105.00 target price, noting that the company has pulled back its annual production targets.

“In March, XOM updated its production outlook over the medium term (through 2017). We note that annual production targets have been ratcheted back, such that by 2017, annual production is anticipated to hit 4.3 mboe/d, down 0.5 mboe/d from last year's forecast for 2017. We think XOM has pared back its assumptions for US natural gas fundamentals, resulting in less production to come from gas-directed activity. Longer-term, we still think U.S. natural gas has secular demand drivers, such as LNG exports and U.S. chemical industry expansion, but in the near-to-medium term we remain cautious.”

Pfizer

Pfizer is expected to report second quarter EPS of $0.57 on revenue of $12.50 billion, compared to last year’s EPS of $0.56 on revenue of $12.97 billion.

On April 29, Leerink gave Pfizer a Market Perform rating, noting the company’s interest in merging with AstraZeneca and the possible tax benefits.

“PFE's management call confirmed what we believe is the relatively straightforward rationale for their prior bid and continuing interest in a possible merger with AZN," the company said. "PFE mgmt commentary supports our view that three features make a PFE-AZN merger valuable to shareholders of PFE including: (1) tax freedom through a U.K. holding company-based 'inversion;' (2) cost-cutting, which we continue to believe could meet or exceed operating synergies of 30 percent of AZN's SG&A & R&D; and (3) pipeline acceleration, with AZN's top-tier respiratory and oncology pipeline assets able to bolster PFE's breakup strategy.”

On May 27, Goldman Sachs gave Pfizer a Buy rating with a $35.00 target price, saying the company has the potential to become more valuable if it downsizes.

“We remove the Not Rated designation on PFE shares. We are Buy rated with a 12-month price target of $35. Since the failed AZN proposal surfaced (4/20), PFE shares modestly underperformed (-2.5 percent vs. S&P 500 +1.9 and S&P Pharma +2.4 percent) in our view on concerns about the underlying business post 1Q revenue weakness and uncertainty over the AZN bid," the company said. "Some investors have questioned PFE’s motives, yet we think CEO Ian Read has been clear about his strategy: he will do what it takes to unlock value, be it a breakup, M&A or whatever drives the most value. Our long held view has been that PFE’s size is its enemy and that getting smaller could unlock substantial value.”

Following the rejection of Pfizer’s offer to buy AstraZeneca on April 29, SunTrust gave Pfizer a Reduce rating with a $30 price target.

“PFE will need to raise its offer from $76.62 ($97B) to $87.43 ($110B EV) to close the gap with AZN’s board since its rejected proposal 'very significantly undervalued AZN & its prospects.' Our NEWCO model suggests ’15E-18E accretion of 4-9 percent & ROIC of 7-8 percent, barely clearing its WACC. Anemic Eliquis/Xeljanz launches, Palbo competition and Celebrex generics in May imply PFE (standalone) is worth only $35/share. Hence, PFE’s $110 billion decision is based on financial engineering and AZN’s pipeline of immuno-oncology assets, which would push a break-up beyond 2017.”

Procter & Gamble Company

Procter & Gamble is expected to report second quarter EPS of $0.91 on revenue of $20.47 billion, compared to last year’s EPS of $0.79 on revenue of $20.66 billion.

On July 16, Merrill Lynch gave Procter & Gamble a Buy rating with an $88.00 price target, noting that Tide has been deeply discounted at most retailers.

"Following a 17 percent price cut at Target (NYSE: TGT) and Walmart (NYSE: WMT), Tide is now being advertised for a meaningfully steeper discount of 40 percent off at Dollar General (NYSE: DG) to $6 ($7.50 shelf price, plus a $1.50 coupon) from $10. This follows channel checks at Target and Walmart showing regular liquid Tide for $9.97/$9.99 vs. $11.97/11.99 in the last two weeks," the company said. "We would note DG SKUs are 69-75oz while TGT/WMT SKUs are 92-100 oz, making absolute dollar prices not comparable. That being said, this follows yesterday’s U.S. Nielsen data showing an 8 percent increase in the percent of Tide sales sold on promotion in the 4-week period ended July 5 vs. flat YoY for the last 12 weeks.”

On July 19, S&P Capital IQ gave Procter & Gamble a Hold rating with an $88.00 price target because of the company’s renewed focus on new products.

“We expect PG to benefit from an increased focus on new product introductions and growth in new markets and categories, which should reverse slight recent global market share losses," the company said. "We anticipate that EPS growth will accelerate in the second half of FY14 and in FY15 as manufacturing start-up costs diminish and productivity improvements become more impactful.”

On April 23, Credit Suisse gave Procter & Gamble a Neutral rating with an $85.00 price target, saying the company will likely face challenges in the coming months.

“P&G’s 3Q was much as expected with 3 percent LFL sales growth, all driven by volumes, with 1 percent price offset by -1 percent mix. Most of the reporting units performed in line with recent trends despite EM sales growth overall slowing to 5 percent, down from 7-8 percent in the past few quarters," the company said. "On the positive side, DM volumes were up 2 percent, partly offset by -1 percent price/mix. With one quarter remaining this fiscal year, we make no material changes to our FY14 estimates.”

Economic Releases

Next week’s economic calendar will be relatively busy with several countries set to report PMI figures. Taking top bill with be U.S. data, which is expected to show that the U.S. economy grew in the second quarter with nonfarm payrolls expected to show yet another improvement in the labor market.

Daily Schedule

Monday

  • Earnings Releases Expected: Cummins Inc. (NYSE: CMI), Jacobs Engineering Group Inc. (NYSE: JEC), Franklin Resources Inc. (NYSE: BEN), XL Group plc (NYSE: XL), Herbalife LTD (NYSE: HLF)

  • Economic Releases Expected:Italian business confidence, US services PMI, Japanese retail sales, Japanese unemployment rate

Tuesday

  • Earnings Expected: Express Scripts Holding Company (NASDAQ: ESRX), United Parcel Service, Inc. (NYSE: UPS), Pfizer Inc. (NYSE: PFE), Aetna Inc. (NYSE: AET), Merck & Company, Inc. (NYSE: MRK), Amgen Inc. (NASDAQ: AMGN)

  • Economic Releases Expected: Spanish retail sales, British consumer credit, the U.S. Redbook, Japanese industrial production

Wednesday

  • Earnings Expected: MetLife Inc. (NYSE: MET), Humana Inc. (NYSE: HUM), Kraft Foods (NASDAQ: KRFT)

  • Economic Releases Expected: British consumer confidence, U.S. oil inventory data, US GDP, German CPI, eurozone industrial sentiment, eurozone business climate, eurozone consumer confidence, Spanish GDP, French consumer confidence

Thursday

  • Earnings Expected From: Exxon Mobil Corporation (NYSE: XOM), McKesson Corporation (NYSE: MCK), ConocoPhillips (NYSE: COP), Anheuser-Busch Inbev SA (NYSE: BUD), DIRECTV (NASDAQ: DTV), AstraZeneca PLC (NYSE: AZN)

  • Economic Releases Expected: Japanese manufacturing PMI, eurozone CPI, Spanish current account, eurozone unemployment rate, Italian CPI, French PPI, German retail sales

Friday

  • Earnings Expected From: Chevron Corporation (NYSE: CVX), Procter & Gamble Company (NYSE: PG), Clorox Company (NYSE: CLX)

  • Economic Releases Expected: U.S. ISM Manufacturing PMI, U.S. nonfarm payrolls, U.S. unemployment rate, British manufacturing PMI, eurozone manufacturing PMI, German manufacturing PMI, French manufacturing PMI, Italian manufacturing PMI, Spanish manufacturing PMI

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