Next week will be relatively slow with few economic releases due out and only a handful of stocks to post their quarterly earnings.
The Bank of England’s policy meeting will be in focus as BOE Governor Mark Carney hinted that the bank may start raising interest rates sooner than expected earlier in June.
Geopolitical tension will remain a factor for markets as the crisis in Iraq looks no closer to being solved and Ukraine and Russia continue to work towards a permanent ceasefire agreement. World powers will continue negotiations with Iran over the nation’s disputed nuclear program with the July 20 deadline quickly approaching.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including Wells Fargo & Company (NYSE: WFC), Alcoa (NYSE: AA), Family Dollar Stores (NYSE: FDO) and Infosys Limited (NASDAQ: INFY).
Wells Fargo & Company
Wells Fargo is expected to report second quarter EPS of $1.00 on revenue of $20.80 billion, compared to last year’s EPS of $0.98 on revenue of $21.38 billion.
On May 19, Nomura gave Wells Fargo a Buy rating with a $60.00 price target, noting that the bank’s risk management has kept it in positive standing with regulators.
“We expect WFC’s upcoming May 20 investor day to serve as a positive catalyst and would be accumulating shares into it based on our view that the company will take the upper limit of its payout ratio well above the high end of its current 50-65% target range. We expect the market to be positively surprised by the magnitude of the increase.”
On May 22, The Buckingham Research Group gave Wells Fargo a Neutral rating with a $50.00 price target, saying that the company’s investor day on May 20 provided good insight into the company’s future plans.
“After WFC’s analyst day, we see a greater commitment to net capital return and better than expected leverage to higher rates adding to LT value in WFC shares. 1) WFC hosted an investor day Tuesday, with management providing insight into key operating segments and detailing aspirational financial goals. 2) Overall, we were impressed with mgmt.’s equal focus on risk management and growth (and its ability to execute on both). There is no change to our thesis on the stock, and we remain cautious on the industry outlook this year for revenue. 3) WFC kept profitability targets unchanged with an ROA target of 1.3%-1.6%, an ROE target of 12%-15%, and an efficiency ratio range of 55%-59%. 4) WFC is targeting a net payout ratio of 55%-75%, up from prior target 50%-65%, with WFC expecting to exceed 55% this year, reflecting the firm’s capital ratios being at or above its targeted levels.”
On May 21, Morgan Stanley gave Wells Fargo an Equal-Weight rating with a $53.00 price target, noting that the company was likely to meet its goals for 2015 ROE and capital return.
“Post crisis mortgage underwriting stronger than we expected: Mortgage NCOs on post 2008 vintages are running at <0.05%. Loans originated post 2008 are of significantly higher quality (Avg FICO 769 vs. 678 pre 2009, avg LTV 62% vs. 84%, % 1st lien 94% vs. 73%). Out of 143k loans made, only 134 are 60+ days delinquent. WFC also revised total over the cycle NCO guidance from 100bps to 75-80bps. We took total NCOs down $280mn in 2015. Expect WFC opens the credit box a little, but credit likely surprises positively given consumer strength.”
Alcoa is expected to report second quarter EPS of $0.12 on revenue of $5.66 billion, compared to last year’s EPS of $0.07 on revenue of $5.85 billion.
On June 27, Sterne Agee gave Alcoa a Buy rating with an $18.00 price target. The analysts at Sterne Agee noted that the company has a huge opportunity for growth in the aerospace sector.
“Alcoa's stock has appreciated 40%+ ytd, which can in large part be attributed to aluminum commodity markets stabilizing and the generational change over to automotive aluminum sheet. However, we believe Alcoa's ~$5 billion aerospace exposure provides the next leg, with the Firth acquisition only accentuating this opportunity. Therefore, by incorporating Firth as well as an improving aerospace outlook we are raising our price target to $18 from $15, and reiterate a Buy rating. ”
Morgan Stanley gave Alcoa an Equal-Weight rating on June 23, saying that the company is likely to improve in the third quarter due to stronger pricing among metals.
“Maintaining 2Q at $0.13 after marking to market. We start from $0.09 in 1Q, adjust it lower by half a penny for higher share count, deduct $0.01 for FX, and another half a penny for upstream guidance. We then add $0.02 for higher aluminum pricing, $0.01 for higher premiums, $0.02 for higher downstream earnings, and $0.01 for productivity improvements. Special charges, related to closures in Australia, are expected to continue into 2Q. Around $0.14 possible in 3Q. Compared to 2Q, spot metal prices are indicating a QoQ ~$0.02 lift to earnings, offset by weaker alumina (~$0.01) and seasonally weaker downstream (~$0.01). But Ma’aden & Davenport ramp up could add another $0.01.”
Stifel gave Alcoa a Buy rating on June 26, noting that although the company’s acquisition of Firth Rixson was expensive, it would be worth it in the long run.
“This morning, Alcoa (AA, Buy, $14.87) announced it would purchase Firth Rixson, an aerospace engine component producer, from Oak Hill Capital Partners for $2.85 billion in cash ($2.35 billion) and stock ($500 million) and an additional $150 million in potential earn-outs. The acquisition price implies an EV/EBITDA multiple of 8.1x based on the targeted EBITDA of $350 in 2016. This compares to the current peer group average of 8.6x for 2014 (per our colleague Steve Levenson). While Alcoa did not provide 2015 EBITDA estimates, we believe next year's EBITDA will be considerably lower given the need to reach qualification at its Georgia Isothermal Press facility (which should take 12-18 months).”
Family Dollar Stores, Inc.
Family Dollar Stores is expected to report third quarter EPS of $0.89 on revenue of $2.62 billion, compared to last year’s EPS of $1.05 on revenue of $2.57 billion.
Merrill Lynch gave no rating to Family Dollar on June 9, following activist investor Carl Icahn’s move to take a 9.4 percent stake in the company.
“Following the disclosure after market on Friday that Icahn has taken a 9.4% stake, resulting in press speculation that he may push for a combination with DG, we have conducted a preliminary analysis of potential synergies and estimate that DG could pay up to $80/share for FDO in a cash and debt-finance acquisition, which would be 1) accretive in 2015 and 2) keep DG’s leverage to within 3.5x excluding merger synergies and 2.8x including synergies, preserving its investment grade rating. We note that DG has not commented on a potential transaction and we are not suggesting interest on their part.”
Deutsche Bank was also cautious following Icahn’s purchase and gave Family Dollar a Hold rating with a $57.00 price target on June 8.
“FDO will likely trade near the high-end of its 52 wk range as Carl Icahn now has a 9.4% beneficial stake (1M shares owned - balance through call options) with plans to enhance shareholder value via the "pursuit of operating initiatives or the exploration of strategic alternatives." With industry headwinds mounting, we believe sector consolidation makes sense, but mgnt. teams have so far resisted. FDO's underperformance to DG presents an attractive opportunity, but how to close that gap has proven elusive. Buying FDO, in our view, must be based on the level of confidence in Icahn being a change agent.”
On June 9, Jefferies upgraded its rating for Family Dollar to Buy from Hold with a $79.00 price target, citing the potential deal between Family Dollar and Dollar General as reason for its optimism.
“We are upgrading both DG and FDO based on the potential for a deal that results in a combination and large synergies are realized. A recent 13D revealed that Icahn Capital LP has accumulated a 9.4% stake in FDO. With multiple activists holding big positions, we could see FDO respond to shareholder pressure by changing management and board members or putting the company up for sale.”
Infosys is expected to report first quarter EPS of $0.76 on revenue of $2.13 billion, compared to last year’s EPS of $0.73 on revenue of $1.99 billion.
On April 25th, Jefferies gave Infosys a Buy rating, noting that the company will likely grow in the future, but that investors should beware that IT consulting sector is exposed to several risks.
“Infosys is at a stage where most financial metrics are at their worst. Growth has been volatile; margins have fallen 450bps (in the last 13 quarters) despite a currency tailwind. We believe that given the recent reset of expectations for next year, an improvement in either growth or margins would be perceived a positive. Turnaround hopes are hinged on Chairman Murthy. Infosys has guided to a 7-9% y/y $ rev growth for FY15 on the back of a soft 2HFY14. The implied CQGR of 2.1-2.9% is achievable. However after the recent set-back, stock price will gain momentum only after revenue growth accelerates. We believe that near term performance would be limited by the cautious commentary (on rev / margins / soft 1HFY15).”
Next week’s economic calendar will be relatively quiet with most data coming from Europe and Asia. Chinese data will be under the microscope as Beijing’s mini-stimulus plan appears to be kicking in. In Europe, investors will be looking at price pressure as the bank’s aggressive easing package in June slowly takes effect. Eurozone inflation remained dangerously low in June, something that could push the ECB into implementing a large scale quantitative easing plan if it continues.
- Earnings Releases Expected: Grupo Televisa S.A (NYSE: TV)
- Economic Releases Expected: Japanese current account, eurozone investor confidence, Spanish industrial production, German industrial production
- Earnings Expected: Bob Evans Farms, Inc. (NASDAQ: BOBE), Alcoa Inc. (NYSE: AA), Container Store Group (NYSE: TCS)
- Economic Releases Expected: Chinese CPI, Chinese PPI, US consumer credit, US redbook, French trade balance, British industrial production, British manufacturing production
- Earnings Expected: WD-40 Company (NASDAQ: WDFC), MSC Industrial Direct Company (NYSE: MSM), CHC Group (NYSE: HELI)
- Economic Releases Expected: Chinese trade balance, Australian unemployment rate
- Earnings Expected From: Family Dollar Stores, Inc. (NYSE: FDO), Progressive Corporation (NYSE: PGR), PriceSmart Inc. (NASDAQ: PSMT)
- Economic Releases Expected: Bank of England interest rate decision, British trade balance, Italian industrial production, French CPI
- Earnings Expected From: Wells Fargo & Company (NYSE: WFC), Infosys Limited (NASDAQ: INFY)
- Economic Releases Expected: German CPI, Spanish CPI, US Federal Budget Balance
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