In the coming week, the FOMC minutes will take center stage as
investors look for cues as to whether the Fed will taper asset
purchases in September. Also, key housing indicators and
housing-related stocks will be in focus.
In the coming week, the key earnings are from Hewlett-Packard
), Home Depot (NYSE:
) and Target (NYSE:
Hewlett-Packard is expected to report its third quarter results
on Wednesday. The company is expected to report EPS of $0.86 vs.
$1.00 a year ago on revenue of $27.25 billion vs. $29.67 billion a
Analysts at Morgan Stanley weighed in on the stock ahead of the
earnings report. The bank has an Overweight rating on the stock and
a $28 price target.
"HP is two-thirds of the way through a 29K workforce reduction
but front-end loaded investments in R&D and process
improvements mitigated savings in F1H13. With cost per employee at
the lowest level in five years, new product introductions, a
revamped channel program, and improving US enterprise IT demand
should begin to drive operating leverage in F2H13."
"The combination of printer supplies growth (plus some Yen
benefit), less bad PC trends, improving storage growth, better
software deal close rates, and services restructuring ahead of plan
with slower revenue run-off, all lead us to believe HP can do
better than the -7% Y/Y revenue, flat gross margin, and -1% Y/Y
OpEx assumptions for F2H13. Currency swings and aggressive server
pricing are headwinds that do not fully offset the long list of
tailwinds in our view."
"Sustainability of cash flow remains a key investor concern but
our in-depth analysis of peer cash conversion cycles and HP's
historical ranges suggest a low 20 day cash cycle is a reasonable
target. This, combined with fewer restructuring outlays, leads to
FCF growth in FY14, to $4+/share. With FCF above EPS for the first
time in four years, earnings quality is improving and we believe
the company will be rewarded for EPS beats with multiple expansion.
As this plays out, our bull case of 8x FY14 FCF of $4.20, or $34,
becomes increasingly likely."
Meanwhile, Goldman Sachs is taking the contrarian view on the
stock heading into earnings. The bank has a Sell rating on the
stock and a $17 price target.
"While HP's earnings and cash flow performance have handily
exceeded expectations over the past two quarters, we continue to
believe the company's historical underinvestment and continued
end-market challenges could force a reset in expectations, and we
remain below consensus as a result. For the July quarter, we model
EPS of $0.78 versus guidance of $0.84 to $0.87 and consensus of
$0.87. While continued savings from recent restructuring actions
and a lower reinvestment rate could allow the company to exceed our
forecast, we believe the secular trends in the business remain
"While the company's reinvestment rate has been lower than we
expected and resulted in higher net savings, it remains our view
that this strategy is unsustainable and that the company's room to
maneuver is growing more limited with each passing quarter. We do
believe that HP's turnaround efforts have been encouraging thus
far, but we also believe that expectations for the pace of the
recovery and steady-state earnings are too high."
J.P. Morgan, however, is neutral on the stock heading into
earnings. They raised their price target to $29 ahead of the
release from $24.50.
"For Jul-Q, our revised revenue and non-GAAP EPS estimates are
$27.09bn and $0.89, versus $27.02bn and $0.85 previously. We also
are lifting our non-GAAP EPS estimates for succeeding quarters. Our
research indicates that our revenue assumptions for services and
imaging segments may have been too cautious. Meanwhile, our
assumptions for PCs, servers, storage, and networking require
modest revisions lower. Net result is that our revenue estimates
change little, but the EPS increases are meaningful."
"Our new C2014 non-GAAP EPS estimate is $3.75. Considering our
Dec-14 price target of $29, the implied P/E multiple is 7.7x, which
trails the current peer group average of 10.6x. If HP can continue
improving EPS and develop a clear path to YoY revenue growth, the
stock's trading multiples stand to improve, in our view."
Home Depot is expected to report second quarter EPS of $1.20 vs.
$1.01 a year ago on revenue of $21.72 billion vs. $20.57 billion a
year ago. The report is expected before the market open on
Deutsche Bank maintained their $80 price target and Hold rating
heading into earnings. They are looking for Home Depot to raise
"Consensus estimate for HD are $3.63 for the year on 4.8% comps,
compared to current guidance of $3.52 and 4.0%. DB is at $3.58 and
4.8%. Guidance includes another $4.4b in buybacks on top of the
$2.1b bought in 1Q13. DB is estimating another $5.2b, including
$1.1b in 2Q13."
"Consistency is the key for HD, with investors increasingly
comfortable that HD is in control of their business regardless of
the macro or competitive environment. Therefore we think any color
around the potential impact of higher interest rates will be a key
focus for investors. We also expect an update on the potential to
add more debt this year and increase the buyback plan this year to
above the already announced $6.5b."
Target is expected to report second quarter results on Wednesday
before the bell. Analysts are looking for EPS of $0.99 vs. $1.06 a
year ago on revenue of $17.33 billion vs. $16.78 billion a year
J.P. Morgan recently downgraded the stock to Neutral and kept
their price target at $74. "We are downgrading TGT to Neutral as
the current stock price is just 3% below our December price target
of $74 and there are significant pressure points on earnings ahead.
First, the stock is trading at 16.5x our 2013 EPS estimate of $4.35
(vs. consensus of ~$4.32 and guidance of $4.25-$4.45 adjusted to
include Canadian dilution of $0.45) and there is a lot of
uncertainty regarding EPS growth into 2014."
"Second, we believe the pressures on the low-end consumer
persist with the 2% payroll tax increase nearly offsetting 2.9% YTD
wage growth and mitigating the lift from TGT's merchandising
efforts (e.g., REDcard and PFresh). Third, this backdrop affects
the near-term outlook and that plus six fewer selling days between
Thanksgiving and Christmas portend a promotional environment in 4Q
while TGT continues to play catch up in ecommerce. Moreover, the
comp lift from PFresh is estimated to fall from 130 bps last year
to 70 bps this year and 40 bps in 2014."
"Finally, as we look to 2014, the EPS contribution from Canada
remains uncertain while representing the single largest driver of
expected earnings growth YOY. We are modeling $0.08 of accretion
vs. an estimated $0.45 drag in 2013 (representing 43% of our
incremental earnings YOY). Over the last nine months, TGT is up 15%
vs. the S&P 500 increase of 20%."
Meanwhile, Piper Jaffray remains bullish heading into earnings.
They have an Overweight rating and a $80 price target on
"We remain positive on Target's ability to develop new and
innovative programs to gain or maintain market share in key
categories. The Beauty Concierge program appears to be a successful
example, having expanded to a total of 200 stores in four markets
this summer after debuting in 28 stores in one market last year. We
believe the expanded Beauty Concierge program can deliver a couple
cents of incremental EPS in 2014 and potentially up to $0.15 in
2015 if expanded to half the store base."
"Beyond the beauty category, Target continues to test new
concepts focused on individual categories, such as Ticket streaming
video, a baby department with dedicated and trained staff,
expansion of the organic food assortment and renovation of parts of
the electronics department for the launch of new video game
consoles - evidence, in our opinion, that Target is now evolving
with the consumer."
"Assuming base beauty sales in Beauty Concierge stores are
currently $1.5M/ store ($2.7B in total), annual cost of $50,000 per
concierge and a 40% gross margin, we estimate the potential EPS
contribution to 2014 EPS is in the neighborhood of $0.01-0.02
assuming a 15-25% realized lift in the beauty category."
"Because the markets Target is running the program in are some
of the company's better markets, we believe the first 200 stores
could be generating closer to $2.0M in annual sales, suggesting the
range could be slightly higher at $0.02-0.03. If the program was
expanded to half the U.S. store base during 2014, we estimate the
contribution to 2015 EPS would be $0.05-0.15 based on initial sales
of $1.5-2.0M per store."
Key Economics Releases
On the economics calendar next week, the FOMC minutes will be in
focus as investors fear tapering. Also, key housing indicators will
be in focus.
Earnings Expected From: Vanguard Health Systems (NYSE:
), Urban Outfitters (NASDAQ:
) and Bob Evans Farms (NASDAQ:
). Economic Releases Expected: the weekly 3- and 6-month bill
Earnings Expected From: Home Depot (NYSE:
), TJX (NYSE:
), Medtronic (NYSE:
), Intuit (NASDAQ:
) and Analog Devices (NASDAQ:
). Economic Releases Expected: German PPI, the Chicago Fed National
Activity Index, the weekly Redbook and a 4- and 52-week bill
Earnings Expected From: Hewlett-Packard (NYSE:
), Target (NYSE:
), Lowe's (NYSE:
), Staples (NASDAQ:
), Limited Brands (NYSE:
), J.M. Smucker (NYSE:
), American Eagle Outfitters (NYSE:
) and Toll Brothers (NYSE:
). Economic Releases Expected: MBA Purchase Applications, Existing
Home Sales and the FOMC Minutes.
Earnings Expected From: Cato (NYSE:
), Hormel Foods (NYSE:
), Dollar Tree (NASDAQ:
), Gamestop (NYSE:
), Abercrombie and Fitch (NYSE:
), Marvell Tech. (NASDAQ:
) and Autodesk (NASDAQ:
). Economic Releases Expected: the flash Chinese, Eurozone, French,
German, and British PMI's are due out (both services and
manufacturing for all but China), Canadian retail sales, initial
jobless claims, PMI flash manufacturing index, the FHFA Home Price
Index, leading indicators, the KC Fed Manufacturing Index, a speech
from Fed President Richard Fisher and China's FDI report.
Earnings Expected From: Ann Inc. (NYSE:
). Economic Releases Expected: German GDP report, New Home Sales
and a speech from Fed Vice-Chairman Janet Yellen.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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