Next week the Federal Reserve is set to meet to decide how to move forward with monetary policy and provide updated forecasts for the nation’s inflation and economic growth. While most aren’t expecting the bank to make any significant policy changes, the focus will be on the bank’s forward guidance for any clues about when interest rates will rise. Most are betting that the Fed will increase interest rates early in 2015 as long as the U.S. economy continues to thrive despite the global slowdown.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including FedEx Corporation (NYSE: FDX), Oracle Corporation (NYSE: ORCL), Accenture plc (NYSE: ACN), Rite Aid Corporation (NYSE: RAD) and BlackBerry Ltd (NASDAQ: BBRY).
FedEx Corporation
FedEx is expected to report second quarter EPS of $2.19 on revenue of $11.98 billion, compared to last year’s EPS of $1.57 on revenue of $11.40 billion.
On September 29, Credit Suisse gave FedEx a Neutral rating with a $165.00 price target, saying that the company’s management may be too conservative.
“FDX reiterated comments from its recent fiscal 1Q15 conference call that it is on track to meet its profit improvement plan goals, highlighting solid execution of its improved revenue quality and cost control strategy. However, we think that FDX could be erring on the side of conservatism. The company had a strong showing in 1Q15, providing a favorable outlook on the pricing environment for both U.S. Domestic package and Freight, and a slightly better outlook for U.S. IP growth. Despite this, the FY15 EPS guidance range of $8.50-$9.00 was unchanged. For reference, our '15 forecast is $8.96, and the 2015 consensus EPS is currently $8.98. While mgmt did not offer any further clarification as to why it did not raise FY15 guidance, our view is that the company is likely being prudent given that it is the first quarter of the fiscal year (leaving plenty of time for things outside of its control to work against its favor).”
On December 11, S&P Capital IQ gave FedEx a Buy rating with a price target of $20.00, citing a strong holiday season for its optimism.
“Ahead of next weeks fiscal Q2 EPS release (12/17), we raise our FY 15 (May) and FY 16 EPS estimates to $9.15 and $11.04, from $9.00 and $11.00, respectively. Pushing out our valuation to base it on our FY 16 estimate, we raise our 12-month target price by $20, to $240, 21.7X our FY 16 estimate, towards the higher end of the company's five year historic range and in-line with key peer, United Parcel Services (UPS 111 ****). We expect strong holiday e-commerce to fuel strong volume and margin gains, and expect FDX to get a near term tailwind from lower oil prices.”
Oracle Corporation
Oracle is expected to report second quarter EPS of $0.68 on revenue of $9.52 billion, compared to last year’s EPS of $0.69 on revenue of $9.28 billion.
On September 19, Credit Suisse gave Oracle an Outperform rating with a $45.00 price target, noting the company’s recent management shift.
“Oracle reported FQ1 revenue of $8.599 billion and EPS of $0.62 versus consensus of $8.775 billion and $0.64. CC software and cloud revenue growth equaled 6% versus guidance of 5-7%, but hardware revenue declined 8% at CC versus guidance of (2)-2%. Deferred revenue of $8.939 million exceeded both consensus of $8.670 billion and our estimate of $8.864 billion. Oracle also announced a significant management shift, as Larry Ellison will be stepping down as CEO to become CTO and Executive Chairman of Oracle's board, and Safra Catz and Mark Hurd will now be CEOs. Although titles have changed, the underlying day-to-day duties of these three have not. Estimates. In addition to this quarter's shortfall, Oracle provided FQ2 guidance below consensus. For fiscal 2015, we are adjusting our revenue outlook from $40.184 billion to $39.980 billion and our EPS estimate from $3.17 to $3.01.”
On December 6, S&P Capital IQ gave Oracle a Hold rating with a $44.00 price target, saying that the company’s stock has been fully valued.
“We downgraded our opinion on the shares in March 2014, reflecting our concerns about revenue growth and what we saw as a largely full valuation. ORCL has been acquiring SaaS companies over the past few years. In January 2012 it purchased RightNow for around $1.5 billion. In April 2012, it acquired Taleo in a deal valued at $1.9 billion. In February 2013, it purchased Eloqua for some $935 million. In February 2014, it bought Responsys for some $1.6 billion.”
Accenture plc
Accenture is expected to report first quarter EPS of $1.20 on revenue of $7.72 billion, compared to last year’s EPS of $1.15 on revenue of $7.36 billion.
On October 7, Credit Suisse gave Accenture an Outperform rating with a $89.00 price target, saying that management is confident about the company’s business model heading into FY15.
“At an analyst day today, management expressed confidence in carrying strong momentum into FY15 and in sustaining the medium term track record of above average revenue growth, margin expansion and cash flow. The underlying messages were evolutionary rather than revolutionary but it is clear the company is focusing on differentiation, especially in the SMAC stack (accounts for c17% of group revenues), to fuel sustainable growth. We continue to see Accenture as an innovation leader and stay at Outperform.”
On December 11, Morgan Stanley gave Accenture an Equal-Weight rating with an $80.00 price target, saying that management’s guidance may have been a bit conservative.
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“We expect Accenture to report revenues at the high end of its $7.55- $7.80 billion guidance, driven by a conservative 1Q guide of -1.3% q/q growth at the mid-point versus +5.1% q/q average growth for 1Q over the last three years. We forecast revenues of $7.74bn with EPS of $1.19 for the November Q versus consensus of $7.72bn and $1.20 respectively. We believe investor focus will be on consulting revenue growth (MSe of +4% y/y) and consulting booking growth on the print. Further, Accenture’s comments regarding discretionary spending will be important for the stock and the IT service group in general. As we had highlighted in our inaugural Global IT services note last week (Technology - Software & Services: Global IT Services - Key Picks & Trends), global demand appears steady, with our proprietary leading indicator model implying better growth over the next few quarters.”
On December 6, S&P Capital IQ gave Accenture a Sell rating with a $70.00 price target, saying that the company could face headwinds in its consulting business.
“We downgraded our opinion on the shares to Sell from Hold in April 2014, reflecting valuation. We have noted challenges related to demand, pricing, growth and execution, especially in the important consulting business. We believe clients, particularly those in developed markets, are looking for help in containing costs and improving their operations. We view ACN as well diversified across geographies as well, which we think constitutes a competitive advantage. However, we see the stock as overvalued at a recent 18X our calendar year 2014 EPS estimate.”
Rite Aid Corporation
Rite Aid is expected to report third quarter EPS of $0.05 on revenue of $6.63 billion, compared to last year’s EPS of $0.04 on revenue of $6.36 billion.
On December 4, Credit Suisse gave Rite Aid an Outperform rating with a $7.00 target price, saying that the company’s sales were impressive due to strength in its pharmacy business.
“Rite Aid provided another positive sales update, as the company beat November expectations on continued strength in the pharmacy. Total comp growth of 5.1% exceeded our estimate of 4.0% and consensus of 3.4%. The pharmacy comp beat for a third month in a row, as sales rose 7.1% vs. consensus of 4.6%. Script growth remained strong at 4.2%, helped by Medicaid expansion and flu shot activity. The front-end comp of 0.7% was a touch below expectations, but remains encouraging given competitive challenges and lackluster staples retail performance generally. We believe Wellness remodels are likely a modest help to the comp and could provide further support over time as a higher proportion of the store base is remodeled. We continue to rate RAD Outperform and expect much better performance from the company in fiscal 2016 as generics reaccelerate, ACA drives further gains, McKesson creates purchasing savings, and internal initiatives like remodels drive better traffic.”
On December 6, S&P Capital IQ gave Rite Aid a Hold rating with a $6.00 price target, saying that the company will likely reap the benefits of expansion within its loyalty card program.
“We expect benefits over the next 12 months from expansion of the company's loyalty card program, continued progress on Wellness store remodeling efforts, increased prescription file buys, and improved purchasing efficiencies. Despite limited flexibility due to a highly leveraged balance sheet, we expect progress on these actions to help strengthen its store base and better position the company to benefit from provisions of the new health care law that went into effect in January 2014.”
BlackBerry
Blackberry is expected to report a third quarter loss of $0.05 on revenue of $937.41 million, compared to last year’s loss of $0.67 on revenue of $1.19 billion.
On December 11, Credit Suisse gave BlackBerry an Underperform rating with a $6.00 price target, saying that the company’s hardware business is still facing headwinds, and the shift of focus to services will prove difficult.
“Focusing on services, visibility remains low. While the company is trying to facilitate a transition to BES 12 by offering various promotional packages of its MDM platform, we continue to see headaches for the services business, as we believe that 1) subscriber base will continue to erode, 2) ARPU will go down as carriers renegotiate, and 3) services will be difficult to ramp up as the monetization of EZ Pass remains difficult in a competitive MDM market environment. We see services revenue of $350.7mn (-17% qoq) in F3Q15. The hardware business turned a gross profit for the first time in five quarters, driven by supply chain efficiencies, improvement in distribution channels, and the strong focus on margin. However, despite the encouraging launch of its Passport phone, we believe sustainable sell through will prove challenging and margin pressures may still remain in the hyper competitive smartphone market. For F3Q15, we assume 2.1mn smartphones (flat qoq) ship in the November quarter and ASP’s of $249.”
On November 19, Morgan Stanley gave BlackBerry an Underweight rating with a $7.00 price target, saying that both the market and the company’s management have been too optimistic.
“We believe that the market has largely valued the company based on the assumption that BlackBerry will generate an incremental $250mm in software revenue and an incremental $100mm in messaging revenue during FY16, consistent with the targets set out by BBRY CEO John Chen (from roughly $0 today). We estimate this implies that BBRY will not only successfully retain roughly its entire existing enterprise subscriber base—plus more—it will also convince that subscriber base to increase ~3x how much it is paying BBRY today.”
On December 6, S&P Capital IQ gave BlackBerry a Hold rating with an $11.00 price target, expressing concern about the company’s subscriber losses.
“Our hold recommendation on the shares reflects our concern regarding subscriber losses and difficulty in rebuilding enterprise relationships. We believe the company is looking to turn itself around by transitioning away from a hardware company to an enterprise mobile device management play. We expect BBRY to focus on physical keyboards, security, and monetizing software. However, we believe the company still has a long way to go to rebuild its relationships with enterprises, particularly those that have already left the platform. We think outsourcing efforts, through an agreement with Foxconn to manufacture certain devices and manage the associated hardware inventory, has significantly reduced fixed costs.”
Economic Releases
Next week the Federal Reserve meeting will be the start of the economic calendar, but investors will also be looking to the Bank of England as it is set to publish the results of its banking stress tests. U.S. data will also be scrutinized as investors look for further proof that the Fed will raise interest rates in early 2015, with both housing starts and industrial production expected to have risen.
Daily Schedule
Monday
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Earnings Releases Expected: Verifone Systems, CarMax Inc.
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Economic Releases Expected: Chinese PPI, U.S. industrial production, U.S. manufacturing production, Chinese manufacturing PMI
Tuesday
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Earnings Expected: Darden Restaurants, CSP Inc.
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Economic Releases Expected: French manufacturing PMI, French services PMI, German manufacturing PMI, German services PMI, eurozone manufacturing PMI, eurozone services PMI, eurozone composite PMI, British PPI, Germany’s ZEW economic sentiment survey, U.S. housing starts, the Japanese trade balance
Wednesday
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Earnings Expected: Oracle, Joy Global Inc., Jabil Circuit, FedEx
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Economic Releases Expected: British unemployment rate, eurozone CPI, U.S. CPI, U.S. oil inventory data, Federal Reserve interest rate decision
Thursday
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Earnings Expected From: Sanderson Farms, Rite Aid, Pier 1 Imports, Accenture
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Economic Releases Expected: Chinese trade balance, Germany’s Ifo business climate index, British retail sales, U.S. services PMI
Friday
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Earnings Expected From: Paychex, CarMax, BlackBerry
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Economic Releases Expected: Germany’s consumer climate, German PPI, eurozone current account
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