With Independence Day shutting US markets down for a long weekend, next week will be a slow week for earnings reports.
However, an influx of economic data will more than make up for it and give investors plenty to consider. US data is expected to show that the nation’s recovery is back on track with both jobs data and PMI data forecast to impress.
Fed Chair Janet Yellen is set to speak at the International Monetary Fund on Wednesday, a talk that will be closely watched as investors look for clues about the bank’s policy tightening timeline.
Key Earnings Reports
Next week, investors will be waiting for several key earnings reports including Paychex (NASDAQ: PAYX), Constellation Brands (NYSE: STZ) and Unifirst (NYSE: UNF)
Paychex Inc
Paychex is expected to report fourth quarter EPS of $0.40 on revenue of $617.35 million, compared to last year’s EPS of $0.38 on revenue of $585.30 million.
On March 28, Merrill Lynch maintained Paychex at a Neutral rating with a $47.00 price objective, noting that competition among payroll providers was high and may have an impact on the company’s growth.
“PAYX continues to face increased competition from SaaS-based payroll providers & Intuit, among others. Management noted that both its SurePayroll (SaaS offering) and full-service offerings with added online features are growing well. We expect Paychex will compete effectively but have concerns that growth in SaaS-based payroll offerings may limit pricing power for the full-service offering over time. Paychex should benefit from an improving cyclical market and greater reliance on payroll data due to healthcare reform. However, questions remain around the competitive environment. Valuation incorporates much of the improving cycle, with PAYX trading at 22x CY15E EPS, in line with its 22x 10 year median forward P/E. We maintain our $47 price objective, based on 24.5x CY15E EPS of $1.92.”
A day earlier, on March 27, Credit Suisse had a similar opinion on Paychex with a Neutral rating and a $41.00 price target. The analysts at Credit Suisse said the company’s shares are already fully valued and that there was little upside to be seen in the near future.
“Despite investments in the business via M&A, JVs, and revamping its omnichannel user experience, PAYX's profitability continues to increase. While operating margin (ex-float) guidance suggests a sequential and y-o-y contraction we view this as conservative given the ~130 bps of expansion through the first nine months. PAYX currently trades at ~24x our CY14 EPS, a considerable premium to the peer group average of 17x). With PAYX's relatively anemic growth prospects (high-single-digit EPS growth) we do not see any significant upside to the current share price.”
On June 27, Morgan Stanley maintained Paychex at an Underweight rating, noting that competition could stifle the company’s growth.
“Although PAYX has a strong recurring revenue business model, its exposure to the smaller businesses creates potential for pricing pressure and share loss to cheaper SaaS-based solutions. High total yield but increasing payout ratio indicates slowdown in growth. Growth opportunities in HR exist but we believe these are reflected in the multiple after recent runup in share price.”
S&P Capital IQ maintained Paychex at a Strong Sell rating with a $35.00 target price on June 21, saying that the stock is notably overvalued.
“We downgraded our opinion on the shares to Strong Sell from Hold in March 2014, based largely on valuation. We see lacking top-line growth, largely reflecting a tepid expansion of the U.S. economy and persistently low interest rates. While we have noted improving domestic employment data, we believe it is more than adequately reflected in the stock price. We see the stock as notably overvalued, notwithstanding a healthy balance sheet and considerable dividend.”
Constellation Brands
Constellation Brands is expected to report EPS of $0.92, compared to last year’s EPS of $0.38.
On June 23, Merrill Lynch maintained Constellation Brands at a Buy rating with a $95.00 price objective. The firm said it expects to see strong EPS growth over the next three years.
“We look for mgmt. to provide an update to the current state of the business. Key areas of focus will be 1) Progress on Crown integration and brewery expansion plans 2) Comments on US beer industry pricing, 3) Updated commentary on wine/spirits trends in the US market. Our $95 PO is based on 21.8x CY15 EPS of $4.37. This is a 15-20% premium to its international brewer peers, which is in our view is warranted by the higher than average EPS growth (led by imported beer) we expect over the next three years. Our trade checks and recent competitor comments and results indicate that US beverage alcohol market is healthy into the upcoming summer season and that STZ trends in beer and wine have broadly held. Our PO reflects this dynamic as well as the potential for STZ to grow faster than its food/beverage peers in CY14.”
On June 21, S&P Capital IQ maintained Constellation Brands at a Strong Buy rating with a $98.00 price target. The analysts at S&P cited the company’s 2012 agreement with Anheuser-Busch as reason for their optimism.
“We view the shares as very attractive, trading at a discount to peers. In June 2012, STZ signed an agreement with Anheuser-Busch InBev SA/ NV (A-B InBev) to buy the remaining 50% interest in Crown Imports LLC that it does not already own for $1.85 billion. To address antitrust concerns from the Department of Justice (DOJ), A-B InBev agreed to sell STZ the rights in perpetuity to Grupo Modelo brands distributed by Crown in the U.S. and a state-of-the-art Mexican brewery for an additional cost of $2.9 billion. The acquisition closed in June 2013.”
Unifirst Corporation
Unifirst is expected to report third quarter EPS of $1.42 on revenue of $349.24 million, compared to last year’s EPS of $1.43 on revenue of $355.76 million.
S&P Capital IQ maintained UniFirst at a sell rating with a $96.00 price target on June 21. The analysts at S&P said they expect to see the company’s growth start to fizzle out this year.
“We see a wide range of customizable product and service offerings and high levels of customer service as underlying strengths in UNF's business. However, after benefiting over the last few years from large account sales, significant growth in its flame resistant garment business that was driven by oil and natural gas exploration, and higher pricing and merchandise recovery charges, we expect the company's top-line and earnings growth to moderate in FY 14. Our outlook is also tempered by continuing high unemployment levels in the U.S. and Canada, as UNF's Core Laundry segment revenue is largely driven by the number of employees at its customers.”
Economic Releases
After US data disappointed this week, a spate of new releases from America will be highly anticipated next week. The unemployment rate is expected to have remained constant at 6.3 percent while US employers likely added nearly 200,000 workers in June. PMI reports are forecast to show expansion in both the services and manufacturing sectors within the US as well.
Also on the radar will be the European Central Bank’s policy meeting, which is set for Thursday. The bank isn’t expected to make any moves as they eased considerably at June’s meeting, but the press conference following the meeting will likely shed some light on the bank’s expectations for the bloc’s economy now that the new easing package is falling into place.
Daily Schedule:
Monday
Earnings Releases Expected: No notable releases expected
Economic Releases Expected: Chinese manufacturing PMI, Japanese Tankan survey, US pending home sales, German retail sales and Japanese housing starts
Tuesday
Earnings Expected:A. Schulman (NASDAQ: SHLM), Acuity Brands (NYSE: AYI), Franklin Covey (NYSE: FC) and Paychex (NASDAQ: PAYX)
Economic Releases Expected: US ISM manufacturing PMI, US redbook, British manufacturing PMI, German unemployment rate, French manufacturing PMI, Italian manufacturing PMI, Spanish manufacturing PMI and Reserve Bank of Australia interest rate decision
Economic Releases Expected: Chinese services PMI, US oil inventory data, eurozone PPI and British construction PMI
Thursday
Earnings Expected From: Markets Close At 1pm ET
Economic Releases Expected: US ISM non-manufacturing PMI, US unemployment rate, US trade balance, European Central Bank interest rate decision, Eurozone retail sales, British services PMI, French services PMI, German services PMI, Spanish services PMI and eurozone services PMI.
