Starbucks: When ‘Extraordinary’ Performance Isn’t Good Enough

Shares of Starbucks (SBUX) are falling in after-hours trading after the coffee purveyor reported earnings that met analyst forecasts and offered guidance that failed to live up to the market’s expectations.

Starbucks reported an adjusted profit of 74 cents a share, meeting analyst forecasts, on sales of $4.2 billion, ever so slightly below the Street consensus for $4.23 billion. Starbucks said it would earn between $3.08 and $3.13 a share in 2015, below forecasts for $3.16.

In a press release, Starbucks CEO Howard Schultz said “Starbucks performance in fiscal 2014 was extraordinary by any metric or comparison.”

Except on the one that matters to the market’s short-term investors. Shares of Starbucks have dropped 4.1% to $74.22 at 4.08 p.m. in after-hours trading.

Goldman Sachs Raises Home Depot Target But Lowe’s Gets the Upgrade

Goldman Sachs’ Matthew Fassler and team are feeling more bullish on consumer willingness to spend on their homes, leading them to raise their price target on Neutral-weighted Home Depot (HD) and lift Lowe’s (LOW) to Buy.

Fassler explains why he prefers Lowe’s to Home Depot:

The home improvement sector has appealing long-term investment characteristics in our view, including limited capacity growth, limited risk of encroachment from Amazon.com (AMZN), and disciplined capital allocation. If anything, Sears (SHLD), with significant share in appliances and hardware, has started to shrink its footprint, albeit slowly.

While both Lowe’s and Home Depot offer investment appeal, we like LOW’s margin opportunity relative to large-cap hardlines peers. Looking at firms in our coverage we consider to operate outside of Amazon’s direct line-of-fire, with the ability to invest in omnichannel at their own pace, LOW’s 2014E EBIT margin is one of the furthest below its own peak, and its own mean. With this in mind, we are encouraged that incremental margins are improving as the firm is modulating investments, and still harvesting its “value improvement initiative.” Additional initiatives, including improving merchandising for pro customers, are still unproven, but offer additional upside if they achieve traction.

Fassler raised Home Depot’s price target to $103 from $100, and raised Lowe’s price target to $63 from $58.

Shares of Home Depot have gained 1.3% to $97.71 at 2:12 p.m. today, while Lowe’s has risen 1.2% to $56.48.

Dow Industrials Jump 200 Points Thanks to Visa’s Supercharged Gain

Stocks are reasonably strong today–except for the Dow Jones Industrial Average, which is very strong thanks to super-sized gain in Visa (V).

The Dow Jones Industrial Average has jumped 207.27 points, or 1.2%, to 17,181.58 at 1:43 p.m. today, while the S&P 500 has risen 0.7% to 1,996.12. The Nasdaq Composite has risen 0.4% to 4,568.13 and the small-company Russell 2000 has advanced 0.4% to 1,151.37.

The Dow’s big gain–it’s risen nearly twice as much as the S&P 500–can be chalked up to Visa’s 9.3% rise to $234.71 after the credit-card ghiant beat analyst earnings forecasts. Remember, the Dow is a price-weighted index, so Visa’s 200+ price-tag makes it the biggest stock in the Dow. All told, Visa’s added more than 120 points to the Dow Jones Industrial average.

In fact, it’s somewhat disappointing that the other indexes haven’t performed better. Jobless claims, for instance, remained near recent lows, while the U.S. economy grew at a 3.5% clip during the third quarter, showing that the second quarter’s big jump wasn’t a one-off.  Marketfield’s Michael Shaoul notes that government spending has stopped being a drag on the U.S. economy:

At 3.5% the estimate of Q3 GDP came in above expectations of 3.0% and growth was much more evenly distributed across various segments. One helpful factor has been the unwinding of fiscal constraints and it is notable that Defense spending increased 16% YoY as this category starts to recover from a number of years of cutbacks. Total Federal Spending grew by 4.6%, and thus was acretive to the overall calculation for the first time in several years. We have noted how the public sector has started to add to non-farm payroll gains in recent months after several years of labor cutbacks and it would seem that there is a broader positive influence on the US economy now emerging from the public sector.

Of course, the strong GDP reading only reinforces the Fed’s optimistic take on the U.S. economy yesterday, which accompanied the end of quantitative easing. Pavilion’s Pierre Lapointe and Alex Bellefleur note that that the market seems to be handling the end of quantitative easing much better this time than it has in the past:

As expected, the Fed put an end to its bond-buying program yesterday. In the previous episodes, the end of a QE program did not sit well with investors…[This] time around, market participants had some doubts about the viability of the economy before the end of the QE program. Over the past few weeks, the S&P 500 experienced a 7% pullback before paring most of the losses. The recent market rebound suggests that investors realize that the only reason the Fed is ending its bond-buying program is because the economy is in good enough shape. We often compare a QE program with putting a patient under an artificial respirator. The problem with the first two QE programs was that there was an end date attached to it. You cannot decide in advance that you will unplug the respirator at a fixed date.  QE3 was different in that it was unlimited. The only reason the Fed is pulling the plug on QE is because the economy can now breathe on its own.

But will that be enough to keep stocks heading higher?

Why U.S. Steel Could Gain 50%

U.S. Steel (X) has gained more than 50% during the past six months but Nomura’s Curt Woodworth and Alexander Burnes think it could gain another 50%. They explain why:

If we normalize for lumpy maintenance expense in 2H of 2014 and annualize back half performance, U.S. Steel is at an annual EBITDA run-rate of $2.0bn and EPS of $5.00 normalizing for a tax rate of 35% even though U.S. Steel’s recent tax rate has been well below this level. We believe that with additional cost reduction efforts in 2015 coupled with accretive capital deployment into EAF and/or DRI, U.S. Steel should be able to achieve mid-cycle EPS near $6.00 in 2015E. Our 2015E EPS estimate is $5.35, based on a 25% tax rate. We believe a fair mid-cycle multiples for U.S. Steel are 10x P/E and 6.0x EV/EBITDA, both of which would equate to a $60 share price. Including the benefits of deleveraging, we note that U.S. Steel would trade at only 4.5x our pension-adjusted 2016E EV/EBITDA at our $55 TP. U.S. Steel currently trades at a FCF yield of 13% in 2015E and 11% in 2016E, which we find compelling.

At yesterday’s close of $40.08, that leaves 50% of upside to $60 and a hefty 37% to Nomura’s price target of $55.

After gaining 5.1% yesterday following a surprisingly strong earnings report, U.S. Steel has dropped 1.1% to $39.62 at 11:09 a.m. today, while AK Steel (AKS) has dropped 1.7% to $7.28 and ArcelorMittal (MT) has fallen 1.8% to $12.73.

Why Weight Watchers’ Stock is Losing Weight

Weight Watchers’ (WTW) shares are shedding some weight of their own today despite solid earnings after the company raised concerns about spending during in 2015.

Weight Watchers reported a profit of 67 cents a share, beating forecasts for 48 cents, on sales of $345.2 million, ahead of consensus estimates for $337.52 million. Weight Watchers also boosted its full-year guidance to a range of $1.95 to $2.05, ahead of the Street’s $1.87 forecast.

So why is Weight Watchers down? Chalk it up to fears of increased spending as Weight Watchers tries to bring customers back. Credit Suisse analyst Glen Santangelo and team explain:

While that was all pretty positive, the initial commentary of F15 painted a picture of higher expenses and “modestly lower” gross margins in F15 vs F14. While management provided some commentary on expenses, the commentary on the new product and marketing initiatives was very limited, giving investors little to analyze in terms of top-line trends next year. As such, we expect to see consensus EPS numbers for F15 come down a bit to reflect the incremental expenses. We believe the recently elevated expectations heading into the print combined with the initial F15 commentary will pressure the shares tomorrow.

Has it ever. Shares of Weight Watchers have dropped 16% to $24.70 at 11:44 a.m.

Barrick Gold: Earnings Beat Not Enough as Gold Prices Tumble

Barrick Gold (ABX) reported better-than-forecast earnings today, but that don’t seem to matter much as the price of gold continues to plunge.

Barrick Gold reported a profit of 19 cents a share, topping the Street consensus for 18 cents, and Barrick also said that its “all-in sustaining costs” for an ounce of gold would come in between $880 and $920, lower than its previous forecast for $900 to $940.

Morgan Stanley’s Brad Humphrey and team consider the numbers:

Barrick Gold delivered strong 3Q14 operating results, with both gold and copper segments coming in ahead of our expectations. Gold and copper production were 8% and 14% ahead of our estimates with costs also better. Operations drove the beat in earnings and a revision to 2014 guidance with slightly better projections for both costs and copper output.

The biggest downer: Barrick also said that a tax change proposed in Zambia would challenge the “economic viability” of its mine there.

Tumbling gold prices are doing Barrick no favors however. Gold futures have fallen 1.8% to 1,202.70, while the SPDR Gold ETF (GLD) is off 1.3% at $115.12. Barrick Gold has fallen 3.6% to $12.37 at 11:23 a.m., a big loss but far better than the 5.6% drop in the Market Vectors Gold Miners ETF (GDX).

Ensco, Noble Buck Offshore Driller Weakness as Earnings Surprise to the Upside

Another day, another drop in offshore drillers–with one or two exceptions, as earnings from Ensco (ESV) and Noble (NE) help keep their stocks above water.

Diamond Offshore Drilling (DO) has fallen 0.9% to $38.45, while Transocean (RIG) has dropped 1.4% tto $29.48 and Atwood Oceanics (ATW) is off 1.1% at $40.15. Ensco, however, has gained 1.8% to $39.39 and Noble has ticked up 0.3% to $20.26.

Cowen’s J.B. Lowe and Roland Morris have the goods on Noble…

Noble reported 2Q14 earnings from continuing operations of $0.57 per share which was in line with our estimate and slightly above consensus of $0.55. Results for the quarter exclude a $20.2 million ($0.08/sh) net of tax loss from discontinued operations during the quarter. A slightly lower-than-expected tax rate contributed $0.02 to results compared with our estimate.

…and Ensco:

Ensco reported adjusted EPS of $1.87 in the quarter, above our $1.67 estimate and consensus of $1.61. The beat was driven by both higher-than-expected revenues as the company likely earned more bonus payments than anticipated. Lower-than-expected costs also contributed, as the company was successful in containing cost inflation in the quarter.

With offshore drillers off by at least 25% so far this year, earnings appear to be one of the few ways to get the market to make a distinction at least on a daily basis.

Airlines: Southwest Gets an Upgrade, Alaska Gets Cut, American Still Our Favorite, JPMorgan Says

JPMorgan’s Jamie Baker and team are still bullish on airlines–though not all of them equally, as they downgraded Alaska Air (ALK), upgraded Southwest Airlines (LUV) and kept American Airlines (AAL) as their top pick.

Baker explains why he still likes airlines…

[With] Ebola fears quickly abating it appears as if the correction leading up to October 13th may have presented investors with one of the best entry points in recent memory. Our US covered names have rallied 20-40% in the two weeks since (relative to SPX +6%), leading some investors to question whether the rally (as opposed to its preceding correction) has been “too fast, too furious.” We don’t believe so. In fact, airline share prices have merely rebounded to levels generally consistent with late August/early September, a time before jet fuel began its precipitous decline. In other words, if we expunge what the press has dubbed “Ebola hysteria,” it appears that stocks have yet to meaningfully respond to an estimated $4 billion decline in 2015’s anticipated fuel bill.

…why he upgraded Southwest Airlines to Neutral from Underweight:

Clearly our prior expectation for valuation compression relative to its peers was not borne out by Southwest’s strong share price performance. Southwest is likely to earn $3.00 in 2016, and the absence of any international RASM drag is likely to continue satiating investors that may consider Legacy investing too risky. As the #3 performer in the S&P 500 YTD, Southwest shares have handily trounced other US names in 2014 almost two fold, despite margin outperformance of < 100 bps. Applying a 6x EV/EBITDAR (15% emphasis) and 14x P/E (85% emphasis) on 2016 estimates suggests a year-end 2015 share price of $42, healthy 23% potential upside from here. In other sectors, that might prove sufficient for an Overweight rating, but relative to forecasted upside potential over twice that for American Airlines and Delta Air Lines (DAL), our rating only rises from Underweight to Neutral.

…and cut Alaska Air:

Based on our revised price target of $51, we see little reason to accumulate Alaska Air shares at current levels, particularly as the competitive situation is likely to worsen from here. Total OA (other airline) capacity in Alaska markets is expected to rise close to 8% in Q4, whereas capacity in Delta overlap markets is forecast to rise in excess of 20%. And Q1 looks even more challenging (15% and 30%, respectively). We expect Alaska Air RASM and margin momentum will handily underperform the industry next year. However, our Underweight rating is relative to expected performance for the rest of sector, as we do not envision material downside from current levels; indeed, absolute margins are still expected to outrank the industry, though fuel is likely to be the reason why, in our view. We simply see greater forecasted upside potential elsewhere…

Shares of Alaska Air have dropped 2.2% to $51.77 at 10:23 a.m., while Southwest has dipped 0.3% to $34.02, American Airlines has advanced 0.4% to $40 and Delta Air Lines has fallen 1% to $39.20.

Morning Movers: Visa Jumps on Earnings, Buyback; Lakeland Industries Gets Ebola Boost

Stocks are set for a lower open one day after the Fed ended its bond buying and painted a rosy picture of the U.S. economy, one that was confirmed by the data today.

S&P 500 futures have dropped 0.2%, while Dow Jones Industrial futures have fallen 0.1%. Nasdaq Composite futures have declined 0.3%.

As for that data, U.S. third-quarter GDP came in at 3.5%, topping economist forecasts for 3.1%. U.S. jobless claims rose to 287,000, slightly above forecasts for 285,000 but the four-week average, which smooths out volatility in the numbers, dropped to 281,000, the lowest since 2000.

Visa (V) has climbed 4.5% to $224.28 after beating earnings forecasts and announcing a $5 billion buyback, while MasterCard (MA) has gained 2.7% after it too reported a consensus-beating profit.

Weight Watchers International (WTW) has plunged 8.9% to $26.79 despite raising its full year forecast as the weight-loss company continues to lose members.

Taser International (TASR) has jumped 3.8% to $17.10 after beating earnings and revenue forecasts and reporting a larger profit margin.

Lakeland Industries (LAKE) have soared 49% to $16.08 after the company said it would double production to handle a rapid increase in orders for its hazmat suits used to protect against Ebola.

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