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Summary

The market has been consolidating as of late, and we believe that the market has a big week ahead. The market has a lot of key data to watch this week with employment, ISM, and trade balance. That data will be key to the market movement, the Fed tone, and will set the tone for Q3, July, and the second half of 2013. It's a shortened week with July 4 on Thursday, but we are looking forward to a lot of questions being cleared up for some time.

Chart Overview

As we can see from the chart above of the S&P 500 (SPY), we are range bound in an upward and downward channel that will lead to a breakout or breakdown if we get outside of that channel. Right now, we are holding support and resistance. The market is consolidating right now, and we should see a big move coming in the market moving forward. A break of 1650 to the upside or 1550 to the downside will make for a lot of buyers or sellers in the market. The Dow Jones (DIA) looks the same.

Economic Data

Date

Data Report

Market Expectations

Previous Report

July 1

ISM Index - June

50.5

49.0

July 1

Construction Spending - May

0.5%

0.4%

July 2

Factory Orders - May

2.0%

1.0%

July 2

Auto/Truck Sales - June

N/A

5.3M/6.8M

July 3

Challenger Job Cuts - June

N/A

-41.2%

July 3

ADP Employment Change - June

150K

135K

July 3

Initial Claims - 06/29

348K

346K

July 3

Trade Balance - May

-$40.8B

-$40.3B

July 3

ISM Services

54.0

53.7

July 5

Nonfarm Payrolls - June

165K

175K

July 5

Unemployment Rate - June

7.6%

7.6%

It is a big week of data to start off the new quarter, half year, and month of July. The key reports to watch will be ISM Index on Monday, Auto/Truck Sales on Tuesday, and employment data throughout the week. On Wednesday, we get Challenger Job Cuts, ADP Employment Change, and Initial Claims. That trio will be key to the market as so much of what the Fed will do relies on employment, and it is crucial to the economy. We wrap up on Friday with Nonfarm Payrolls and Unemployment Rate. ISM will show key manufacturing data for June that is supposed to show improvement, while employment data is also for June.

Foreign Markets

Outside of the USA, Europe and Asia will be key to the market. On Monday, we get the key Chinese Manufacturing PMI. That number is important to the market, as it would definitely be key to getting China back on the right track. Along with the government report, we get the HSBC PMI as well. Additionally, we get PMIs for all major European markets that day. On Thursday, we get another round of BOJ bond, stock, and foreign asset buying as well as an ECB rate decision that many think will likely remain put.

Earnings

Date

Key Company

July 2

Constellation Brands (STZ)

Earnings are at a standstill for this week as we prepare for Q2 results starting next week.

Fed Outlook

The Federal Reserve has been extremely important to the market over these past few weeks, and it is very important to the market every week. It will not leave the market until QE tapers or does not. The week is very important to the market's idea of what will happen next with the Fed as employment data is released. If things are not very solid, it could mean less taper push. Good data would push forward a taper more soon. There are no planned Fed speeches or data points that are expected to be announced.

Conclusion

It is an important week for the markets with jobs data, ISM, and a lot of key June data. Earnings are light, and there are no Fed developments this week. What data shows for the Fed this week will have a big impact on the market and what the market thinks the Fed will do? It's a shortened week, but Friday will have a lot of action on light volume, so things could get volatile. Be careful!

Trades

Ticker: Visa (V)

Visa looks like it could be a stock to watch and could break out soon. The stock has had significant resistance at $185. The company has had triple resistance at that level, and it could make a solid move above that level. The company has some strong potential after its first investor meeting in three years. We will run through some of the highlights of the meeting, and then run the stock through a price target analysis.

In the company's first shareholder meeting since 2010, the company noted that they expect mid-to-high teens growth in EPS as well as low double digit for revenue for 2014. The company could see around $13B in revenue in 2014 along with $5B in FCF. The company, additionally, commented that they are on track to generate 50% of their revenue from outside the USA by 2015, and the company was happy to note that they are seeing strong affluent credit growing in developed markets. Further, the company noted that they see the debit card industry as the largest "cardable" opportunity.

Additionally, the company noted that it wants to position its dividend attractively in their industry. Currently, V has a dividend at 0.7%. That rate compares to 0.4% for MasterCard (MA), Discover (DFS) at 1.7%, and American Express (AXP) at 1.2%. The company is expected to raise its dividend this year, and we would expect it to move to north of 1% in yield and potentially 1.5%.

Let's run the company through a price target analysis:

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

4850

5450

6000

6300

6400

Taxes

1455

1635

1800

1890

1920

Depreciation

375

400

450

475

475

Capital Expendit.

-450

-500

-525

-550

-600

Working Capital

440

440

440

440

440

Available Cash Flow

2880

3275

3685

3895

3915

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for V: 6.0%

2013

2014

2015

2016

2017

PV Factor of WACC

0.9434

0.8899

0.8396

0.7920

*

PV of Available Cash Flow

2717

2915

3094

3085

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for V: 2.0%

2017

Available Cash Flow

3915

Divided by Cap Rate

2.0%

Residual Value

197750

Multiply by 20167PV Factor

0.7921

PV of Residual Value

155052

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

11811

PV of Residual Value

155052

Cash/Cash Equivalents

1377

Interest Bearing Debt

0.00

Equity Value

168240

Step 5.

Divide equity value by shares outstanding:

Equity Value

168240

Shares Outstanding

650.02

Price Target

$259

Ticker: Abercrombie & Fitch (ANF)

We continue to see ANF as a weak name right now since its last earnings report, and we believe it is a good candidate to short or sell if weakness strikes the market. In the company's last earnings report, it missed EPS expectations of -0.05 with a -0.09 report as well as a sizeable miss in revenue at $839M versus $942M expected. The company also saw a 17% decline same-store sales. Here were some comments from us about the report:

Reported EPS this quarter was -0.09, missing consensus by $0.04 and reported revenue was well below expectations. Net sales dropped by 9% to $838.8M from $921.2M last year. The decrease in net sales is a sum effect of a decrease in same-store-sales in the US of 14% and a decrease in same-store-sales in international stores of 16% to give a total decrease in same-store-sales of -12% compared to the same point last year.

Another main problem for Abercrombie & Fitch is that their decreases in revenues are occurring in all segments of the company. For example there was a decrease of $73M for Abercrombie for kids, and an even higher decrease of $421M for Hollister Co. coupled with decreases elsewhere. This doesn't bode well for the company as in the next quarter they might start seeing the effects of the comments made by the CEO.

Since that report, shares have dropped nearly 20%. Is the downside done or is there more to worry about? For us, we wonder what is the catalyst for upside. Sure, there is value in shares. They have a future PE at 11.5 as well as price/sales ratio at 0.8. Both levels show good value. Yet, what is the catalyst to drive buying?

The back-to-school shopping season will begin in Q3, and that is always a big lift for teen retailers. The company is expecting a 6% lift in revenue year/year for this quarter as well as over 50% growth in earnings. All good, right?

One issue, though, that we believe remains in these shares that we cannot reconcile is store growth. The company is closing about 50 Hollister stores and only opening about 20. Those stores are international and the closings are domestic. The company is obviously trying to improve its growth potential by moving internationally while improving efficiency and closing down underperforming stores, but we do not like this growth trend. In the last quarter, Hollister also saw an 18% decline in direct-to-consumer sales year/year. Many see Hollister as the growth potential for ANF.

Yet, an 18% drop in Q2 was preceded by a 2% decline in Q4 2012. In Q3 2012, Hollister sales dropped 1%. This is not the trend of growth that we are excited about. The company has been closing Hollister stores at an alarming rate domestically along with slower international growth. While the international potential is solid, we have not seen the results that make us believe in this opportunity, yet. Until we start to see some actual growth in comps for this growth area of Hollister, we think ANF remains in check.

Source: Weekly Outlook: Buy Visa, Sell Abercrombie & Fitch