The market had a solid week in the shortened timeframe on the back of very solid jobs data. The Nonfarm Payrolls data came in at 195K versus the 166K expectations for the market. Additionally, the ADP Employment Change came in at 188K versus 134K expectations. These two data points help get the market moving higher despite the fact that it likely means that QE is to end. This week, the market will likely follow through on jobs data and could see more upside as more investors enter the market after a light volume week. It's a light week as we get set for earnings reports.
As we can see from the chart above of the SPDR S&P (SPY), we are still in this tight range with strong resistance at 1640 and 1650 along with support at 1600, 1580, and 1560. We believe that we will stay in the 1600-1650 range moving forward unless something very large develops. We could breakout of this range if earnings are very solid, and we would only lose support if something very negative develops overseas, with the Fed, or with earnings.
Consumer Credit - May
Wholesale Inventories - May
FOMC Minutes - 6/19
Initial Claims - 07/06
Continuing Claims - 06/29
Export/Import Prices - June
-0.7% / -0.3%
Treasury Budget - June
PPI - June
Michigan Sentiment - July
It is not a massive week for the market as far as data but there are some key reports to watch this week. On Wednesday, we will get FOMC minutes, which will definitely spark conversation about tapering for QE. On Thursday, we get initial jobless claims as well as import/export prices. Finally, we finish the week with Michigan Sentiment, which should be an important report.
Outside of the US, Europe and Asia will be key with a lighter week overall for economic data. On Tuesday, we get important Chinese Consumer and Producer Price Index reports, which are expected to show growing inflation for Chinese consumers. We also get Great Britain's GDP for June. On Wednesday, we get China's Trade Balance data. A good report there could do a lot for confidence in China, which to this point has waned. Thursday, attention will shift to Japan's monetary policy as well as its rate decision. We finish the week with the eurozone's Industrial Production report. Asian developments will definitely be crucial to market movement this week.
Family Dollar (FDO)
Yum! Brands (YUM)
JPMorgan Chase (JPM)
Wells Fargo (WFC)
Earnings are light this week but begin a very important earnings season. AA, FDO, YUM, JPM, and WFC al are key reports to the market. We believe each shows important things. AA will give us a good look at demand for materials and how that is progressing. FDO and YUM will give us interesting looks at consumers domestically and abroad. YUM especially will have an interesting report as it updates on how it is doing in China. Finally, we finish the week with two earnings from the financial industry that are probably the most important and should set the stage for the coming week when we have major financial reports all week.
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. Last week's employment data suggest QE tapering will come sooner than later, and we should get some more information on this when the FOMC minutes are released on Wednesday. On top of that, we get a Bernanke speech on Wednesday after the minutes are released. That news should bring attention to tapering and could lead to a mid-week correction.
This week is more of a stall week before we fully get to earnings season, but there is some key information to watch from Europe, Asia, earnings, and the Fed. We believe that a more neutral week to slightly up should be expected, but we could see some correction if data from China is very weak and/or the Fed pushes hard for tapering. Weak earnings also could create some fear, but with so many more to be released, it's unlikely.
Ticker: Dell (DELL)
Dell had some interesting developments on Friday that could impact its share price significantly moving forward. News broke that Michael Dell and his partner, Silver Lake, did not look to likely improve their buyout deal of $13.65. That deal does not seem to compete with the $14 per share offer that Carl Icahn is offering. Icahn's deal looks more likely to be the one accepted on July 18, which would allow for some upside from current prices. Yet the Icahn deal is not seen as strong/stable as a Dell deal. If the Dell deal is not approved and Icahn's deal does not actually come through, shares could see some hefty correcting.
That uncertainty makes us nervous about Dell shares. Short float has dropped all the way down to 1.5%, and we could start to see shorts flood back into the stock as uncertainty rises. Yet the plans that each has for the company are likely different. For Icahn, he will likely split up the business into PC and IT like he did with Motorola into Motorola Mobility and Solutions (MSI). Dell is less likely to do this. He would more likely turn the company around and then bring it public again.
The problem remains that the Dell deal is solid, and the deal from Icahn has more question marks. Dell believes that his knowledge of the company and unrealistic financials from Icahn are reason that his buyout deal will be accepted.
For us, we have had a $21 price target on DELL as we believe that the company is vastly undervalued, but it appears that investors will not likely see much more upside over $14. Additionally, what happens if the deal is not accepted on July 18 from Dell and Silver Lake? Shares will likely get shredded.
Here is our strategy for investors of DELL:
It is important for investors to hedge some risk, so we like a bear call spread over the $14 level moving forward. Right now, we can make nearly 10% on a 14/15 Aug17 bear call spread. Without a boost from Dell, $14 is unattainable moving forward. Icahn's deal at $14 is also a restriction to upside. We like that resistance level. If you are not long DELL already, we like this bear call spread as a way to enter the position if it breaks out of that level.
Ticker: VF Corp (VFC)
In mid-June, VFC outlined a five-year growth plan that looked quite enticing. Before the report and coming into today, we had a buy rating on the company with a price target at $217. We want to update our model given these new developments.
The new developments are expected to drive cash flow, increase dividends, and produce share repurchases. The company expects to grow revenue to $17.3B by 2017, which is around a 10% growth per year for each year for the next five years. The company expects EPS to grow to 18.0 as well. That level would be a growth of nearly 80% in the next five years. How is the company expecting to do this?
It expects to grow margins by growth in its "Outdoor & Action Sports" segment as well as international growth. The company expects ROIC to grow to 20% by 2017. ROIC is at 16.2% currently. The company expects OAS to grow to $11.1B in revenue, growing to 64% of VFC's revenue. The company expects around 11% organic growth per year with 12% growth in the Americas and 24% growth in the Asian region. The company is seeing a lot of its growth from The North Face, Vans, and Timberland brands.
The company expects smaller growth in its Jeanswear of about 4% each year, with expectations for good growth in its Lee and Wrangler brands. Additionally, the company expects to see about 8% growth per year in its Sportswear segment. The company expects most of that growth in its Nautica and 7 For All Mankind brands. Finally, the company will have a lot of growth from its online and direct-to-customer business that is expected to grow at a 14% clip per year.
The company is expected to open 645 stores in the next five years, along with 13% growth per year in international markets. The company has benefited from its diverse portfolio that can do well in many market conditions. We went to a PT model:
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.
Available Cash Flow
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 VFC: 7.0%
PV Factor of WACC
PV of Available Cash Flow
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 VFC: 3.03%
Available Cash Flow
Divided by Cap Rate
Multiply by 20167PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding: