The market had another solid week on the back of positive follow through from employment data and Fed information that did not confirm taper would occur as soon as expected. The coming week will be all based on earnings. Last week, the marketplace got some positive news from Alcoa (AA) and bank earnings - Wells Fargo (WFC) and JPMorgan Chase (JPM). The coming week, the market will be moving nearly wholly on earnings reports. Some of the key reports to watch will be Google (GOOG), Microsoft (MSFT), IBM (IBM), Coca-Cola (KO), and Bank of America (BAC).
As we can see from the chart above of the SPDR S&P (SPY), we have broken the key line at 1650 and is moving higher, breaking the yearly highs. The company's breakout of the 1650 line as well as declining wedge shows a strong bullish market with more potential moving forward. The market now has good support at that level of 1650 with likely potential to 1700 (mental resistance). The Dow Jones (DIA) looks like a similar chart.
Retail Sales - June
Empire Manufacturing - July
Business Inventories - May
Industrial Production - June
NAHB Housing Market Index - July
Housing Starts and Building Permits - June
958K / 1000K
914K / 974K
Fed Beige Book
Initial Claims - 07/13
Philadelphia Fed - July
It is an important week for the marketplace as far as economic data along with earnings. We have some very critical reports moving forward this week like Retail Sales on Monday that are expected to show 0.7% increase in retail sales for June. Another key report will be Industrial Production in June, which is expected to show a 0.3% increase over the 0.0% level the month prior. On Wednesday, we are going to be seeing housing data as well as the Fed Beige Book. The housing data is expected to expand quite significantly for June, and it can help push the market further.
Outside of the USA, Europe and Asia will continue to be important to the market. With such a large amount of information to be released this week between earnings and economic data, foreign markets may slip a bit under the rug. The key reports to watch will be Monday's Chinese GDP and Industrial Production numbers. Tuesday we get an important Euro-Zone Trade Balance as well as German ZEW Survey. Finally, we have a G20 Finance Ministers meeting in Russia, which may bring attention to Europe to end the week.
Goldman Sachs (GS)
Johnson & Johnson (JNJ)
Bank of America
General Electric (GE)
Earnings are the key to this week with a lot of very important reports to be made including banks, consumer discretionaries, technology, and oil services. We have listed what we believe are the ten most important reports this week. These large numbers of blue chips will be very crucial to the market moving forward as they will give a great reading of the market's health in Q2 from a number of industries. These reports and their outlook will direct the market this week. So pay close attention!
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. QE conversation may have tempered in its important after last week's minutes. The market will be reacting to Fed President Bernanke's Semi-Annual Policy Report as well as the monthly Beige Book. The Book and Bernanke's words will be parsed on Wednesday to see what his thoughts on QE are moving forward.
The market has a crucial week with earnings, economic data, and Fed information. The key will be earnings s they give us a look at Q2 earnings and outlook moving forward. The data for the market will be very important especially with retail and housing. Finally, Fed action will round out a busy week for the markets.
Ticker: Boeing (BA)
Boeing had a tumultuous week with the Asiana crash along with a fire on a 787 Dreamliner on Friday. The 787 Dreamliner lit on fire near a runway at Long Heathrow. The issue for BA was that the Dreamliner was taken out of service for five months due to faulty lithium-ion batteries. The fire taking place brings attention back to these issues and brings into question the safety and future of the Dreamliner - warranted or not. Yet, the latest updates have noted that damage was in a non-inflicted area near the batteries and was in a separate part of the aircraft.
The negative headlines have caused Boeing some definite volatility, but it appears that in both cases, BA was not the cause. To us, this pullback presents an opportunity for Boeing and is not a long-term negative catalyst. To further issues, another 787 reversed its flight on Friday, suffering from issues outside of the battery. These issues have left a blemish for the Dreamliner. Yet, TUI Travel, which owns six British airlines commented they were 100% sure of the plane's safety.
The 787 Dreamliner is key to the market because longer flights with more fuel efficiency are crucial to the market. Airbus has done better in this department, and the 787 continues to have bad luck and bad press. Yet, is that information just bad press or actually a negative investment that will not pan out? While we and no other investor has a crystal ball, the company has a stellar record, solid dividend, good value, and could be presenting an opportunity. These issues are much less impactful than the actual Japanese Airlines issue back at the beginning of the year. That issue barely derailed BA, and the company has taken off since.
Moving forward, we recommend an options and equity strategy to take advantage of this opportunity. We like buying the stock on this pullback along with a bull put spread. The key to watch is any airlines that pull out on deals or any issues that link to batteries. At this point, that has not happened, and until we see that happen, the stock is a value buy with future PE under 15, price/sales under 1.0, and solid growth moving forward. The market is expecting to see 27% earnings growth this year along with nearly 10% revenue growth potential next year.
Moving forward, we can do a 90/87.50 bull put spread for August expiration that is offering 15% return. 90 looks safe moving forward as long as no new developments with 787 Dreamliner changes happens. The stock should be bought for future upside on this dip, as the long-term prospects are very solid. With cheap valuations, good growth potential, and a current discount in share prices, we should see a lot more potential upside for this name.
Position: BA, Long and BA, Aug18, 90/87.50 Bull Put Spread
Ticker: Sirius XM Radio (SIRI)
We also want to check in on SIRI this week. We continue to like this name due to the long-term progression of satellite radio as it continues to be put into new cars and as those cars become used cars, the capabilities of SIRI continue to grow. This past week, Sirius announced that they had passed 25M subscribers and added another 715K new subscribers in Q2. The key to the company's success was continued growth in automotive sales that grew 15% year/year in Q2. As auto sales continue to grow, the company will benefit.
The company is expected to see 33% growth in earnings in 2014 along with just under 10% growth in revenue. We do believe that after 2014, the company could see a cyclical drop in automotive sales, which will hurt some growth potential. Yet, the company will also benefit as their new cars continue to pass onto new users in the form of used cars. Used cars will be outfitted with Sirius capabilities, which furthers the potential for SIRI stock. The company is in 2/3 of US cars sold and more than 50M cars on the road that have OEM-installed satellite radios.
The company may have some issues with growth past this cycle as well as Apple (AAPL) looks to move into cars with its iOS 7 integration along with Pandora Media (P) trying to break into the scene as well. Another issue for the company is that Sirius XM will be hurt as cars integrate LTE compatibility, which will allow people to connect their cars with their phones, and other devices that could allow a person to stream music from iTunes in their car and transmit it wirelessly. The options are endless and could hurt SIRI that does not have a strong presence in the mobile devices, tablets, etc. Here is SIRI's battle:
...We hold the strong belief that having satellite connectivity and IP connectivity in vehicles will prove to be a durable advantage versus IP only connectivity as we move into a connected car world. We are already working closely with several OEMs on the development of in-car apps that will provide the initial integration of Sirius XM streaming services. So stay tuned for announcements in this area as well. I should briefly note that much has been said about the potential threat to our business from in-car streaming. But owners - no one has recognized that broader and improved streaming also gives us a much better opportunity to better serve our customers in their homes, offices and on the go...
With issues arising and the company pricing in a lot of growth, we are thinking its time to cool things in SIRI. We definitely agree that the company has tons of potential, but we believe, as the model shows, that growth is fully priced in.
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 SIRI: 10.0%
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 SIRI: 5.0%
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: