In this week's weekly outlook, we will be discussing the market, what will move it, preview earnings from Qualcomm (NASDAQ:QCOM) and take a deeper look into Ford (NYSE:F). Qualcomm is a very interesting name going into this week, and we want to sit down to talk about what is going to move QCOM after its earnings report. After another great quarter from Ford, we are still unsure why F is still not feeling the love. We will discuss Ford's debt, Europe turnaround, and price the company. Let's get to it!
This week, the market is going to be searching for a signal higher or lower. The indices appear to be nearing a top right now, and they either need to breakout or we can expect some potential downside. Economic data looks to be the key signal for the week with employment data (Unemployment Rate, Nonfarm Payrolls, and jobless claims). Additionally, we will get the first signal for Michigan Sentiment November reading as well as GDP for Q3. It is a large economic data week as the Fed, government, and earnings start to back off. This data should give us a lot of the reason for the move this week.
The S&P 500 (NYSEARCA:SPY) is having trouble with the 1770 area at the top of this channel. It is following this channel higher, and the stock has to cleanly break 1770 to see further upside from here. Support is at 1750.
The Dow Jones (NYSEARCA:DIA) is also starting to see some resistance at the 15600 level, and it is looking to have near-term resistance at that level right now. Solid support at 15500 and 15400. A break of 15600 with strength will help.
Factory Orders - August
Factory Orders - September
ISM Services - October
Leading Indicators - September
Challenger Job Cuts - October
Initial Claims - 11/02
GDP - Q3
Nonfarm Payrolls - October
Unemployment Rate - October
Personal Income/Spending - September
0.2% / 0.2%
0.4% / 0.3%
Michigan Sentiment - November
As one can see, it is a busy week for the market with employment data, GDP, and consumer sentiment. The market will likely look at GDP and sentiment more importantly than employment data since that report is for October, which will be shrugged off due to the government shutdown. Yet, if the employment data comes in stronger than expected, it could actually lead to some downside as it would suggest that employment was better than anticipated in the shutdown and could curb the Fed's reluctance to taper. If it is weak, we should expect potential upside.
Outside of the USA, Europe and Asia may gain some prominence this week due to a lighter menu for our own markets. On Monday, China's Non-Manufacturing PMI will be released as well as Europe's PMIs for Italy, France, Germany, and Euro-Zone. On Tuesday, the European Commission will release its economic growth forecasts, and Wednesday, we will get Great Britain's Industrial/Manufacturing Production and Euro-Zone Retail Sales. Thursday, we get a key Bank of England and European Central Bank rate decisions. These two reports will be crucial to the European markets. It is a busy week for Europe, and their recent success should take center stage. If Europe is strong, it could definitely lift American markets this week.
Twenty-First Century Fox (NASDAQ:FOXA)
Emerson Electric (NYSE:EMR)
Time Warner (NYSE:TWX)
Walt Disney (NYSE:DIS)
EOG Resources (NYSE:EOG)
Earnings take a backseat this week. Despite some interesting reports, we believe the market has gotten a good taste of earnings, and it will likely not have as much impact on the market as in previous weeks. Some key reports to watch, though, are Qualcomm, Disney, and Priceline. QCOM can definitely move the Nasdaq while Disney is important for the tourism/entertainment angle. PCLN is an interesting report to watch, but like most of the reports this week, they are more important for their industry rather than the entire market.
The major report that we are most interested in watching this week is Qualcomm. Since its last report, the company has moved up roughly 10%, but the question now is whether there is more upside and what is important to watch in this report. The key to this report for Qualcomm is going to be how the company comes through on their FY2013 results, guides for 2014, 3G/4G shipments, and how the RF front-end solution is doing.
Right now, expectations are that the company will report EPS of 1.09 versus 0.89 one-year prior. Additionally, expectations are for 30.2% revenue increase year/year to $6.34B. Expectations for 2014 are EPS at 4.95 versus 4.54 as well as $27.5B in sales versus $24.7B. The 2014 expectations are going to be very crucial to the company's movement off this report. The company's expectations will be very important, as there has been some recent criticism as of late for QCOM due to Intel (NASDAQ:INTC) entering the multimode LTE industry as well as Nvidia (NASDAQ:NVDA) and Broadcom (NASDAQ:BRCM). Ashraf Eassa delves into this conversation. Yet, we believe that the company's move into their RF360 family is a big win that will help them maintain some type of moat as we discussed in our last QCOM article.
QCOM was first to the fight with a family of chips that would allow phone makers to not have to make different phones for different carriers. As we discussed in our last article:
The company could easily revolutionize the mobile phone from the standpoint of chips, as it unveiled a family of chips that will help with fragmentation that faces current phone builders as they attempt to build phones for different countries and different carriers. The family of chips, which QCOM is calling the RF360 Front End Solution, will allow phone builders to build a global phone for 4G LTE. This move helps QCOM move well above RF Micro (NASDAQ:RFMD) and SWKS. Moving forward, we believe this deal helps create a technological moat for QCOM.
In the latest report, QCOM reported that RF360 Front End Solution first product is on-track and sampling. We believe that the solution is very crucial for the company's future success. How this is progressing is something else key to watch. Overall, the company needs this product to battle some of the rising competition we mentioned earlier, so we believe it is important to see progress here.
Overall, QCOM is still cheap as well with sub-15 future earnings, and a solid report that beats this guidance could lead to significant upside.
The Fed will take a backseat this week without any major announcements, but there are seven key Fed speeches to come out this week that will definitely have an impact on the market as traders to digest what is next for the Fed. The key announcements are Lacker's speech on labor markets on Tuesday with Williams' speech on the same day as well. Lockhart also has a speech on Thursday. Overall, these speeches will be parsed for signals especially in the wake of job data this week.
We are neutral on this week, as we believe it is a very reactionary week. As different reports are announced, we should start to see the market make up its mind on what it wants to follow. From earnings to jobs data to Fed speeches to European data, the market has a lot to digest and needs to know what it wants to follow throughout this week.
Stock To Watch
We continue to be quite interested in Ford Motors as a "Buy". As we noted in February, we thought Ford had 50% upside by next February. So far, we have seen the stock move about 30%, but we still see more upside. The company's latest earnings and sales report was quite strong, the stock is still quite cheap, and this American icon has more upside still. The company has been held back by its heavy debt load, European exposure, and black eye from the Recession. As an investment, individuals do not want to own cyclicals or companies that have trouble making money in tougher market conditions.
The company's latest earnings report was quite impressive, though, and it is time that investors start to take notice. The company reported $36B in sales in the latest quarter, and it now expects a rise in profits in 2013 from 2012. Even margins saw a bump. The issues like debt, Europe, and confidence also are taking a better look.
As for debt, the company, in its latest quarter saw cash/cash equivalents rose from $13.4B to $14.8B. Debt, though, actually rose from $107B to $110B. For a lot of investors, that type of debt is definitely not something that attracts them, but the company's automotive debt was only $15.8B, and the company still promises that auto debt will be down to about $10B by 2015. Further, cash covers that debt 2-to-1. The Ford Credit debt, though, is typically money actually owed to Ford Automotive, and the company typically only writes off about 1% of this debt. So, what does this mean? The debt issue is not really an issue at all. The company reported a net cash position of $10.5B. The company, therefore, is actually in a very solid credit position.
What about Europe?
In the latest quarter, Ford reported that wholesale volume and revenue was up 5% and 12%, respectively. This makes it now two quarters in a row of top-line growth. The company has making the right moves by lowering their inventory there and saw a market share improvement from 7.8% to 8%. Slides link.
We, therefore, want to price the company to see what we believe they are worth. In our model, we used a fairly unaggressive growth model with about 10% growth in 2014 and a pullback in 2015. We see 2016 looking stronger as well as the company continues to grow in emerging markets. With Europe on the comeback and potential in India, China, Brazil, and other markets, we like Ford's chances for 5-10% growth in operating income. In this model, we use a limited level of growth, and we still see a lot of upside. We see capital expenditures at $7B to $8B in 2017. We even used a modest cap rate of 3% that shows limited growth. In this very unaggressive model, we see Ford worth $26.
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: 6.0%
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 F: 3.0%
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:
As we can see, Ford has still considerable upside from its current levels for the next twelve months. As Ford continues to report solid earnings and sales, they will gather more investors. With PEs hovering just over 10, the value in this name is incredible.