Earnings Preview: Acuity Brands, Alcoa, and Monsanto
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Earnings season formally kicks off on Tuesday this week, and I’m most interested in listening to the reports of Acuity Brands, Alcoa, and Monsanto. While I expect to see the words “Hurricane Sandy” and “fiscal cliff” printed abundantly on earnings transcripts in coming weeks, each of the above companies reporting on Tuesday is more levered to the commercial and industrial economy than the U.S. consumer. Readers may argue that Acuity Brands is the slight exception, given its residential lighting division. Let’s review the recent events specific to each company that may have an impact on market sentiment.
Acuity Brands (NYSE: AYI) — Tuesday before open; Consensus $0.81 EPS / Rev. $499M
This $3 billion dollar company headquartered in Atlanta, Georgia provides lighting solutions for “commercial, institutional, industrial, infrastructure, and residential applications.” Shares of Acuity Brands reached an all-time high on January 3 following an analyst upgrade at Robert W. Baird & Co. The boutique Wall Street firm raised its price target on Acuity Brands from $72 to $77, citing increased confidence in the lighting company after recent channel checks.
For the fourth quarter of 2012, Acuity Brands missed estimates by delivering a lower-than-expected number on both earnings and revenue. The firm reported fiscal Q4 EPS of 88 cents vs. consensus 92 cents and revenue came in light at $514 million vs. $522 million. Management stated the slight miss can be attributed to a short-term decline in the rate of growth (second derivative) within the North American lighting market. Despite the miss, CEO Vernon Nagel stated he expects his industry “will experience solid growth over the next decade.”
The market seems to agree with Mr. Nagel’s assessment, as shares have rebounded strongly following short-term weakness on October 3. I think shares of Acuity Brands can continue their steady march higher, given the overall market sentiment remains positive. If the company’s recent project at Mall of America serves as an indicator, Acuity Brands is poised to benefit from an uptick in non-residential construction during the New Year.
If management at Acuity Brands remains optimistic following Tuesday's report, an ancillary play exists in the form of Cree (NASDAQ: CREE) which manufactures semiconducter materials used for light emitting diode (LED) products. The company was recently named a top "Clean Tech pick" for 2013 at botique research firm Wedbush. The analysts at Wedbush raised their 12-month target on Cree from $36 to $45, mentioning positive channel checks on lighting fixture volumes.
Alcoa (NYSE: AA) — Tuesday after market close; Consensus $0.07 EPS / Rev. $5.61B
Wall Street often recognizes the beginning of a new earnings season following the report of this veteran Dow Jones Industrial Average component. Shares of Alcoa managed to briefly move into double digits during 2012, only to finish the year with neither a gain nor a loss. The persistent slump in Alcoa’s stock price is a function of continued weakness in the aluminum market.
On December 18, rating agency Moody’s stated it was considering a downgrade of Alcoa’s credit rating based on recent aluminum price declines. The market price per ton managed to temporarily exceed $2,000 in September, only to resume its long-term trend to the downside during October and November. The cyclicality of Alcoa’s business is reflected by the volatility in aluminum prices over the past decade. With respect to Tuesday’s earnings announcement, the market is expecting a less than 3% movement in share price based on the cost of Alcoa’s equity options. Although Alcoa may seem attractive on a valuation basis, I would advise readers to invest elsewhere as Wall Street analysts agree that aluminum has the poorest outlook of any commodity for 2013.
Monsanto (NYSE: MON) — Tuesday before open; Consensus $0.37 EPS / Rev. $2.64B
This $51 billion dollar company headquartered in St. Louis, Missouri develops agricultural products for farmers in the form of genetically engineered seeds and herbicides. Monsanto uses biotechnology to improve agricultural productivity, leading to higher quality food output for consumers and reduced costs for farmers.
Shares of Monsanto are reaching three-year highs after the company posted consistently strong results during the fiscal 2012 year. Analysts believe momentum can continue into fiscal Q1 2013 results, after recent conversations with seed dealers indicate the company is gaining market share in corn and its higher priced offerings are seeing improved demand, shifting the overall price mix higher. The company’s primary competitors are DuPont and Syngenta (NYSE: SYT). The Basel, Switzerland based Syngenta is also breaking out to five-year highs as the company is growing in international markets such as Latin America. Both Monsanto and Syngenta trade at premium 25x and 22x price-to-earnings multiples respectively, compared to an industry average of 18x within the chemical manufacturing industry.
Monsanto earned its place on Goldman Sachs' vaunted Conviction Buy list in October 2012, as the analysts believe weak commodity prices will force farmers to seek maximum crop yields by using Monsanto's technology. Piper Jaffray also maintains an overweight rating and $116 price target on the stock.
Economic Data Releases
On Tuesday morning at 7:30 a.m., the National Federation of Independent Businesses releases its monthly Small Business Optimism Index report for December. The small business indicator fell 5.6 points in November to 87.5 on “an overwhelmingly negative response” from small business owners to the Democratic victory in the recent Presidential election.
On Tuesday afternoon at 3:00 p.m., the Federal Reserve Board of Governors releases its monthly report on consumer credit for November. Consumer credit is short speech for the amount of consumer installment credit outstanding. Investors are looking to see if the debt-to-income ratio of Americans can rise for a fourth month, after three consecutive increases took place in the August–October period. It appears that a large portion of the recent rise in consumer credit can be attributed to student loans, which doesn’t bode well for the U.S. economy long term.
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