Earnings Preview: Banco Bradesco, Biogen Idec, Caterpillar
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Investors are entering the fourth week of earnings season, and it’s the busiest week thus far with nearly one-fourth of S&P 500 companies reporting the week of January 28.
As of this writing, the S&P 500 is nearing the 1,500 level on Friday afternoon, despite weaker-than-expected new home sales. Earnings season continues to bring mixed results, with consumer goods makers Procter & Gamble and Kimberly-Clark providing upbeat reports and rising after beating expectations. The technology sector continues to be lukewarm at best in the New Year, however, as Apple and Microsoft have both disappointed with their own quarterly reports this week. On Thursday, Microsoft posted earnings that beat estimates by a penny, but revenue came in short of consensus.
Here are three earnings reports in different sectors of the economy that I’ll be watching on Monday, January 28.
Banco Bradesco (NYSE: BBD)
Monday, Jan. 28 before open; Consensus $0.39 EPS / Revenue $9.19 billion
Brazil’s third largest bank is scheduled to report fourth quarter 2012 earnings on Monday. Banco Bradesco operates in two lines of business: a traditional financial segment and an insurance and pension plan segment. Due to its level of diversification, the bank derives about half of its revenue from fee income, thereby decreasing its reliance on interest rate spreads.
On January 3, investment firm CLSA initiated coverage of Banco Bradesco with an Outperform rating. CLSA is short for Credit Lyonnais Securities Asia, the largest independent brokerage and investment group in Asia-Pacific. However, a difference of opinion became apparent on Banco Bradesco when Deutsche Bank downgraded the stock to Hold from Buy on January 14.
I tend to agree more with CLSA’s bullish thesis on Bradesco, as I believe the Brazilian economy is set to outperform in 2013 with the government’s tax breaks and interest rate cuts beginning to stimulate growth. GDP growth in Brazil is expected to be around 1% for 2012, but the current consensus figure for 2013 stands at 3.3%.
Readers interested in the international exposure offered by Banco Bradesco who desire greater diversification should consider the iShares MSCI Brazil ETF (NYSEMKT: EWZ). Banco Bradesco is one of the four largest holdings, along with Vale, Petrobras, and Itau Unibanco. This Brazilian ETF has a beta of 1.75 (similar to Banco Bradesco) and yields approximately 2.2% in contrast to Bradesco’s 3.2% dividend yield.
Book value at September 30 was equal to R$17.30 Brazilian Real per share for Banco Bradesco, or $8.54 US dollars. Based on recent market prices, the bank’s American Depository Receipts (ADRs) are trading at approximately 2.2x book value. The bank has a market capitalization of $71 billion and is an official partner for the Rio 2016 Olympics.
Biogen Idec (NASDAQ: BIIB)
Monday, Jan. 28 before open; Consensus $1.46 EPS / Revenue $1.38 billion
This Wall Street darling in biotechnology is set to report fourth quarter 2012 results on Monday. The company has two market-leading drugs for multiple sclerosis (MS), Tysabri and Avonex. Tysabri sales reached a $1.5 billion run rate in recent years, and analysts believe annual revenue could surpass $2 billion as physicians are able to use new diagnostic tools to prescribe the drug for patients most likely to see greater efficacy and fewer side effects.
On January 15, analysts at Bank of America Merrill Lynch downgraded Biogen Idec to Hold from Buy, citing a lack of near-term catalysts and preference for other stocks in the biotechnology sector.
The following day on January 16, Biogen Idec and Elan Corporation announced their joint application to the FDA and European Medicines Agency (EMA) for an expanded indication label for Tysabri, which bodes well for higher sales of the drug. Approval of the new label would support Biogen Idec’s diagnostic test for Tysabri which helps physicians identify the best patients for the drug.
The mean (average) price target among the analyst community for Biogen Idec is $156.47, with a high target of $178 and a low target of $139. Earnings growth has outpaced revenue growth at Biogen Idec in the last 12 months, a trend that is not sustainable over the long-term. Revenue has grown 9.8%, while earnings have grown approximately 20%.
Caterpillar (NYSE: CAT)
Monday, Jan. 28 before open; Consensus $1.70 EPS / Revenue $16.13 billion
The world’s largest manufacturer of construction and mining equipment is set to report fourth quarter 2012 results on Monday.
On January 18, Caterpillar announced the company would record a non-cash goodwill impairment charge of $580 million, or $0.87 per share, for the fourth quarter of 2012. The goodwill impairment is related to a discovery that a recently acquired international subsidiary in Zhengzhou, China has engaged in multi-year accounting misconduct. Caterpillar has removed the senior managers in place at the subsidiary and installed a new management team.
To put the incident at Caterpillar in perspective, concerns related to the accounting practices in China have limited the amount of foreign direct investment in the world’s fastest growing economy as a whole.
Despite the fraud disclosure, shares of Caterpillar managed to finish the trading session higher on January 18 as Piper Jaffray upgraded Caterpillar to Overweight from Neutral, raising its price target to $113 from $85. Recent economic data supports improving demand for Caterpillar’s end markets and therefore a higher share price.
While only a small portion of the company’s revenue originates from China, the region is believed to be a large growth area for Caterpillar. China’s GDP growth, as well as industrial output and retail sales data all exceeded analyst estimates for the fourth quarter. Iron ore prices have also risen since a recent September low.
Economic Data for Monday, Jan. 28
On the economic front, the U.S. Census Bureau is scheduled to release its monthly report on durable goods for December, a leading indicator of industrial production and capital spending. Durable goods range from household appliances to industrial machinery, all of which are non-consumable items that are used for an extended duration between individual purchases.
New orders for durable goods have increased in six of the last seven months. Machinery has also posted an increase for three consecutive months through November. Readers will be able to view the December report after 8:30 a.m. on Monday here.
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