A select group of market segments and companies are poised to improve results in the coming months, analysts say.
Analyst: Ronald A. Tadross, CFAFirm: Banc of America Securities [email protected]
Area of coverage: Autos and auto parts
Sector outlook: We expect auto sales to increase to 16.5 million units from [the original projection of] 16.2 million in 2007. North American auto production is expected to total 15 million units in 2007 and 15.2 million in 2008. We estimate Big Three production at 9.2 million in 2008, down from the 9.6 million expected in 2007.
Sales mix could continue to pressure the Big Three and their suppliers. We see a significant increase in the mix of four-cylinder engines in the 2007 model year vehicles. This trend could continue for three to four years after gas prices have peaked, as was seen in the 1970s.
To end with the good news, commodity cost increases continue to moderate and even showed the first meaningful year-over-year decline since late 2001.
We estimate that higher commodity costs might have hurt automaker and supplier margins by 1-2 percentage points over the last two years. While we are modeling commodity costs flat from 2007, we could see some benefits if recent trends continue, but wouldn’t pay for it now.
About Toyota Motor Corporation (TM): We are raising our respective fiscal year 2008, fiscal year 2009 and fiscal year 2010 earnings per share (EPS) estimates for Toyota to $9.40, $10.10 and $11.00 respectively from $9.15, $9.80 and $10.80. The earnings estimate increase primarily reflects a weaker yen and higher equity income from unconsolidated subsidiaries and first quarter 2007 results that beat expectations.
We are now modeling 117 yen-to-U.S. dollar rate compared to 115 yen-to-U.S. dollar before. Higher equity income from Chinese joint ventures, which tripled in the first quarter of fiscal year 2008 from a year ago, and strong results at keiretsu suppliers seem sustainable.
Analyst: John W. RansomFirm:. Raymond James & Associates, Inc.800-237-5643
Area of coverage: Drug stores
Sector outlook: Same-store sales for August increased 3.7 percent on average; the consensus called for a 4 percent increase … [W]e remind investors that the deceleration at the pharmacy is largely expected, given the hurdles associated with lapping the Medicare Part D rollout and the high utilization of lower-priced generic drugs.
That said, front-end sales have improved in recent months as retailers gain better traction on various internal initiatives. August front-end sales were particularly strong at CVS/Caremark Corp. and Walgreen, as both likely benefited from a strong back-to-school season. Walgreen reported the leading results for the group, with better-than-expected same-store sales growth of 6.5 percent (consensus was 6.1 percent), as a soft prescription comp of 6.5 percent (consensus was 6.8 percent) was offset by strong front-end sales growth of 6.6 percent (consensus was 5.2 percent).
About CVS/Caremark Corp. (CVS): CVS/Caremark outperformed expectations on all fronts (as the newly combined entity reported its first full quarter results), with strong top-line growth and margin improvements at both the retail pharmacy and the pharmacy benefit managers (PBM) segments. Furthermore, management’s commentary during the quarterly earnings conference call was bullish, and although near-term financial targets were unchanged, the opportunity for more upside improvements appears more likely as the Caremark integration is tracking ahead of schedule. We expect the company to exceed its current synergy forecasts while broader pharmaceutical channel tailwinds are likely to help sustain its recent operating momentum.