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John W. Ransom
Raymond James

We reiterate our Outperform rating on shares of CVS Health (CVS) following the release of strong Q3’14 results, with trends in both segments continuing to track ahead of our and internal expectations. While the profit cadence is expected to slow in Q4 (tobacco, generics timing), we continue to believe the 2015 outlook provides a view into double-digit EPS growth alongside robust free cash flow (FCF) generation. Additionally, momentum in pharmacy benefits management (PBM ) remains robust, as witnessed by recent selling season success; we view this trend as sustainable given competitive differentiation.

Call highlights: (1) The $26 billion of 2015 PBM contract renewals are 80% complete with a 96% retention rate; (2) management continues to expect the deflationary nature of generics to persist, aside from a select group that continue to experience price increases; and (3) per management, any incremental cash flow over and above guidance will be a pull-forward from 2015, rather than a step-up in operations.

Management narrowed the full-year adjusted earnings-per-share (or EPS) guidance to $4.47-$4.50 (from $4.43-$4.51) and provided Q4’14 guidance of $1.18-$1.21 vs. consensus of $1.21.

Revenue growth guidance was also raised 75 basis points at the midpoint. Further, free-cash-flow guidance was raised to $5.7 billion-$6.0 billion (from $5.5 billion-$5.8 billion), with capital expenditures of $1.7 billion. Yet, share buyback expectations remain at $4 billion.

Our 2014 non-GAAP EPS estimate moves to $4.50 (+$0.02), largely reflecting the Q3 beat and lower interest expense from debt reduction.

For 2015 and 2016, we model non-GAAP EPS of $5.12 and $5.77, respectively, with generics (new launches and Red Oak), pharmacy benefits management strength, specialty, and reform helping to offset tobacco and competitive PBM pricing. Our capital deployment assumptions could prove conservative, particularly if M&A is pursued near term.

CVS trades at 16.7 times our 2015 non-GAAP EPS estimate, above the low- to mid-teens five-year trading range. Our new $95 price target (from $86) is based on a 16.5-times multiple on 2016 EPS, reflecting continued confidence in longer-term double-digit EPS growth targets.

Charles Rhyee
Cowen and Company
[email protected]

CVS Health’s Q3’14 adjusted EPS of $1.15, excluding the loss on early extinguishment of debt in 2014 and a legal settlement gain in 2013, beat consensus of $1.13 and the guidance range of $1.11 to $1.14, with top line (sales) of $35.02 billion, up 9.6% year over year, modestly beating Street expectation of $34.72 billion.

PBM revenues of $22.53 billion, up 15.7% year over year, were slightly ahead of Street estimate of $22.41 billion, driven by growth in specialty including the acquisition of Coram and the impact of Specialty Connect, along with increased volume in pharmacy network claims.

Pharmacy network claims processed increased 4.3% year over year to 209.6 million, primarily due to net new business and growth in Managed Medicaid, but partially offset by a decrease in Medicare Part D claims. Mail decreased 1.3% to $20.7 million, driven by a decline in traditional mail volumes, but partially offset by growth in Maintenance Choice Program. Segment operating margin was down 32 basis points year over year to 4.8%, but was ahead of consensus of 4.6%. Segment operating profit came in at $1.09 billion, in line with Street estimate of $1.04 billion.

Revenues in the Retail segment increased 2.9% year over year to $16.75 billion, slightly ahead of consensus of $16.56 billion. Total comps increased 2.0% year over year vs. consensus of 0.9%, with prescription same-store sales up 4.8% and front-end same-store sales down 4.5%. Prescription sales were negatively impacted by about 190 basis points due to recent generic launches and by about another 190 basis points due to the implementation of Specialty Connect, which had a greater effect on revenues than prescription volumes due to higher dollar value.

Front-end sales were negatively impacted by about 480 basis points due to the exit of tobacco, as well as softer customer traffic, while partially offset by increase in basket size. Segment operating margin of 9.1% was up 45 basis points, in line with Street expectations. Operating profit of $1.53 billion was also in line with Street expectations.

Vincent Andrews
Morgan Stanley & Co.

Following Q1-FY15 results, in which RPM International Inc. (RPM) reaffirmed full-year guidance and provided a $2.70 to $2.90 EPS outlook for FY16, we are revising our quarterly estimates for the remainder of FY15, as well as raising our FY16 estimates to account for accretion related to the reconsolidation of Special Products Holding Corp.

RPM reported somewhat mixed results for the first quarter, as it faced tough comparisons in its Synta and Kirker businesses, as well as slowing momentum in Europe. Excluding the contribution of Synta and Kirker, RPM’s consumer segment continued to perform well through the quarter, with core growth of 7% driving mid-double-digit EBIT growth in the teens. European weakness in RPM’s industrial segment, to which it is about 30% exposed, represents a reversal of RPM’s recent momentum in the region, and a contrast to the acceleration across RPM’s U.S. construction and industrial-related businesses.

RPM maintains full-year guidance of consumer sales +5-7%, industrial sales +6-7% and 9-11% EPS growth, implying a range of $2.38 to $2.42 per diluted share. While management highlights that European pressures are likely to persist, and be made worse by the strengthening dollar, the company points to the following positives underlying its full-year outlook: (1) Easier Synta comparisons through the last three quarters of the year; (2) further acceleration in its U.S. construction, chemical, flooring and industrial coatings businesses; and (3) more normal winter weather driving year-over-year improvements in the third quarter.

On a reconsolidated basis, excluding estimated transactions costs, RPM now expects FY16 diluted earnings per share to fall in a range of $2.70 to $2.90.

Model Update: As a result of Q1-FY15 results, we have slightly lowered our full-year earnings estimate, from $2.40 to $2.39 per diluted share. We maintain our Q2-FY15 estimate of $0.55 per share, while raising our estimates for the back half of the year on account of easier comps across RPM’s consumer businesses, and continued momentum in U.S. non-residential construction.

Our revised estimates also include adjustments for further European weakness and currency exposures. Our revised FY16 estimates reflect the benefits of RPM’s Special Products Holding Corp. reconsolidation, as well as a continuation of FY15 trends in U.S. non-residential construction.

Ghansham Panjabi, Ph.D.
Robert W. Baird
[email protected]

On an operating segment basis, RPM’s Industrial segment (63% of FY15 estimated sales) reported a year-over-year improvement (reported sales up 5.8% year over year), as volumes contributed positively for the fifth consecutive quarter and organic sales were up 4.5%.

Industrial volumes improved (up about 3.9%) in Q1-FY15 as a result of resurgent recovery in U.S. commercial construction demand (sealants/flooring/corrosion-control/concrete additives), which was partially offset by a slowdown in the European markets, most notably Germany and France, which experienced sales declines of mid-single digits. Meanwhile, foreign exchange (+0.1%) contributed positively and acquisitions (+1.3%) were a significant tailwind, noting that pricing also contributed about 0.5% to Industrial sales growth. As for profitability, operating margins decreased 10 basis points year over year, to 13.6%, as a result of lower sales volumes stemming from weakening demand in Europe.

Next, RPM’s Consumer segment (37% of FY15 estimated sales) reported a slight year-over-year sales decline (–0.8%) primarily as a result of lower organic sales (-2.1%). The company faced difficult year-over-year comparisons due to successful product introductions for its Synta and Kirker brands. More specifically, organic sales were down 2.1% as the company reported declining volumes (–3.1%) and higher pricing (approximately +1.0%), with acquisitions (+1.2%) and foreign exchange (0.1%) contributing positively to net sales.

New product introductions and improved U.S. housing turnover are expected to continue during Q2-FY15, and the Synta comparisons should rebound to positive, though the Kirker comparisons should remain difficult until 2H-FY15.

Zacks Investment Research

Japan-based Toyota Motor Corporation (TM) is the leading automaker in the world in terms of sales and production. Its product portfolio consists of a full range of models from passenger cars and minivans to trucks as well as related parts and accessories. The company’s operations are classified into three segments: Automotive (92.8% of net revenue in first-quarter fiscal 2015), Financial Services (5.3%) and All Other (1.9%).

Toyota’s Automotive business caters to its domestic market as well as markets in North America, Europe and other countries. Other markets include East and Southeast Asian countries. Globally, Toyota sold approximately 2.24 million vehicles in first-quarter fiscal 2015.

Roughly 60% of all Toyota vehicles sold in North America are built locally, with parts sourced from over 500 North American suppliers. Toyota has 51 manufacturing companies in 27 countries and regions, producing vehicle brands including Toyota, Lexus, Hino and Daihatsu, as well as automobile components.

Toyota’s Financial Services business primarily finances dealers and customers for the purchase or lease of Toyota vehicles. The business also offers retail leasing through the purchase of lease contracts originated by Toyota dealers.

Toyota’s All Other business segment comprises the design and manufacture of prefabricated housing and information technology related businesses, including an e-Commerce platform called

David Whiston, CFA
[email protected]

President Akio Toyoda’s vision includes cost efficiencies under its Toyota New Global Architecture, or TNGA, which seeks to develop multiple vehicles at the same time using large amounts of common parts. The first cars from this move are due in 2015 and will first focus on three front-wheel-drive platforms that make up about half of Toyota’s production.

The goal is to streamline engineering and increase product development efficiency by as much as 30%. The company can then reinvest the savings into technology and design.

A big change in the parts side is that the company will use more parts on a global standard as opposed to Toyota-specific standards. The long-term goal is for vehicles that share a platform to have 70%-80% common parts, but the commonality will start at 20%-30%. This efficiency will increase the risk of a major recall should a part be defective, but we think these changes are necessary to keep pace with other major common platform moves under way across the industry.

More plants outside Japan will also help Toyota deal with foreign-exchange risk. In calendar 2013, about 77% of Toyota’s vehicle sales were outside Japan, but only 58% of production was based outside the country.

The company has long pledged to produce at least 3 million vehicles a year in Japan, but this promise had become very hard to keep with the strong yen trading well below ¥80/$1 until late 2012. Every ¥1 change in the dollar affects Toyota’s operating income by ¥35 billion, more than twice the impact at Honda.

Management has said that the Japanese operations break even at ¥85/$1, and below ¥80/$1 is where management has to reconsider its Japanese production levels, especially for compact cars. We’d like to see Toyota produce more of its vehicles where it sells them.

Ryosuke Hoshino
Morgan Stanley MUFG Securities
[email protected]

Toyota Motor (TM): 1H Results: Highly stable – key plus in a sales climate that remains uncertain.

Opinion on shares – Minor positive: 1H operating profit (OP) was below our forecast, but met the market’s expectations. Results content indicated strength in reserve, as brand, product and sales strength in the U.S. was coupled with initiatives to improve prime costs in the stagnant ASEAN (Association of Southeast Asian Nations) region, too. In a global economic environment that is hardly favorable (apart from foreign exchange (FX), the value of Toyota’s strong, stable earnings is high. We reiterate our Overweight (OW) rating.

Opinion on results – No surprise: 1H OP missed our forecast as volume mix did not improve as much as we expected, but equity-method income beat our forecast allowing net profit (NP) to overshoot. U.S. business remained brisk, and was the regional driver. At the same time, it was positive to see a degree of profitability even in the ASEAN region, where the sales environment is challenging.

Opinion on Outlook – Minor positive: Toyota cut its consolidated shipment forecast by 50,000 units, but this was offset by a forecast for steady cost reduction to be stepped up and the impact of FX (2H assumption is ¥105/$1), and (fiscal year) March ’15 profit guidance was raised. The new OP target of ¥2.5 trillion is below our number and the market consensus, but given the scope for additional cost cutting we don’t see this as a concern. We acknowledge a scarcity of near-term catalysts, but view Toyota’s stable margins as highly appealing in an increasingly difficult global auto sales environment.

Daniel L. Kurnos, CFA
Benchmark Company
[email protected] (FLWS-Buy) reported predominantly uneventful fiscal Q1’15 (September) results, with a $3 million revenue shortfall vs. consensus due to a dock worker strike … on the West Coast, which also boosted profitability ahead of the Street due to a positive sales mix shift away from wholesale.

With FY15 guidance reiterated, the focus remains squarely on the holiday season, which we think has at least some promising indicators given the modest improvement in Consumer Floral sales and the slight uptick in consumer confidence, along with good sell-through in the wholesale channel.

The longer-term view also appears incrementally more positive with regards to the potential cross synergies between Flowers and Harry & David, and while management is calling for $90 million in EBITDA in FY15 with a modest decline in FY16 due to the inclusion of the Q1-FY16 loss from Harry & David, we think there is a chance for EBITDA to be flat to up slightly.

Consumer Floral growth of 4% matched our estimate, reflecting an easy comparison and the absence of any major holidays. BloomNet revenue was down 1.5% year over year, below our 5% estimate, due to the impact of delayed shipments in the wholesale channel caused by a … dock worker strike, which also impaired Gourmet Food & Gift Brands (or GFGB) revenue.

GFGB revenue was up 3.5%, with the strike impairing revenue by about $500,000-$1 million, offset by the inclusion of 16 Fannie May retail stores, reacquired from a franchisee in June.

We continue to believe Flowers will show 20-40 basis points of core EBITDA margin expansion, excluding any synergy benefits from Harry & David.

We are establishing FY15 and FY16 estimates excluding the Q1-FY15 results from Harry & David, estimating FY15 revenue may be $1.15 billion, up 52% year over year, including 4.5% organic growth. Harry & David may grow 2% year over year to $395 million, with that forecast likely proving conservative.

Our adjusted EBITDA estimate is $90 million, matching guidance, with upside likely coming from additional top-line contribution and/or increased operating leverage in the GFGB segment, including Harry & David. Our FY15 EPS is $0.81 with free cash flow of $40.6 million, or $0.62 per share. With no real synergies forecast in FY16, we estimate total revenue could be up 7% (4% organic), with adjusted EBITDA of $85 million and EPS of $0.38.


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