LCM Dawn Patrol – 17.10.13 – US end the shutdown, JPM sees more upside in the US, MS downgrades ASML, lots of Earnings. CARREFOUR, METRO, ROCHE, NESTLE

Bonjour,

US equities were higher on Wednesday with the major indexes all gaining more than 1% and finishing around their best levels for the session. The rally was driven by the likely reprieve surrounding default concerns after Senate leaders reached a bipartisan deal to fund the government through 15-Jan and suspend the debt ceiling through 7-Feb. Financials led the move higher, while homebuilders also fared well despite some softer sentiment data. However, a number of the other deeper cyclical pockets of the market failed to keep up with the tape despite the favorable risk/recovery takeaways from a likely end to the fiscal stalemate in Washington. While today’s price action was largely macro driven, the earnings calendar also influenced stock-specific moves. In addition, key Q3 earnings metrics showed some signs of improvement from earlier in the week.
Asia-Pacific markets were higher across the board, with Japanese stocks in the lead, joining the relief rally.
European markets are expected to open up as well, but there could be some pressure as many were expecting the deal to come through and may be looking to cash in their profits.

Today, we’ll watch: KPN as America Movil withdraws $9.7b takeover offer. U.K. retail sales. Spain sells bonds, France sells linkers. Biggest 3Q earnings day so far; results from Nestle, Carrefour, Roche, Diageo, SABMiller, BSkyB. In the US, we’ll get the initail jobless claims.

NEWS

• Congress Votes to End 16-Day Govt Shutdown as Obama to Sign Bill
• Merkel Backs SPD Coalition as Hard Bargaining Looms

Carrefour 3Q Rev. In Line With Est., France LFL Sales Rise
Nutreco Lowers FY Ebita Guidance to EU255m From About EU262m (oops as GS just upgraded).
BBVA to take eu2.3b charge this year on china Citic stake sale
Airbus Said to Near $5b Order From Mexico’s VivaAerobus
KPN conference call scheduled for 9am: +31 20 53 11 58 50
TeliaSonera 3Q Revenue In Line, Co. Reiterates 2013 Outlook
Telecom Italia Investor Findim Seeks Shareholder Meeting
Richemont Gets Non-Binding Offer for Lancel: Reuters
Christian Dior 1Q Rev. EU7.4b Vs EU7.2b y/y
Nestle 9-Month Organic Sales Growth 4.4%; Est. 4.5%

Ebay Sees 4Q Adj. EPS 79c-81c, Est. 83c; Shrs Down 4%
IBM Shares Tumble After Sixth Straight Quarterly Sales Decline
America Movil Withdraws $9.7 Billion Takeover Offer for KPN

Earnings

Carrefour 3Q total rev. EU21.1b, est. EU21.1b (median of 11).
• 3Q total France sales up 1.4% on reported basis; says all formats posted growth
• 3Q total intl sales up 3.8% constant FX
• France 3Q hypermarket LFL sales ex-fuel up 3%, est. up 1.6% (median of 10)
• France 3Q supermarket LFL sales ex-fuel up 2.7%, est. up 0.6% (median of 9)
• Italy 3Q LFL sales down 3.9%, est. down 6% (median of 10)
• Spain 3Q LFL sales down 1.8%, est. down 2% (median of 10)
• Belgium 3Q LFL up 1.6%, est. up 1% (median of 10)
• Brazil 3Q LFL up 8.8%, est. up 6% (median of 11)
• China 3Q LFL up 1.1%, est. up 1.5% (median of 11)
• Call 8:30am CET +33 (0)1 70 77 09 58

Metro stub yr 2013 EU46.3b, est. EU46.4b.
• FY Ebit ex-items to slightly exceed prior yr’s EU706m, confirms forecast
• Stub yr Cash & Carry rev. down 2%
• Stub yr Real rev. down 8.3%
• Stub yr Media-Saturn rev. up 0.6%
• To report FY results Dec. 12

Roche says 3Q sales rose 8% y/y to CHF11.6b.
• 3Q Pharma sales CHF9.03b vs UBS est. CHF9.03b, JPMorgan est. CHF8.8b
• 3Q Diagnostics sales CHF2.54b vs UBS est. CHF2.54b, JPMorgan est. CHF2.48b
• 3Q MabThera/Rituxan sales CHF1.81b vs est. CHF1.74b
• 3Q Avastin sales CHF1.62b vs est. CHF1.58b
• 3Q Herceptin sales CHF1.51b vs est. CHF1.51b
• Today: Roche 3Q Sales CHF11.6b vs Est. CHF11.5b; Confirms 3013 Forecast
• Conf. call at 2pm CET on +44-203-059-5862

Actelion on track to deliver 2013 double-digit constant FX core earnings growth.
• Says Opsumit approval in Europe could occur in early 2014
• 3Q op. income CHF135m vs est. CHF112m
• 3Q product sales CHF438.4m vs CHF436.9m y/y
• NOTE: July 18, co. saw 2013 double-digit constant FX core earnings growth
• Saw 2014 core earnings at least at same level as 2013, at least single-digit earnings growth in 2015
• NOTE: Pdufa date for Opsumit (macitentan) for treatment of pulmonary arterial hypertension (PAH) is Oct. 19, according to Bloomberg Industries’ est.
• Conf. call at 2pm CET on +44-203-367-9454

Nestle 9-month organic sales growth 4.4%, est. 4.5% (median of 14).
• 9-mo. real internal growth (RIG) 3%, est. up 3% (median of 13)
• 9-mo. pricing up 1.4%, est. up 1.5% (median of 13)
• 9-mo. total sales CHF68.4b, est. CHF69b (median of 11)
• Sees about 5% organic sales growth in 2013
• Sees improvement in margins, underlying EPS in constant FX in 2013
• Says Europe continues to grow, Asia, Africa have picked up speed
• 9-mo. Zone Americas organic sales growth 5.2%, est. 5.1% (median of 6)
• 9-mo. Zone Europe organic sales growth 0.7%, est. 0.6% (median of 6)
• 9-mo. Zone AOA organic sales growth 5.6%, est. 6% (median of 6)
• 9-mo. waters organic sales growth 2%, nutrition 6.6%
• Call 9:30am CET +44-20-7019-0812, pw 9M SALES

CURRENT STUFF

US eleventh hour deal averts default:The Senate and then the House of Representatives both voted to end the partial government shutdown and extend the debt ceiling into early next year while Democrats and Republicans start negotiations on a new budget. The Senate approved the agreement on Wednesday night with a vote of 81 to 18, and the House followed, approving the measure 285 to 144, although a majority of Republicans in the chamber voted against it. (Financial Times) The agreement, crafted by two Senate leaders, offers only a temporary reprieve from the brinkmanship that has become a hallmark of divided government. (WSJ)

Carlos Slim has admitted defeat in a €7.2bn takeover battle for KPN after the intervention, via poison pill, of an independent foundation linked to the Dutch telecoms group. Bernstein estimates that Slim’s América Móvil is nursing a €900m loss on its investment in KPN, although shares in the group have traded higher since the bid. (Financial Times)

Buffet’s Marmon Group, a Berkshire Hathaway company, has agreed to pay $1.1bn in cash for two units of IMI, the UK engineering group, including its drinks dispenser division that supplies Coca-Cola, PepsiCo and McDonald’s. (Financial Times)

STRATEGY

JPM (Lee) US Equity Strategy FLASH
4 reasons post-shutdown relief argues for at least 1775 by YE. 21 ideas.
We have likely avoided a default, a binary outcome that posed great risk to our thesis(even if the likelihood of a negative outcome was small, in our view). Hence, we are personally relieved as well. As we have reiterated for several weeks now, a successful post-shutdown outcome would offer sufficient positive elements for the S&P 500 toreach our 1775 YE target (14.8x ’14E EPS of $120). At the risk of sounding repetitive, we want to again highlight the four elements below:

• Foremost, fundamentals remain solid and 3Q earnings season is expected to underscore this.
• Second, history shows that markets tend to rally post-government shutdown: 4 of 5 precedent instances of shutdowns (>10 days) saw rallies into YE.
• Third, investor positioning, particularly mutual funds, suggests that clients are likely to add risk into YE.
• Fourth, the Fed is likely to be on hold even longer given the potential for a political redux in early 2014 and also the near-term “corruption” of economic data.
MARKET STRATEGY: Stick with Cyclicals. Technology and Industrials have performed the best during post-shutdown rallies. As shown on Figure 7, Cyclicals ty picallylead post-shutdown rallies, outperforming an average of 100bp. Within Cyclicals, the best performing sectors have been Technology and Industrials. We have identified 21 ideas using the following criteria: i) Positive relative performance YTD and QTD; ii) OW rated by J.P. Morgan analysts; iii) Cyclical or Financials sector; iv) 2014E P/E < 20x; v) Upside to JPM target price of at least 10%. The 21 names on average have 17% upside to JPM target prices, outperformed 21% YTD and 4% QTD, and have a 14.8x 2014E P/E and a 4.24x P/B. The 21 names include: FSLR, LCC, TRW, DIS, RKT, CMA, OMC, AVG, ATK, BLK, KEY, AL, CBS, BAC, PBCT, COF, LOW, TWX, FMER, CMCSA, and MET

UPS&DOWNS

Nokia (JPM, Deshpande) Becoming ‘Nokia’ again. IP should lead the way
With Nokia undertaking a strategic review, we evaluate where Nokia could generate more value. Our estimates show that if Nokia adopted an IP centric strategy that resulted in 1% per handset royalty (at a discount to Qualcomm’s 3%+), the stock could be valued at between €10-€15 in ’18 with additional potential depending on cash generated in the interim.

ASML Holding NV (MS, Meunier) EUV on Pause: Downgrade to EW
OW to EW, PT €70

ASML has been a great performer in the past year and we believe the share price reflects a significant ramp-up of EUV in the coming years. A 6-9m delay for main customers to commit to EUV for 10nm and discipline on our valuation methodology mean we struggle to raise our PT above €70 and d/g to EW.

Aerospace & Defence (MS, Vig) 3Q13 Preview
In the midst of numerous warnings in industrials so far in 3Q we expect Civil Aerospace earnings to perform better & largely meet expectations. However, 3Q for Defence could prove tougher given uncertainty from current US political issues & higher 2014 Sequestration risk.

Nutreco (GS, Cazzol) Buy: Scaling up in a bigger pond; up to Buy
We upgrade Nutreco to Buy as we believe the company is undergoing structural change which will lead to an improved earnings growth and cash returns profile. Our 12-month price target of €50 implies 29% potential upside.

BANCO POPULAR CUT TO UNDERPERFORM VS NEUTRAL AT MEDIOBANCA
BMW RATED NEW HOLD AT BERENBERG; PT EU85
E.ON CUT TO SELL VS NEUTRAL AT UBS
EURONAV PT RAISED TO EU6 FROM EU5 AT ING
EVERGREEN MARINE CUT TO NEUTRAL VS BUY AT GOLDMAN
GDF SUEZ CUT TO NEUTRAL VS BUY AT UBS
NUTRECO RAISED TO BUY VS NEUTRAL AT GOLDMAN
TELEKOMUNIKACJA POLSKA RAISED TO EQUALWEIGHT AT BARCLAYS
TUI TRAVEL CUT TO NEUTRAL VS BUY AT UBS

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +149.31 (+1.03%) at 14,616
Topix up +9.86 (+0.82%) at 1,207
Hang Seng up +53.39 (+0.23%) at 23,282

US markets
S&P 500 up +23.48 (+1.38%) at 1,722
DJIA up +205.82 (+1.36%) at 15,374
Nasdaq up +45.42 (+1.20%) at 3,839

European markets
Eurofirst 300 up +2.41 (+0.19%) at 1,266
FTSE100 up +22.48 (+0.34%) at 6,572
CAC 40 down -12.30 (-0.29%) at 4,244
Dax up +41.56 (+0.47%) at 8,846

Currencies
€/$ 1.35 (1.35)
$/¥ 98.60 (98.76)
£/$ 1.60 (1.59)

Commodities ($)
Brent Crude (ICE) down -0.03 at 110.56
Light Crude (Nymex) down -0.10 at 102.19
100 Oz Gold (Comex) unchanged 0.00 at 1,282
Copper (Comex) unchanged 0.00 at 3.30

10-year government bond yields (%)
US 2.66%
UK 2.83%
Germany 1.93%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.66bps at 72.79bp
Markit iTraxx Europe -1.26bps at 87.59bp
Markit iTraxx Xover -1.6bps at 354.75bp

Sources: FT, Bloomberg, Markit

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