Wednesday, May 9, 2018
Equity Market Recap
· Major U.S. averages surged on Tuesday, with energy, technology and financials taking the leadership role as the Dow topped 24,500, the Nasdaq 7,300 and the S&P 500 back to 2,700. After a three-week rally that erased the dollar’s 2018 losses, the dollar took a breather, ending little changed, while WTI crude oil prices reached fresh highs (best levels since November 2014) amid bullish inventory data and yesterday’s announcement from President Donald Trump that the U.S. will exit the Iran nuclear deal and reimpose sanctions (possibly disrupting supply in the near-future). With today’s gains, the Dow Industrials make it a 5th straight day of gains, its best winning streak since mid-February ahead of key inflation data tomorrow morning (CPI for April). Also tomorrow, the Bank of England (BOE) holds its monetary policy rate decision (no changes expected given the weaker inflation readings). Small caps extend gains as the Russell 2000 index approaches the 1,600 level, outperforming large caps of late. Earnings season wrapping up, with Wells Fargo noting (coming into today) that roughly 87% of the S&P 500 constituents have reported and EPS beats are outpacing EPS misses (333 vs. 100) while sales beats are outpacing sales misses (322 vs. 116). Strong quarter for companies, but cautious guidance and outlooks have kept stocks from trading to new highs, along with concerns over trade and tariffs.
· Producer price index (PPI) for April rises a less-than-expected 0.1% (est. +0.2%), down from the 0.3% increase last month while core prices (ex: food & energy) also rose 0.1% (also missing the +0.2% estimate). The 12-month rate of wholesale inflation slipped to 2.6% from 3%. The March reading was the highest the government has recorded since it reformulated the PPI in 2013. The yearly rate of core inflation slipped to 2.5% from 2.9%.
· Wholesale Inventories rose 0.3% in March, below the 0.5% estimate as March wholesale inventories increased to $627.4B vs $625.3B in prior month; Feb. inventories revised to 0.9% from 1.0%, while wholesale inventories excluding oil rose 0.4% in March. Wholesale sales rose 0.3% in March after rising 1.1% the prior month
· Oil prices rise, leading overall commodity prices higher, with WTI crude up $2.08, or 3% to settle at $71.14 per barrel back at best levels since November 2014 after yesterday’s brief hiccup lower, while Brent crude tops the $77 per barrel level. A combination of bullish inventory data (from API overnight and EIA this morning – more below) and news that the U.S. pulled from the Iran nuclear accord, reinstating sanctions against the OPEC member, leading to fears of reduced supply, helped push prices across the board. Gold futures ended little changed again, slipping 70c to $1,313.00 an ounce, falling for a third straight session
Currencies & Bonds
· The dollar erased early gains and bounced off lows to end little changed around the 93 level for the dollar index (DXY). The dollar pulls back from its best levels since December yesterday (highs of 93.41) ahead of key inflation data tomorrow (CPI). The greenback was unaffected by the softer PPI reading today (both headline and core), as the euro ends little changed at 1.186, while the Pound steadied off multi-month lows ahead of its BOE policy meeting tomorrow. The Canadian dollar rallied behind the push in oil, bouncing off 6-week lows.
· Treasury markets dip as the benchmark 10-year yield topped the 3% earlier as investors rotate back into U.S. stocks this week. Inflation data was slightly weaker (PPI for April) on both the headline and core prices, ahead of the important CPI data tomorrow. In the afternoon, the U.S. Treasury sold $25B in 10-year notes at a yield of 2.995% compared to 2.994% when issued prior; the bid-to-cover (demand) was 2.56 vs. 2.46 in prior auction and indirect bidders awarded 63% and directs receiving 8.3%.
Sector News Breakdown
· Retailers; WMT agrees to make about a $16 billion investment in Flikpart Group, acquiring an initial 77% majority stake in the Indian e-commerce market leader (beating out AMZN) https://reut.rs/2IuEPEM ; CROX downgraded to hold at Stifel; WWW posted Q1 EPS beat by 13c on higher revs while lifts 2018 guidance; SHLD rises as Sears Auto Centers said it is working with Amazon.com to provide full-service tire installation and balancing for customers who purchase any brand of tires on Amazon.com (ORLY, AAP, AZO, MNRO slipped on headlines)
· Consumer Staples; MNST reported mixed 1Q18 results, with sales ~1% ahead of consensus while EBIT was ~5% below expectations (was downgraded at JPMorgan); COTY posted Q3 revenue above consensus views helped by luxury fragrances; TSN and Cargill have shown interest in potentially buying Keystone Foods, the U.S. supplier of chicken nuggets to MCD, Bloomberg reports https://bloom.bg/2K7iN8f
· Restaurants; PZZA Q1 earnings and revs missed views with revs down ~5% mainly due to lower comparable sales in North America restaurants/reaffirms FY18 forecast; WEN Q1 comp sales missed estimates after in-line earnings and revs; CMG said it has seen a 667% increase in weekly delivery orders since initiating the partnership with DoorDash; RRGB upgraded to buy at Stifel; other restaurants moving on earnings: BOJA, CHUY, PBPB
· Housing & Building Products; in roofing, BECN downgraded to hold at Jefferies as reported disappointing GMs and operating expense and noted top line comps are difficult in 2H owing to storm activity; CSTE shares plunge after cutting its 2018 revenue and adjusted Ebitda views, and as first-quarter adjusted EPS and revenue trailed estimates; overall broad weakness in homebuilders on the day early (LEN, TOL, MTH, DHI)
· Auto movers; ADNT was upgraded to buy at Longbow as believe the stock price is de-risked following the 2020 guidance reduction and like risk/reward; Morgan Stanley upgraded auto parts supplier TEN to equal weight but downgraded ADNT
· Casino, Lodging & Leisure; in fitness center, PLNT EPS met expectations, as strong membership growth and pricing increases were offset by higher expenses and reiterated guidance; in lodging, MAR shares dropped initially following earnings results
· Inventory data: the EIA reported weekly crude inventories fell an unexpected -2.1M barrels, compared to the 1M barrel build expected (Cushing rose 1.38M barrels). Gasoline inventories fell -2.7M barrels (vs. est. unchanged) and distillates fell a greater -3.7M barrels (vs. est. -1.5M). Last night, API reported that U.S. crude supplies fell by nearly -1.9M barrels for the week ended May 4; showed a fall of about -2.1M barrels in gasoline stockpiles, while inventories of distillates dropped -6.7M barrels
· Top news; ENB agrees to sell a 49% stake in some North American onshore renewable power assets and two German offshore wind projects to the Canada Pension Plan Investment Board for C$1.75B; XOM says Algeria’s state energy firm Sonatrach will buy its 175K bbl/day Augusta refinery in Sicily; financial terms are not disclosed; 52-week highs for several energy names: PXD, OKE, OXY, MRO, VLO, PSX, COP, NBL, HES, APC in the S&P 500 index
· Earnings; OXY EBITDA/EPS beat expectations and Permian Resources production exceeded the upper end of guidance (first time since 4Q16 Permian Resources exceeded guidance midpoint according to one analyst).
· E&P sector; GPOR shares rise as increased its production guidance by 4% for 2018 and is now estimating 20-23% growth while spending within cash flow, while capex was reduced by $20M due to the impact of its Strike Force interest sale; other E&P earnings results from AXAS, BCEI
· MLPs; PAA and PAGP downgraded to hold at Stifel and no longer include S&L cash flows in our EBITDA calculation to determine valuation or our target price; MLPS higher, with the Alerian MLP Index (AMZ) higher, but not rallying as widely as E&P, equipment and service stocks as the recent rise in Treasury yields weighing on the high dividend paying sector
· Utilities & Solar; sector opened lower as 10-yr yield back above 3%; UTY down for a 3rd straight day and seven of its last 8 days; PPL prices 55M secondary offering at $27 per share; SPWR shares dipped on mixed results while VSLR shares declined; solar stocks got a boost late day after California voted to require rooftop solar power on new homes (FSLR, SPWR, JKS, SEDG)
· Large Cap banks among top beneficiaries as yields still pushing higher (10-yr topped 3%); in earnings, AMBC significantly better than expected earnings were largely due to the company exiting rehabilitation whereby insurance beneficiaries agreed to swap their paper; consumer finance and lending; LC shares outperformed, rising over 20% after its earnings results; in REITs, LXP downgraded to sell at Stifel saying it has little chance of FFO growth and may cut its dividend
· Large Cap Pharma; HZNP 1Q sales of primary care medicines dropped 21% YoY citing greater than expected seasonality and a $14M accrual in wholesale, retail channel following price action; IRWD was downgraded to underweight at Morgan Stanley saying shares have run ahead of fundamentals; LPCN plunges as FDA Response on Tlando notes four deficiencies; MYL Q1 EPS in-line while revs fell short of consensus, but reaffirmed its year outlook; ARNA posts a wider than expected quarterly loss; other movers on earnings, LGND, OPK, JAZZ; ARWR shares rose as analysts positive following the 2Q18 earnings report and ARWR’s transition to clinical-stage development with subcutaneous delivery (upgraded at Cantor)
· Medical equipment and devices; BIO shares jump as earnings handily top consensus on better revs and backs its year revenue growth; CUTR shares plunged over 25% as Q1 sales missed consensus on weaker earnings; QDEL surges after Q1 EPS beat by 28c
Industrials & Materials
· Aerospace & Defense; ARNC upgraded to buy and $23 tgt at Longbow as see the sub-$18 price as a good entry point for a company highly-levered to aerospace growth (representing 40-45% of company sales) that may also participate in future M&A activity; Citigroup on defense space saying the stocks can still work after the group has sold off in the past few weeks as firm upgraded HII to buy after a reset in earnings expectations, while RTN remains its favorite; AAXN shares surge after analysts note convincing Q1 beat (Ladenburg raises tgt to $54 from $48)
· Industrial & Engineering; FLR double upgrade to buy from underperform at Bank America reflecting their more constructive stance on the energy and mining capex cycle in the coming years; JEC was upgraded to neutral at Macquarie
· Transports; UPS and the Teamsters union are discussing a two-tier wage system that would allow the company to hire lower-paid workers to deliver packages on weekends, including Sundays, to meet e-commerce demand; airlines declined (DAL, UAL, AAL), which offset the strength in the rail sector (UNP, CSX, NSC)
· Metals & Mining; KGC Q1 earnings beat estimates but production falls; ABX agrees to acquire a 19.9% stake in Midas Gold, which is developing a project in Idaho, for ~$38M
· Chemicals; CBT upgraded to outperform at Baird saying believe recent tailwinds in the carbon black market are structural in nature and should contribute to sustained market strength; IPI was upgraded to overweight at Stephens saying the worst is behind us in pricing, and the path toward deleveraging becomes clearer; KRO falls as one analyst noted reduced TiO2 output cuts sales vols
Technology, Media & Telecom
· Internet; in online travel, TRIP shares jump after 1Q earnings and revenue beat the highest estimates helped by FX tailwinds which contributed ~500bps to Rev and ~700bps to Adj EBITDA growth according to one analyst/also guided to EBITDA growth for the year vs. its prior guidance of flat; GRPN Q1 beats on EPS/revs with $300M share buyback and FY Ebitda view above est.; ETSY guidance was raised, implying ~23% revenue growth and 22% EBITDA margins at midpoint; SINA and WB declined despite better earnings results; GDDY rises on earnings/guidance
· Media movers; Dow component DIS EPS of $1.84 beat street $1.70 by 8%, revs of $14.55B were 3% ahead of views as media had a good quarter, Parks had a great quarter and Studio had a stellar quarter (Avengers); FOXA agreed to buy seven television stations from SBGI for about $910 million https://reut.rs/2ItoU9E ; VOD has agreed to pay $21.8 billion to buy LBYTA’s assets in Germany and eastern Europe https://reut.rs/2rubGQ3 ; in research, BATRK was upgraded at Morgan Stanley noting down about 10% in the past six months against the backdrop of appreciating sports team values; MTCH falls despite better Q1 results as analysts point to relationship with Facebook gets even more complicated
· Semiconductors; Nomura with a broad call, saying multiples continued to compress in April despite positive revisions (Apple suppliers the exception). That being said, this weakness looks temporary and are encouraged by the performance in May and look for companies reporting off quarter (ADI, AMAT, NVDA) or hosting analyst meetings (QRVO, MU, XLNX) to reassure investors that 2H-18 won’t fall off a cliff. Firm upgraded XLNX and downgraded AVGO while saying INTC will grind higher as data points later this month reaffirm strong enterprise demand. In other semi news; DIOD reported Q1 beat and upside revenue guidance from $292M to $308M
· Software movers; TWLO rises on Q1 results that beat EPS and revenue estimates with a 48% Y/Y revenue growth, with upside guidance; CHKP downgraded to hold at Argus as remains mired in sales execution issues; MB shares fall as Q1 results met revenue estimates and beat on EPS but issued downside guidance for both Q2 and full-year; VERI earnings that showed a top line beat led by the AI platform business; CA reported revenue results in-line with consensus while EPS and CFFO were above; RPD Q1 results, supported by accelerating ARR growth to 38% and raised revenue guidance; NEWR surges following a solid F4Q beat on revenue, billings, margins and EPS; HDP shares tumbled as revs beat for the quarter but billings disappointed; MXL drops on Q1 miss
· Optical movers; AAOI reported a soft 1Q and guided 2Q essentially in-line with consensus as Craig Hallum notes 100G sales were down q/q for 3rd straight quarter; OCLR March results above consensus, but didn’t provide guidance; NPTN dropped after missing earnings and revenues
· Video gamers; EA reported a solid 4Q beat across all key metrics and saw full year EPS exceed initial guidance ($4.38 versus $4.10) for a fifth consecutive year (note showing any negative effects by the sudden popularity of Fortnite); marks the third straight US video game publisher to post strong results despite Fortnite strength (ATVI, TTWO also active)
· Movers to the upside on earnings: GDDY, NEWR, TRIP, TWLO, VDSI, ZAGG
· Decliners on tech on earnings: CNK, CSPI, EXTR, HDP, MXL, NPTN, TRUE, WB