Monday, July 16, 2018
Equity Market Recap
· Major U.S. averages end mixed as stocks fluctuated between gains and losses, Treasuries and the dollar slipped and commodity prices fell amid a 4% decline in crude oil prices. The S&P 500 index pulled back from 5-month highs while the Dow Industrial Averages managed to hold the 25,000 level and the Nasdaq Composite the 7800 level (though snapped its streak of 2-straight days of setting record highs). Among top stories today outside of the upcoming corporate earnings or continued slide in the commodity markets (gold to 52-week lows and oil prices falling further), was the joint press briefing between U.S. President Trump and Russian President Vladimir Putin. Trump and Putin called their talks at the summit successful, saying there were no reasons for tensions between the U.S. and Russia in their joint press conference. However, several members of the U.S. government expressed their displeasure and disappointment of Trump following his responses to the allegations of Russia meddling in the 2016 election among other topics. The IMF said it sees slower-than-expected growth for euro area, Japan and UK saying global expansion has plateaued and is under threat from trade disputes (showing the trade war fears remain).
· Sector movers: Financials outperformed, helping offset weakness in the energy sector, as earnings results from Bank America and a rise in Treasury yields helped propel the banking sector ahead of results from GS, CMA, and SCHW tomorrow morning. Energy stocks drop as WTI crude and Brent oil each slumped over 4%, extending last week declines. Transports sunk, weighed down by the trucking group after JBHT quarterly results topped estimates, sending shares up as much as 6.7%, only to see share sink more than 4% later, dragging the Dow Transports down over 150 points earlier. In tech, all eyes on NFLX ahead of earnings tonight (+105% YTD) while AMZN kicked off its 36-hour Prime Day event this afternoon.
· The Empire State manufacturing index fell -2.4 points in July to a reading of 22.6, down from the June reading of 25 (which was an eight-month high), but came in above estimates for a 21.0 reading; July prices paid fell to 42.7 from 52.7, new orders fell to 18.2 vs 21.3 and the number of employees fell to 17.2 vs 19.0; six-month general business conditions fell to 31.1 vs 38.9; shipments index fell 8.9 points to 14.6. Indexes for unfilled orders and inventories also declined
· Retail sales for June rose 0.5%, in-line with consensus views while retail sales less autos rose 0.4% in June, vs. est. 0.3%; The increase last month followed an even bigger burst of spending in May, when sales grew a revised 1.3% instead of previously reported 0.8%. Retail sales have increased 6.6% over the past 12 months.
· Business Inventories for May rose 0.4% MoM, in-line with consensus estimates as business sales rose 1.4% in May after rising 0.6% the prior month; April business inventories rose 0.3% m/m, unrevised; retailers sales rose 1.1% m/m in May after rising 0.4% prior month; Inventory/sales ratio at 1.34 in May vs 1.39 a year ago; lowest since Dec. 2014
· Oil prices dropped again on Monday, with WTI crude down nearly $3 on the day, or 4.2% to settle at $68.06 per barrel (lowest level in 3-weeks). The decline follows a -3.8% drop in WTI last week. Brent crude prices fell over 4% to a three-month low as supply outages in Libya eased and output increases from global producers were in focus. A combination of a potential slowdown in the global economy, as the IMF said that growth is slowing in the euro area, Japan and the United Kingdom and warned that a further escalation of trade tensions stands as the greatest near-term threat pushed prices lower. Talk late Friday (as per the WSJ) of a possible release from global crude reserves (the SPR) by the U.S. also weighed on sentiment. Reports Saudi Arabia was said to offer extra crude to some customers also took its toll on oil prices. Precious metals end lower, falling -$1.50 to settle at $1,239.70 an ounce early, holding around 1-year lows around $1,240 an ounce after falling last week on the resurgent dollar.
· The U.S. dollar fell vs. most currencies following its 1% gains last week vs. major counterparts as markets erred on the side of caution after the summit between U.S. President Donald Trump and Russian President Vladimir Putin. The British pound fell from highs of 1.3293, ending near Friday’s closing levels of 1.3230 as Prime Minister Theresa May faces opposition to her Brexit plan from all sides and is fighting to put down a rebellion within her party. The Russian ruble was slightly stronger versus the greenback, after the meeting between Putin and Trump. Bitcoin back near highs late afternoon, up over 8% just shy of $6,700 (highs $6,709.54 and lows $6,330.98), getting a lift today after reports that BlackRock, which has more than $6 trillion under management, has put together a team to explore potential investments in digital currencies and blockchain. The euro and yen each posted small gains on the day against the dollar.
· Treasury markets end lower, but off their worst levels, as yields slip from highs in afternoon trading; bonds yields fell from earlier highs around 2.873% earlier (highest in over a week) to settle around 2.85% while the 2-yr yield dropped back to 2.595% after earlier highs 2.605%. Economic data was mostly strong (retail sales, empire manufacturing), adding to expectations the Fed will remain on track for two additional rate hikes this year as inflation heats up.
Sector News Breakdown
· Retailers; VFC was upgraded to overweight and tgt raised to $105 at JPMorgan as sees an attractive risk/reward profile at current share levels given the company’s multi-year inflection; COLM downgraded to neutral at DA Davidson saying brand strength remains intact but is now reflected in share price and lacks near-term catalysts until winter; TIF tgt raised to $150 at Loop Capital after updating model for the company’s growth prospects as they now see them; SBH was downgraded to underperform at Bank America and cut tgt to $15 from $17 given challenges to sales and margin expansion
· In toy retail, FNKO was downgraded to neutral at Goldman Sachs after recent strength, as shares have gained 80% since added to their Americas Buy List in November, while HAS was downgraded to market perform at BMO citing valuation, but is also concerned that the Toys “R” US liquidation may have a larger impact than expected
· Consumer Staples; Guggenheim raises PTs for both PFGC (to $43 from $41) and USFD (to $45 from $40), with PFGC still Best Idea as they remain constructive on the foodservice distributors, on the belief that their 7-9% secular EBITDA growth potential is increasingly rare; Supermarket operator Albertsons Cos. reported improved Q1 results as it prepares to merge with drugstore chain RAD/Albertsons posted a quarterly loss of $17.7M vs. a loss of $204.9M a year earlier
· Restaurants; DRI downgraded to neutral at Maxim after the share price reached our $112 price target on Friday, noting it has been a steady performer in recent quarters, and we see sustained comp growth, margin expansion, a rebound at Cheddar’s, and buybacks contributing to at least mid-teen EPS growth; DPZ positive mention at Longbow saying believe domestic franchised same-store sales were up 8.0-8.5% in 2Q18, which encompasses their estimate for 8.0% growth but lies ahead of consensus at up 6.8%; SBUX tgt cut to $58 at RBC believe Starbucks will reduce its growth targets to more realistic levels
· Energy stocks were among the top underperforming sectors this morning, with oil prices extending last week declines, as WTI crude slumped more than 2% after last week decline of -3.8%. Oil prices have rallied 15% in 2018 so far, but prices have slumped over the last few weeks as Libya supply comes back on line and Saudi pumps more oil
· Stocks movers; in IPO space, largest deal this week is the $300 million IPO of AFG Holdings Inc., the oil services company that will mark a return to the market for that sector (have been just six energy IPOS in 2018); TDW and GLF to combine to be $1.25B Offshore Vessels Co. as GulfMark holders will beneficially own 27% of the combined entity, or total value of about $340M out of $1.25B equity market capitalization of the combined co. based on Tidewater’s July 13 closing price; CLD shares fell after U.S. Mine Safety and Health Administration released data showing lower 2Q production for the Wyoming-based coal producer.
· Utility stocks slip, as the UTY falls amid a bounce in Treasury yields, making dividend paying sectors less attractive; MDUacquired the operations of Molalla Redi-Mix and Rock Products, Inc. for an undisclosed term – said the acquisition will be accretive to 2018 earnings per share
· Large Cap banks; earnings remain top story for group this week; BAC quarterly profit jumped 33%, topping estimates on slightly better revs helped by tax cuts and a boost in trading as Fixed-income trading rose 2% and equities surged 17% and currency trading up YoY; in European movers, DB shares rise as sees Q2 net income of about 400 million euros ($468 million) and income before income taxes of about 700 million euros, “considerably” above estimates; WFC upgraded to outperform at KBW Inc. after earnings last week, noting share underperformed with earnings but they saw enough in the quarter to make them more constructive longer term; asset manager BLK also reported slightly better EPS and revs but noted that investors pulled $22.4 billion from its equity products in the second quarter. Inflows into its iShares products totaled $17.8 billion, the lowest since the second quarter of 2016
· Monthly Master Trust credit card data: 1) AXP June write-off rate 2.0% vs. 2.2% last month and reports June 30 days past due loans 1.3% vs. 1.3% last month;2) JPM June Credit-Card Charge-Offs 2.39% vs 2.56% Mom, while June delinquencies 1.11%; 3) SYF June charge off rate 4.73% vs. 5.26% last month and June 30-plus day delinquencies 2.72% vs. 2.73% last month; 4) ADS June net charge offs 6.6% vs. 6.4% last month and June delinquency rate 5.5% vs. 5.4% last month; 5) DFS June charge-off rate 3.4% vs. 3.4% last month and delinquency rate 2.2% vs. 2.2% last month
· REITs; in storage REITs, Evercore ISI downgraded PSA to underperform and CUBE to in-line ahead of earnings season as believe the sector could be setting up for some relative underperformance following the strong run YTD (sector is up +11.9% vs. +2.2% for the RMZ), especially with PSA where we are positioned below the Street on Q2, FY18 and FY19 FFO estimates. AMT was downgraded to neutral at Guggenheim pending the outcome of negotiations with an existing customer in India, while FX presents an increasing headwind
· Biotech and Pharma industry; Dow components JNJ and UNH report earnings tomorrow morning; Crispr stocks fell (EDIT, CRSP, NTLA) after CRISPR-Cas9, a therapy from Crispr Therapeutics, can cause significantly greater genetic damage than experts previously thought, STATNews reports, citing a study published on Monday in Natural Biotechnology; XONwas downgraded to underperform at Bank America; IRWD said it has initiated a Phase 3b clinical trial assessing linaclotide for the treatment of multiple abdominal symptoms, including bloating and discomfort, and pain in adult patients with irritable bowel syndrome with constipation (IBS-C); AVRO initiated by at least four analysts with overweight/outperform ratings; MGTA initiated by four analysts, all with buy/outperform ratings (Street high $22 tgt at Wedbush)
· Medical equipment and devices; WAT was downgraded to underperform at Bank America and tgt cut to $190 from $200 as see continued softer performance and think 2018 targets (4-6% organic sales growth) may be too ambitious; OSUR shares fall after Stephens downgraded to equal-weight as feels the molecular collection business and long-term prospects for microbiome are largely reflected in the stock at its current levels
Industrials & Materials
· Industrial & Machinery; PH was downgraded to neutral and tgt cut to $164 at Goldman Sachs as believe consensus numbers are too high and peak cycle concerns are likely to persist, skewing a more negative risk/reward at current levels; ROK was downgraded to sell at Goldman Sachs as believe that it will be difficult for ROK to outperform as growth/EPS decelerates
· Farnborough International Airshow to be held in Farnborough, England on July 16-22: updates included: BA and ERJ won orders valued at $2.3 billion from UAL as the airlines said it will buy 25 Embraer E-175 planes and four Boeing 787-9 Dreamliners; Leonardo SpA (LDO.MI) said that it received an order for up to 21 helicopters from Milestone Aviation Group
· Aerospace & Defense; ARNC has received takeover interest from private-equity firms, including APO the Wall Street Journal report, citing people familiar with the matter. A deal for the aerospace parts maker could be worth over $10B
· Transports; truckers active after JBHT Q2 results topped analysts’ expectations on revs $2.14B vs. est. $2.06B (shares of HUBG, WERN, KNX, CHRW among movers in sympathy) – shares jumped more than 6% early to highs around $130 before slipping to 200-day MA support of $116.73 later; KNX was also upgraded to overweight at Barclays saying Trucking fundamentals remain robust and plenty of company specific opportunities lie ahead for Knight
· In freight and package delivery, UBS downgraded FDX to neutral from buy saying with a large global Express business representing 55% of revenue and about 13% of revenue linked to Asia, FedEx is exposed to risk from tariffs and potentially slower trade activity. UBS upgraded UPS to buy from neutral and raise tgt to $125 saying the combination of cost and productivity improvements, coupled with a constructive” revenue backdrop, provide potential for improved Domestic Package margin performance and stronger operating income growth in 2019 for UPS
· Packaging sector; Bank America notes the sector has been beaten down YTD and recommends buying, particularly if stocks have growth or “some controversy.” Preferred companies include CCK, BLL, BERY, GPX, WRK and PKG saying based on its strategy team’s analysis, thinks that market likely in a cycle where a potential late-summer buy signal could lift stocks (firm upgraded LPX to buy while downgraded GEF to underperform)
· Metals & Mining; The U.S. launched separate disputes at the World Trade Organization against China, the European Union, Canada, Mexico and Turkey. “The U.S. steel and aluminum duties imposed by President Trump earlier this year are justified under international agreements the United States and its trading partners have approved. However, retaliatory duties on U.S. exports imposed by China, the EU, Canada, Mexico and Turkey are completely without justification under international rules,” the U.S. Trade Representative said
· Chemicals sector; Goldman Sachs said Titanium dioxide (TiO2) sector is nearing a peak as multiple factors are signaling a deterioration of producers’ pricing power, as the firm cut its targets on VNTR to $16 from $23 and CC to $52 from $62. Firm sees weakening TiO2 fundamentals as an important development for coatings consumers, creating the potential for an improved price/cost dynamic beginning in 2019
Technology, Media & Telecom
· Internet; NFLX with earnings after the close tonight – downgraded at Buckingham to neutral saying optimistic forecasts are already priced in at these levels, while Citigroup said the near term setup for Netflix shares may not be favorable as the stock is up 115% year-to-date, putting the valuation at an all-time high; AMZN shares active ahead of its upcoming 36-hour Prime Day which started today
· Semiconductors; NXPI at Morgan Stanley, said following weakness in NXPI over the past month, they see the upside/downside slightly better than even at this point. Specifically, we see 18% upside to the $127.50 takeout price and 14% downside to the potential level of support we have identified at $92 in the event of a deal break. AMD tgt raised to $21 from $17 at Stifel citing data showing the Zen-based CPU line tracking in-line to slightly above guidance
· Software movers; VMW tgt raised to $190 from $161 at Bank America based on continued strong fundamentals and updated long-term framework (notes based on 19x CY19E EV/FCF multiple, 15% discount to RHT’s 22x as VMW grows billings in the mid-teens vs 17-18% for RHT)
· Optical Comms (OCLR, FNSR, NPTN, LITE, IPHI, IIVI, MTSI) active after the US Dept. of Commerce announced the lifting of the ban against US companies shipping products to Chinese OEM ZTE. Optical comms companies with historical exposure to ZTE that would benefit from this event include OCLR (18% F17 sales), FNSR (~5-7%), NPTN (up to 5% of sales expected in C18), IPHI (2-3% of sales expected in C18), LITE (~1%), MTSI (~1%) and IIVI (~1%) as per Craig Hallum research
· Media & Telecom; broadcasting stocks fell broadly after FCC Chairman Ajit Pai said “based on a thorough review of the record, I have serious concerns about the SBGI/TRCO transaction”. The evidence we’ve received suggests that certain station divestitures that have been proposed to the FCC would allow Sinclair to control those stations in practice, even if not in name, in violation of the law. The commentary weighed on shares of NXST, GTN, TGNA along with SBGI and TRCO