Wednesday, July 25, 2018
Equity Market Recap
· The benchmark S&P 500 index traded to its best levels since January, while the NASDAQ outperforms after trading back at new highs, and the Dow jumped nearly 200 points after reports late day that President Trump is said to secure EU concessions to avoid a trade war, Dow Jones reported. U.S. stocks also got a lift on headlines that Senators introduce a bipartisan bill to delay auto tariffs, raising hopes for markets that the trade impact, which has already dented several profit forecasts during earnings season, may become a non-factor. Companies, especially in the auto sector (GM, FCAU, and HOG), have noted the potential impact of upcoming tariffs to their forecasts as trade remains a “hot button” for stocks.
· Markets await a handful of a few large macro catalysts including: 1) a key trade-related meeting between President Donald Trump and European Union chief Jean-Claude Juncker tonight (“I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies!” Trump said in a Tuesday night tweet), 2) the European Central Bank policy decision tomorrow with unanimous expectations look for the ECB to leave its three key rates unchanged, 3) NAFTA talks between Canada and Mexico today and Mexican minister speaking with U.S. Trade Representative Robert Lighthizer tomorrow.
· Several sectors were once again active amid the earnings barrage this week: Auto sector biggest drag on markets after GM and FCAU both lower their annual profit forecasts, while auto dealer LAD slashes its outlook. New Home sales tumbled to an 8-month low, hitting housing market stocks, along with lower guidance from OC, TUP today (follows WHR yesterday). Transports rebound behind better UPS results. Semiconductors mixed ahead of busy week of earnings and deadline for China gov’t approval of NXPI/QCOM deal tonight. Lodging stocks fall on HLT guidance. Aerospace and Defense names mixed as BA and NOC drag industry lower on guidance, while GD rises. Staples get a lift as beverage giant and Dow component KO raises guidance. Tonight attention turns back to tech with FB reporting after the close.
· Oil prices end higher following bullish inventory data, as the EIA reported a weekly draw of -6.14M barrels, more than the expected -3M barrel draw (bullish), while gasoline also a bigger draw of -2.3M barrels vs. est. -1.09M (also a bullish data point). Meanwhile the American Petroleum Institute late Tuesday had reported an inventory decline of 4.2 million barrels.
· August gold prices rose $6.30, or 0.5% to settle at $1,231.80 an ounce, getting a lift as the dollar lumped late day to lows, and as traders positioned themselves ahead of upcoming meetings on trade between the US and its partners. U.S. and Europe faced a key test in the afternoon meeting between the European Union’s top official and President Donald Trump.
· The U.S. dollar slipped to lows late day ahead of President Trump’s meeting with EU Junker about trade and auto tariffs. The euro edged higher late day, trading back above the 1.17 level vs. the dollar while the greenback slipped vs. the yen below the 111 level (after recently touching 6-month highs of 113.17). The British Pound traded to afternoon highs as well, rising 0.25% (1-week highs), while the dollar slipped vs. the Canadian dollar to lows of 1.3040 ahead of Nafta meetings the next few days and following report that U.S. senators have introduced a bipartisan bill that would delay auto tariffs. Bitcoin prices pare recent gains, falling over 1% to $8,100 (but up over 30% from June lows)
· Treasury bonds edged higher as yields eased off 1-month highs as markets await the latest developments between Washington and its international trade partners, as President Trump was to meet EU’S Juncker later today. Also helping bonds, a strong auction as the U.S. Treasury sold $36B in 5-year notes at a yield of 2.815% vs. 2.825% when issued with the bid-to-cover (demand) at 2.61 vs. prior 2.55 and indirect bidders awarded 67.2% of auction. The 10-year yield fell 1 basis points to 2.94%, while the 30-yr slipped 1 basis points as well to 3.065%. However, the yield on the 2-yr note rose 0.5 bps to 2.657%, hanging around its highest yield since 2008.
· New Home Sales for June fell (-5.3%) to 631K, below the 668K estimate; new home sales fell 35K in June from prior month, while the previous three months’ new home sales data revised down by 27K; median new home price fell 4.2% y/y to $302,100; average selling price at $363,300; 18% of new homes sold in June cost more than $500,000, up from 17% prior month
Sector News Breakdown
· Retailers; LULU hired Calvin McDonald as its new CEO. Mr. McDonald was most recently at Sephora; LB downgraded at Evercore ISI and initiated a 5% short position in his model portfolio after new evidence of declining brand engagement for both Victoria Secret and Pink; LVMHF upgrade to outperform at Raymond James. Saying it diversified profile makes it one of the most defensive and attractive plays in the luxury goods world; COLM was downgraded to hold at Pivotal Research; IRBT shares jump after Q2 results topped views saying int’l sales fueled rev beat, while raising its full-year outlook; CROX upgraded to buy a Pivotal
· Autos; sector among top underperformers after FCAU and GMlower guidance; GM cut its full-year earnings forecasts because of higher steel and aluminum costs (after Q2 EPS beat by 4c on in-line revenue) – cuts year view to $6.00 from prior mid-$6.00 range, est. $6.41; FCAU posted a 17% miss at Ebit line in 2Q and cut 2018 Ebit guidance by 11% at the mid-point; auto dealers weak as LAD posted Q2 results below consensus and slashed its earnings and revenue forecasts for 2018, saying it will no longer provide annual outlook starting in 2019; also auto industry legend Sergio Marchionne passed away at age 66 amid complication to surgery; auto supplier DAN falls as Q2 EPS missed by 4c and weaker annual sales forecast
· Consumer Staples; KO reported 2Q results that topped estimates and slightly boosted year organic revs and comparable FX-neutral operating income views (now sees “at least” 4% growth in organic revenues and “at least” 9% growth in comp FX-neutral operating vs. prior view of ~4% organic rev. growth and 8%-9% growth in comp FX); in the protein sector, Mizuho downgraded HRL to underperform and maintains TSNas top pick saying in sum, for the quarter, they are below consensus across the board saying they aren’t calling a bottom for protein prices until 1H19 when the swell of protein thins; USNA shares rally early after Q2 beat and guidance; SAM was downgraded to underperform at Macquarie ahead of earnings
· Housing & Building Products; in roofing, OC shares slumped after 2Q results missed, and the company said it expected the overall U.S. asphalt shingle market to be down mid-single digits on lower storm demand (BECN, BLDR, NCS active); TUP shares slide following softer guidance for the year ($4.25-$4.35 vs. est. $4.50); housing related names fell yesterday after lower outlook from WHR on tariff fears; VMC was downgraded to neutral at Bank America in building materials as think valuation looks fairly full and we see risk of California repealing its gas tax hike an overhang on shares at least through October.
· Casino, Lodging & Leisure; in leisure, RV maker PII shares fall as one analyst noted reported top- and bottom-line results that topped estimates, but Motorcycle revs fell 13% and EPS guidance was essentially unchanged (MPX rises on results in marine space); in lodging, HLT reported in-line Q2 EPS of 70c on slightly better Ebitda, but falls as Q3 EPS view of 71c-76c misses the 77c estimate; in parks, SIX posts mixed Q2 results (revs beat but Ebitda missed); RV stocks fall (THO, WGO, LCII, CWH after RVIA’s June survey of manufacturers showed RV wholesale shipments finished at 41,990, down -11.4% from the 47,416 units shipped last June
· Inventory data: The API reported that U.S. crude supplies slid by -3.16M barrels for the week ended July 20, also showed supplies of gasoline fell by -4.87M barrels, while distillate stockpiles slid -1.32M barrels. The EIA reported a weekly draw of -6.14M barrels, more than the expected -3M barrel draw, while gasoline also a bigger draw of -2.3M barrels vs. est. -1.09M
· E&P sector; CLR reported soft 2Q production results, though the shortfall looks to be transitory due to inclement weather in the Bakken (CLR’s Q2 production averaged 284 MBOE/d (vs. KeyBanc 286 MBOE/d estimate and guidance of 285-290 MBOE/d).
· Top movers; BE 18M share IPO priced at $15.00; HES one of first integrated names to report this week (still get CVX, XOM, COP later in week), as posts narrower than expected Q2 EPS loss of (23c); SPN reported mostly in-line Q2 results
· Banks have gotten a lift the last few days on rising Treasury yields, boosting lending margins; today earnings results from regional banks HBAN, NYCB (Q2 EPS missed), FBP, FCF, FMBI, PB, STL; in insurance and P&C, CB Q2 combined ratio missed estimates
· Financial technology; Credit Suisse said SQ and PYPL may actually benefit from increased regulation in the U.K., as it could encourage more competition and help the firms win share as they seek to penetrate the country’s brick-and-mortar market (notes payments stocks with exposure to the U.K. such as WPsold off on Tuesday amid concerns about the U.K. Payment Systems Regulator’s review of the merchant-acquiring industry)
· Asset managers and brokers; AMTD upgraded to neutral at Credit Suisse after earnings; TROW Q2 adjusted EPS of $1.87 beats consensus by 9c and higher QoQ and YoY; AMP Q2 results bolstered by wealth & management unit as revs beat; NDAQ Q2 EPS beat slightly but revenue missed sending shares lower
· Lending and finance; SC shares rise as much as 5% before paring gains as Q2 solid quarter driven by higher top-line growth and lower provisions citing strong core trends, with credit metrics and auto originations growth beating ests.; EEFTrises as Q2 EPS in-line but Q3 guidance 12c above estimates; SLM reported higher profits and higher sales than estimated, but its year core EPS view of 99c-$1.01 was slightly below the $1.02 est.
· Biotech movers; TORC shares surge after saying a 10mg daily dose of its RTB101 drug was tied to a statistically significant 30.6% reduction in the percentage of elderly patients with a respiratory tract infection in a Phase 2b study; RETA shares advance further as Citi raises tgt to street high $185 and adds to focus list; the European Union’s top court said a patent extension for GILD’s HIV drug Truvada may not be valid, in a ruling that will affect a dispute in the U.K. against generic drugmakers such as TEVA and MYL; BLUE 3.385M share Secondary priced at $162.50; GILD reports tonight, CELGtomorrow morning and AMGN tomorrow night
· Medical devices & equipment; NVRO rebounds more than 20% after JPM noted while Nevro’s systems claims patents were ruled invalid vs. BSX, the company’s broader method claim patents were upheld and said to buy the dip; BSX posted Q2 EPS and sales beat but moving along with NVRO news overnight; SYK reported strong 2Q results showing continued business momentum, including ~7% organic days-adjusted cc revenue growth and a 2% EPS beat (raised guidance); IART in-line Q2 EPS on slightly lower sales while raises low end of year profit view
· Healthcare services; hospital provider HCA beat 2Q Ebitda estimates and raised its guidance for the full year, as first hospital to report for quarter; in managed care, ANTMquarterly profit up 23% thanks to higher premiums, lower medical costs (in-line guidance); second lab company in as many days disappoints as LH misses views (DGX fell yesterday on lower outlook); CTLT 9.94M share Secondary priced at $40.24
Industrials & Materials
· Aerospace & Defense; Dow component BA weighs on the index after its 2018 EPS outlook midpoint misses analysts’ expectations (sees FY core EPS $14.30 to $14.50 vs. est. $14.50); NOC shares fall despite EPS beat and upped guidance (boosted its view on lower taxes and tightened free-cash-flow guide), while GD Q2 revenue topped views and raised its year outlook; LMT upgraded to outperform at Cowen for hiked 2018 prospects & enhanced visibility of ~10% “economic” EPS CGR at least thru 2021; RTN reports tomorrow morning; waste service stocks rally behind better WM earnings/guidance (RSG, WCN)
· Industrial & Machinery; IR shares rise as Q2 EPS beat by 12c on better revs and boosted its year profit and sales outlook; IEXreported better-than-expected Q2:18 results and increased 2018 guidance as continues to make progress on margin expansion; ROK Q3 EPS beat by 10c on in-line revs while guiding the year EPS above views ($7.90-$8.10 vs. est. $7.88)
· Transports; UPS Q2 EPS and revs slightly topped estimates while raising its free cash flow view for the year, but notes higher expenses; in airlines, HA was upgraded to buy at Deutsche Bank citing the strong 2Q results and an improving cost trajectory; in rails, one analyst noted resounding 2Q18 beat and corresponding guidance increase for CNI, while NSCtopped both top/bottom line
· Metals & Mining; copper producer FCX posted Q2 profit and revs ahead of estimates and remain positive on the outlook for copper prices given limitations on supply and the important role of copper in the global economy – but shares fell following comments about Grasberg underground issues; BHP has presented its final wage offer to workers at the Escondida copper mine in Chile, hoping to avoid a repeat of last year’s damaging strike that lasted 44 days and rattled the global copper market
· Chemicals; Linde (LNAGF) says it is on track to complete its merger with PX in H2 2018, as the companies await a decision by European regulators on whether their planned asset sales are enough to satisfy antitrust concerns; PPG was upgraded to buy at Goldman Sachs
Technology, Media & Telecom
· Internet; GRUB Q2 results topped consensus, while revenue guidance for Q3 and the full-year also topped expectations; SPOT received its first downgrade from Pivotal Research citing valuation after rally in shares while Morgan Stanley says continues to see streaming music as a growth industry, with Spotify as the global leader as reiterates OW and $300 tgt; online travel slipped after TRVG Q2 revs missed lowest estimates as it pared back advertising which hurt revs (BKNG, EXPE also active); FB reports earnings tonight, AMZN Thursday night, TWTR Friday
· Semiconductors; all eyes on NXPI as QCOM has yet to win China’s nod to buy the chipmaker for $44B even as a deadline for the offer to expire is just hours away, raising the prospect the deal could be scrapped and QCOM would need to pay a $2B break-up fee (due to trade issues ongoing with China and U.S.); TXN reported strong results and guided roughly in line with expectations and reported upside to guidance last week and week raised estimates; TER jumps on Q2 beat and higher Q3 guidance (59c-66c vs. est. 52c); MKSI results missed views
· Software movers; MANH Q2 results mixed as showed improvement in business trends and also deferred revenue grew the fastest (up 24% y/y) in seven years, but license revenue missed ests.; 3D sector dropped sharply late yesterday (DDD, SSYS, XONE) – this morning shows reports that AMZN launches own brand of 3D printer filaments, citing 3DPI rep
· Hardware movers; EMS stocks fell after BHE Q3 profit forecast fell short of consensus (28c-26c vs. est. 36c), sending shares down as much as 16%; FLEX reports earnings tomorrow; GLW advanced on earnings results as core EPS beat views
· Media & Telecom; AT&T (T) shares fall as much as 4% after its quarterly results, dragging the Telco sector lower after the company added fewer wireless customers than expected last quarter. Meanwhile the company gained 79K video subs vs. an expected loss); KN reported top and bottom line beat, guided Q3 revs and EPS slightly beat, and provided upside `18 rev guidance
· Video games; ahead of earnings, Credit Suisse said anticipating uneventful June quarter results given no near term release slate changes: price targets for ATVI and TTWO are effectively unchanged at $86 (vs. $85 prior) and $123, respectively, while the target for EA ratchets higher to $155 (vs. prior $143); Piper raised tgt on EA to $165