Friday, July 27, 2018
Equity Market Recap
· Stocks end the day broadly lower, with technology shares dragging main indexes down, with Small Caps also hit hard as the Russell 2000 index trades down over -1.8%, falling below its 50-day moving average support of 1,668.85. The U.S. dollar slipped (narrow trading range) while Treasuries gained as U.S. economic growth failed to live up to big expectations. The US economy grew at a 4.1% rate in Q2, its best in four-years, but below the estimate of 4.2%, while inflation remained in check. The tech sector lagged, with disappointing quarterly results from Twitter following Facebook’s 20% drop yesterday and Dow component/chip giant INTC falling after commentary related to its earnings results (several tech names falling on lower guidance and/or quarterly results: BCOV, EA, IMPV, INTC, JNPR, LOGM, NCR, TWTR, TYL, WDC). Financial stocks were one of the few outperformers, with banks and insurance stocks moving higher. Despite today’s declines, major averages still posted weekly gains as the Dow and the S&P rose for their fourth straight positive week. It was a very busy week of economic data (GDP, weaker housing data), along with more developments on the trade front between the US and China and EU (improving with the EU, but nowhere closer with China). European stocks on Friday finished with their strongest weekly gain since March, leaving regional equities at a six-week high.
· GDP tops 4%: The U.S. economy accelerates to 4.1% rate in second quarter, mostly in-line with the 4.2% forecasts and the fastest in almost 4 years; GDP rose 2.2% in prior quarter (upwardly revised form 2% prior). Personal consumption rose 4.0% in 2Q after only rising 0.5% prior quarter. Government spending also accelerated at both the federal and state levels. The GDP price index rose 3% in 2Q after rising 2.0% prior quarter (well above the 2.3% estimate), with the core PCE for Q2 rose 2.0% in 2Q after rising 2.2% prior quarter.
· University of Michigan sentiment (final) fell to 97.9 from 98.2 last month but above the 97.1 in the preliminary reading; the current economic conditions index fell to 114.4 vs. 116.5 last month and the expected change in median prices during the next year fell to 2.9% vs. 3.0% last month
· Oil prices close lower, as September WTI crude falls 92c, or 1.3% to settle at $68.69 per barrel. Natural gas futures rose +4.2c to close at $2.822/mmbtu on Nymex, capping the longest streak of increases since April (4-days) and gaining 2.4% this week. August gold futures dropped -$2.30 to settle at $1,233 an ounce, falling for a third consecutive week after tallying a -0.7% loss from Monday to Friday. Gold prices have slipped amid rising expectations of further Fed hikes given the strong economic data, including today’s 4.1% GDP reading for Q2. Gold closes not far from 2018 lows.
Currencies & Bonds
· After a busy and volatile week for both currency and Treasury markets, Friday’s action was much ado about nothing. The dollar index (DXY) held in a tight range all day after a volatile week – not doing much after the GDP reading (high 94.74 and low 94.628). Action was similar in individual moves, falling slightly vs. the euro, yen, pound and Canadian dollar. Bitcoin caps a strong week, rising more than 1% above $8,200 (well off June 28th lows of $5,791).
· Treasury yields slip after strong Q2 gross domestic product data was outweighed by the weak inflation data, which should keep the Federal Reserve hiking interest rates at their current pace of one increase per quarter. The U.S. economy grew 4.1% in Q2, the fastest pace since 2014, but was shy of estimates for 4.2% (and even more bullish expectations). Overall a strong report – but given the number slightly below estimates and inflation as well not as “hot” tempers fear of FOMC raising rates too far too fast; the 10-yr dips to 2.96%, while the 2-yr steady just under 2.68% – but yields ending the week not far from best levels in over a month for the 10-year and back around decade highs against the 2-year (2.67%).
Sector News Breakdown
· Retailers; DECK was downgraded to hold at Stifel reflecting concern that further meaningful upside may prove limited, as firm upped tgt to $123 from $120 (follows Q1 EPS/sales beat though Q2 guidance disappoints); COLM shares drop as sets guidance below expectations, despite topping Q2 estimates (guides full-year EPS of $3.15 to $3.25 vs. $3.35 consensus); the guidance took its toll on retailers with big declines in UAA, FOSL, URBN, ANF
· Consumer Staples; CL shares slip after reporting quarterly results that fell below the company’s expectations and lowered its year net sales and EPS forecasts (gross margin fell 140 bps to 59.3% of sales); SAM shares slide after Q2 EPS missed the lowest estimate (83c miss) with selloff driven by the revised gross margin guidance coming from the higher commodity and logistics costs
· Restaurants; CMG reported 6c EPS beat driven by stronger restaurant-level margin and modestly better same-store sales (rose 3.3% vs. est. 2.7%) driven by 5.1% average check growth that was partially offset by a (1.8%) decline in traffic; BJRI delivered another strong quarter highlighted by +5.6% comp sales and EPS upside; NDLS 8.5M share Secondary priced at $10.00; TACO mixed results as Q2 comps beat (3.3% vs. est. 24%), but EPS missed and guidance midpoint missed; SBUX rises on earnings results, while DFRG Q2 revs miss views
· Housing & Building Products; homebuilder PHM was downgraded to sell at BTIG with a $24 tgt as they expect PHM’s order growth to underperform over the next 4 quarters & believe PHM’s multiple likely to revert to the group mean as a result; BZH shares dropped after its earnings results as housing industry hammered this week on weaker housing data/lower EPS outlooks; Zillow (Z) shares fell after Steve Eisman, an investor known for his correct bet against subprime mortgages a decade ago, told Bloomberg News that he’s taken a position against Zillow calling its new venture into selling houses “a terrible business.”
· Casino, Lodging & Leisure; BYD shares help boost recently beaten up gaming sector after group fell on LVS and PENN results; BYD Q2 beat and raised its year Ebitda forecast to a range of $618M to $633M from $600M to $620M prior; BYD shares later reversed on a negative short call out of Hedgeye according to Bloomberg; WYNN reports earnings next week in casino space
· Autos have had a dreadful week with no real headway made on tariffs for industry, while top OEMs GM, F and FCAU all lowered their annual forecasts after mixed quarterly results; today in auto retail suppliers, dealers, SAH, TEN and GT all advanced following in-line/better results
· Big oil stocks with earnings misses today as CVX Q2 EPS of $1.78 missed the $2.08 estimate as Net oil-equivalent production increased to 2.83M barrels per day from 2.78M barrels per day, missing the 2.85M barrels per day est. (but shares rebounded amid improved outlook); XOM Q2 EPS of 92c missed the $1.26 estimate as production of 3,647 mboe/d, missed the consensus estimate of 3.83M, while cap-ex of $6.63B was much higher; BP agreed to acquire a portfolio of unconventional oil and gas assets from BHP for $10.5B bringing extensive oil and gas production and resources in the regions of the Permian and Eagle Ford basins in Texas and in the Haynesville gas basin
· Nat gas exposed names lower; CHK rises as agreed to sell its Utica Shale assets (320,000 net acres, 107 MBOE/d (67% natural gas, 24% NGLs and 9.0% oil) of 2017 net production, 480 MMBOE (72% natural gas, 23% NGLs and 5.0% oil) of YE ’17 proven reserves, for ~$2.0 billion; NFX was downgraded to hold at SunTrust as believe NFX shares currently and should trade on par with its peer group average and at a premium to a number of comparable operators; SWN falls as Morgan Stanley sees risk to the company’s Fayetteville sale process expectations after BHP announced the sale of its U.S. shale assets; COG reported a Q2 EPS miss of 7c and cut 2018 daily production growth guidance range from 10%-15% to 10%-12%
· Equipment and services; PTEN upgraded by two analysts to buy (CSFB and Seaport Global) saying it has moved contract drilling to the forefront, with strong new contract wins for rigs, and faded a bit on pressure pumping with guidance to future weakness owing to broad overcapacity in the markets; WFT earnings out and sees work stronger in Eastern Hemisphere in 2H ’18 vs. 1H ’18, and says Middle East has most competitive pricing in Eastern Hemisphere; DRQ shares fall after posting larger than expected Q2 EPS loss and guides year revs $350M-$370M below $386M est.; BOOM dropped as Q2 earnings missed views (shares fell over 20%). The Baker Hughes weekly rig count rose 2 to 1,048, with oil rigs up 3 at 861 gas rigs down -1 to 186, and miscellaneous rigs unchanged at 1; NOV shares jumped more than 8% late day after Q2 earnings results
· Solar sector; FSLR shares sink as much as 10% before paring losses after posting significantly weaker Q2 earnings miss, much lower revenues/higher start-up cost related to the Series 6 transition and projects sales which were pushed into 2H18 driving a $104M 2Q operating loss; SEDG was reiterated a sell at Goldman Sachs given the company faces the most competitive risk to Huawei’s U.S. residential inverter offering
· MLPs and pipelines; AMID plunges over 40% as cuts quarterly dividend to 10.31c per unit from 41.25c and plans asset sales as revised capital allocation strategy identifies about $350M-$400M of noncore assets; The Alerian MLP Index (AMZ) falls more than 2%, trading to lows above 275 (falling from best levels since early February), with broad weakness in group (USAC, VLP, SHLX, NGL, CVRR, ENLK shares all down sharply)
· Insurance; HIG Q2 results beat, essentially represent better-than-expected underlying performance in each of the company’s four segments offset partially by higher-than-expected catastrophe losses; CINF sizeable earnings beat, with about half of the beat was driven by lower-than-expected catastrophe losses, with favorable development also playing a significant role; PGR was upgraded to buy at Argus as posted steady earnings growth in recent quarters, and the stock appears favorably valued; AFL shares jump on Q2 sales beat and raised forecast
· Asset managers and brokers; WETF slips as Q2 adjusted EPS came in line with consensus and AUM only improved due to its acquisition of ETF Securities completed in April; VIRT shares drop as Q2 profit missed the lowest analyst estimate as saw reduced retail participation in addition to declining volatility; PJC Q2 results missed views, while JEF rises on its earnings results
· Lending and finance; ELLI positively surprised the Street with a beat and mostly raise quarter in its 2Q:2018 given the industry fears and a CFO search; DFS shares rallied after earnings in card space, while SYF Q2 results beat but still reeling from news yesterday they lost card business with WMT (went to COF); NAVI Q2 GAAP net income of $83M compared to $112M y/y, primarily due to a decrease in net interest income, an increase in provisions for loan losses
· Pharma and Biotech movers; AMGN posted quarterly beat and raise quarter due to higher revenue, lower tax rate and fewer shares outstanding; CHRS gets positive CHMP opinion for Udenyca/says the European Commission decision on the approval for UDENYCA is expected in October/Citigroup said; Dow component MRK posted Q2 beat and raised top and bottom end of year forecast; ABBV shares slumped as news Hulio, MYL’s biosimilar to AbbVie’s top-selling arthritis drug, Humira, got a positive opinion from EMA’s CHMP, which overshadowed better quarterly results and an improved outlook; INSY falls as fails to win approval for painkiller spray
· Healthcare services; MGLN shares plunged as much as 20% to 52-week lows after Q2 missed by over 30c on lower revs and cuts FY18 EPS view to $5.18-$5.96 from $5.90-$6.68; it was a good week to start for hospital providers after HCA beat and raised, but CYH falls despite EPS beat was driven by outperformance on both revenues ($3.56B, +$40M vs est) and margins; LPNTreported mixed Q2 results as EPS beat but revs short of consensus
· Medical devices and equipment; in ortho, ZBH shares rise after 2Q revenue and EPS beat analyst expectations, driven by a noticeable increase in its knee segment, citing one analyst; DXCMshares dropped after the FDA expands approval of ABT’s Libre for 14-day wear and a 1-hour warm-up; MedTech group underperforms after MTD Q2 top/bottom line beat but issued Q3 EPS below views ($4.97-$5.02 vs. $5.07 est.) and as EW fell as comments on 2Q EU share loss related to pricing competition are likely causing some concern (group broadly lower – SYNH, CRL, PRAH, ABMD, VAR, TNDM, NVCR, IRTC among active names)
Technology, Media & Telecom
· Internet; AMZN trades to record highs after quarterly earnings and operating income far surpassed analyst estimates, overshadowing slightly weaker revs; TWTR shares dropped as much as 19% after Q2 monthly active users fell short of estimates, and it forecast further declines (Q2 MAUs 335M vs. 337.8M est. and sees MAUs declining by mid-single-digit millions in 3Q q/q; EXPEQ2 EPS topped estimates by wide margin and raises adjusted FY18 EBITDA growth view to 7%-12% from 6%-11%
· Semiconductors; INTC the lone drag on the index after posted a Q2 beat and raised its guidance for the year but was downgraded at Bank America and Citi given a deceleration in FY19 earnings growth, a competitive position that is becoming tougher with nex-gen 10mn product delays, higher capex from insourcing memory, and potential gross margin declines; NXPI was upgraded by several analysts (SunTrust, Mizuho, Deutsche) after QCOM merger fails to go through and saying near-term earnings growth is supported by a larger than typical $5B buyback; MXIM delivered upside to their 4Q results and 1Q guide as Auto/Industrial (now >50% of sales) grew double digits in the Jun-qtr; CY jumps on Q2 top/bottom line beat and above average guide
· Semi-equipment; LRCX quarterly revs missed consensus saying that both memory and foundry segments have witnessed short-term reduction in equipment demand, with the largest adjustment occurring in DRAM/also lowered its full year 2018 WFE (wafer fab equipment) growth outlook from low-double-digit % to single-digit % – however, LRCX called a n-t bottom on its call, lifting shares of several semi related names (KLAC, MKSI, AMAT higher)
· Security software; PFPT reported better than expected 2Q18 results and slightly upped FY18 guidance/IMPV shares plunge, leading to at least three analyst downgrades as posted weaker than anticipated results with Q2 Revenue, Q3 guidance and FY19 Revenue coming in below consensus, while Q2 deferred revenue and billings were above expectations
· Software; in video games, EA shares slide after reporting better than expected 1Q earnings but 2Q guidance below estimates (live services growth of 7% Y/y came in light of Goldman 12% est.); TEAM shares soared after quarterly revenue handily beat consensus and billings growth meaningfully accelerated; SPSC trades to record highs as delivered a solid quarter of results and raised guidance/Benchmark upgraded shares to buy with street high $90 tgt; OMCL shares jump as reiterated its view that it expects long-term organic growth of about 10-12% and raised its 2018 bookings guidance slightly; LOGM shares plunged over 20% results that beat EPS and revenue estimates but guided down Q3 and FY guidance
· Hardware, networking and services; JNPR shares fell as reported solid 2Q18 results, but disappointing Q3 guidance, saying shortfall was attributed to pull-ins in the Enterprise business and further delays with large cloud customers; NCR shares fall as missed 2Q18 revenues/EBITDA and beat EPS (lower taxes); cut FY18 guidance by even more than guidance/Street; WDC noted it was affected by N-T weaker NAND pricing than prior quarters as guidance disappoints
· Media & Telecom movers; CBS shares dropped midday after reports Chief Executive Officer Leslie Moonves will be accused of unwanted kissing and touching in a New Yorker magazine article set to be published Friday. The allegations in the article by Ronan Farrow involve incidents that go back, in part, more than 20 years (shares of VIAB rallied) ; CHTR shares fell late day as New York regulators rescind merger approval with Time Warner Cable saying they didn’t deliver benefits to New Yorkers
· Gainers in tech after earnings: AMZN, MXIM, SPSC, TEAM
· Decliners on earnings: BCOV, EA, FLEX, IMPV, INTC, JNPR, LOGM, NCR, TWTR, TYL, WDC