Tuesday, July 31, 2018
Equity Market Recap
· U.S. stocks end higher (for the day and the month), getting a boost on reports the U.S. and China were said to be trying to restart talks, giving the market hopes on trade. However, a late day headline that talks are said to show little progress (as per the WSJ), pared some gains. Economic data was strong again, with manufacturing, confidence and better personal income/spending data reinforcing the strength of the US economy. Markets overlooked President Trump’s tweet that a government shutdown threat is needed to move Democrats on border security and turned their attention to the Fed. Markets await details of the Federal Reserve, which kicked off its two-day policy meeting today and the decision tomorrow afternoon (no policy change expected). Energy prices dropped, with oil settling July down over -5%, while the dollar gained. Corporate earnings also gave markets a boost, with Dow components PG and PFE each advancing after quarterly results. European markets end the month higher as the Stoxx 600 ended up by 3.1%, the first monthly gain since April, with the German Dax rising by 4.1%, its best month since April.
· Technology made a nice comeback as the Nasdaq Composite snapped its 3-day losing streak of more than 1% declines each day amid weakness in FAANG stocks, getting a lift today from semiconductors after better results (KLAC, IDTI) and on optimism ahead of AAPL earnings tonight. Dow Transports a standout to the upside, with the index up as much as 200 points, with all 20-components trading higher. With today’s gains, both the S&P and the NASDAQ snapped their three-day losing streak. The S&P and Nasdaq also posted their fourth straight monthly gain.
· Personal Income and consumption for June both rose 0.4%, which was in-line with expectations on both counts; real personal spending rose 0.3% vs. est. 0.4%. Core inflation MoM rose 0.1% (also in-line) and rose 1.9% Y/y. PCE prices rose 0.1% (in-line w/ests.) and rose 2.2% Y/y; the compensation at 0.3% in June vs 0.3% the prior month while the savings rate at 6.8% in June vs 6.8% the prior month
· Chicago PMI rose 1.4 points to 65.5 in July, the highest reading in six months and above the 62 estimate, as the new-orders and production indexes also hit six-month highs, while the prices paid index reached a 10-year high, with MNI saying there’s anecdotal evidence of tariffs impacting operation
· Consumer Confidence for July rose to 127.4, topping the 127.1 reading last month and above the 126.0 estimate; the Present situation confidence rose to 165.9 vs. 161.7 last month and the consumer confidence expectations fell to 101.7 vs. 104.0 last month.
· S&P CoreLogic Case-Shiller National Home Price index rose 6.38% y/y in May after rising 6.39% in prior month; S&P/Case-Shiller 20-city NSA index at 211.94 after 210.43 in April; the 20-city SA index rose 0.2% m/m in May after rising 0.16% the prior month; National home price index rose 0.4% m/m in May after rising 0.33% the prior month
· Oil prices end lower as WTI crude slipped -$1.37 or about 2% to settle at $68.76 per barrel while Brent futures dropped to $74.25 per barrel ahead of inventory data tonight (API) and tomorrow morning (EIA). For the month, WTI crude declined over 5%.
· Gold prices edged higher, rising $2.10 to settle at $1,233.60 an ounce, snapping its 3-day losing streak, but still ended with a monthly decline of -2.6% amid rising rate hike expectations and a stronger dollar. The dollar overall was little changed with the U.S. dollar tilting higher as the Federal Open Market Committee began its two-day monetary policy meeting.
Currencies & Bonds
· The U.S. dollar managed to eke out a small gain, as the dollar index (DXY) traded near the 94.50 level as the start of 2-day FOMC meeting kicked off today and concludes tomorrow, though no rate hike is expected. The dollar gained vs. the yen after the Bank of Japan kept its ultra-easy monetary policy in place in a bid to stimulate inflation, which the central bank acknowledged will likely fall short of its 2% goal until at least 2021. The British pound slides vs. the dollar while the euro edged higher. Bitcoin prices fell 5% at $7,750 after surging more than 30% from June lows.
· Treasury prices traded in a narrow range today as markets await results of the 2-day FOMC meeting tomorrow afternoon which isn’t expected to yield major changes to policy, but may underscore the central bank’s intent to lift rates twice more in 2018. Treasury yields have bounced over the last few weeks back to 2018 highs (and decade highs in some cases like the 2-year) on rising rate hike expectations following stronger data points about the economy. The 10-year yield ended around 2.96% with the 2-year yield around 2.67%.
Sector News Breakdown
· Retailers; RL Q1 EPS and sales topped consensus, but comp sales fell -3%, missing the -1.6% estimate; Nomura comments on retail as they downgrade SIG and GOLF after reaching target price, see valuation concerns for shares of UAA & GOOS, and see opportunities in AMZN, BJ & JWN; NLSreported a mixed 2Q that witnessed softer direct segment sales and gross margins; NAKD shares jump after it said its subsidiary, Bendon Limited, has partnered with CVS to bring Heidi Klum Intimates Solutions line to more than 4,000 U.S. locations; SHOO warned that hand bag prices would likely go up if China tariffs are finalized
· Consumer Staples; Dow component PG Q4 core EPS beat by 4c on in-line revs of $16.5B as sees organic sales and core EPS for 2H to be stronger than 1H as higher commodity costs and FX headwinds are mitigated with pricing and productivity savings build throughout fiscal 2019
· Restaurants; CMG shut down a restaurant in Powell, Ohio following multiple reports of sickness by customers, Bloomberg reported, citing comments by the company spokesperson. Separately. Jefferies upgraded shares of CMG to buy with $550 tgt as believe CMG is one of the better positioned companies to benefit from the ongoing shift to digital/off-premise; TXRH shares drop as margins disappoint on softer-than-expected comp sales growth of 5.7%, while EPS of 62c missed by 5c (shares were upgraded at RBC as believe beef cycle downside to food costs can begin to offset labor costs to deliver roughly flat margins and low double-digit EPS growth; DENN shares dropped as quarterly sales fell short of consensus
· Housing & Building Products; another housing related product stock with weak results, as LL shares plunge following an unexpected 2Q loss of (5c) vs. est. for profit of 24c, though posted strong comp sales beat +4.7% vs est. +2.8% (flooring names FND, TTS active); building products maker VMC mixed Q2 results as EPS missed by 13c on better sales, while guidance in-line; SSDshares did jump after its Q2 sales topped consensus; TREX shares surge after its record Q2 results
· Services; TNET reported 2Q revenue and EPS above guidance and consensus, to some extent driven by a pull forward of revenue and margin from 3Q, and raised EPS guidance for the year; HSII shares spike after Q2 results handily top consensus
· Auto’s; Morgan Stanly upgraded LEA to overweight from equal-weight saying that Lear has a strong operational track record and history of “beat and raise quarters,” was trading at a discount to historical levels; see upside to LEA’s estimates and multiple going forward ADNT downgraded to underweight from equal-weight (PT $43 from $50), saying there is limited upside to numbers in the near term, with MS’s estimate for 2019 roughly 15% below consensus; APTV Q2 top and bottom line topped estimates but guided Q3 below views
· In gaming, IGT Q2 sales and Ebitda topped estimates growth of 10% in 1H allows co. to absorb $26M FX headwinds and maintain full-year Ebitda outlook; SGMS late yesterday announced a sports betting deal with CZR; WYNN reports earnings tomorrow night
· Integrated and equipment; BP reported surging Q2 earnings that edged past analyst consensus estimates, helped by higher oil prices, and its first dividend increase in nearly four years; DRQ was downgraded to underweight at Barclay’s as stock’s current valuation is difficult to justify as the company’s earnings trough looks poised to extend until 2021; PES falls more than 25% on larger Q2 EPS loss and revs lag estimates
· E&P sector; PXD said 2Q average realized price for oil, including the effects of commodity price derivatives, was $59.92, about 13.5% below the price excluding derivatives of $61.20; RRCreported a positive quarter, benefiting from an improved mix as oil volumes beat and costs were lower than expected; PXD agrees to sell all of its assets in the West Panhandle field in Texas to an undisclosed buyer for $201M; NOG to buy 10,600 net acres in Williston Basin from Crestview Partners portfolio company W Energy Partners for $100m in cash and 56.37m NOG shares.
· Solar stocks getting a boost after SPWR earnings results beat as Q2 results beat expectations and ’18 EBITDA guide narrowed to top-end of prior range; shares of other solar companies SEDG, FSLR, CSIQ move in sympathy (follows big miss by FSLR last week)
· Coal and Utilities; ARCH reported 2Q earnings that beat estimates and maintaining 2018 coal-production guidance/Q2 Ebitda of $85.4M topped the $82.1M estimate
· Insurance movers; Bond insurers AGO and MBI rise after Puerto Rico’s government, its federal oversight board and a key group of investors reached a preliminary agreement to restructure the debt of the island’s electric company; UNM reported 2Q EPS of $1.30 topping the $1.26 estimate as co. indicated it has accelerated its LTC reserve review to 3Q18 (vs. more typical 4Q timing), with after-tax GAAP charge unlikely to exceed $750M; RE shares to lowest levels since December after its Q2 results
· Asset managers, investment names; AMG upgraded to outperform at KBW Inc. as continue to like the fact that AMG has relatively greater exposure to faster-growing parts of the industry and cheap valuation; WETF was downgraded to sell at Citigroup as believe WETF’s P/E multiple could further compress, putting incremental downward pressure on the shares; PJT shares jump after Q2 EPS exceeds consensus by more than 30%
· REITs; FCE/A agreed to be acquired by BAM in a deal valued at $11.4B, with holders getting $25.35 in cash for each share held ; in earnings, AVB reported a 2Q beat, and raised 2018 core FFO guidance by 0.4% at the midpoint due in part to better core growth expectations; BRX posted steady 2Q results that included a beat, an improvement in SSNOI growth, and continued execution on both the balance sheet and investments; EPR’s posted in-line 2Q18 FFO as adjusted and maintained the midpoint of the investment spend guidance; TCO reported in-line 2Q results while raised the FY forecast for comp center NOI by 100 bps to a new range of 3-4%; UDR reported a 2Q18 adjusted FFO beat and management increased 2018 FFO guidance by 0.8% at the midpoint
· Large Cap Pharma; PFE lowered its outlook for full-year revenues due to the impact of a stronger dollar as it revealed Q2 earnings that were ahead of expectations – but shares gained after quarterly results; SNY announced better Q2 sales of Dupixent (partners with REGN); INCY Q2 EPS and revenue topped consensus as Q2 revenues up 29% and Jakafi sales up 25%; WCG jumps to record highs after its quarterly results, while HUM reports earnings tomorrow in managed care
· Medical equipment and devices; ILMN posts beat-and-raise quarter as 2Q revenues grew 25% y/y (vs. 19% consensus estimate), and EPS grew 75% y/y (better than expected top line growth, margins, and lower tax rate) and raised its 2018 guidance; CSII better earnings and sign collaborative agreement with Aerolase to develop device; TNDM mixed Q2 results
· Healthcare facilities and services; ACHC shares drop as reported adj EPS in line with consensus with Adj EBITDA of $165M, roughly in line with consensus, but guidance reduced for lower exchange rate; ATHN raised its full-year 2018 outlook for operating margins after stronger Q2 margins, though 2Q were bookings down -5% y/y (-19% 1H18), with revs being roughly in line
Industrials & Materials
· Industrial & Machinery; CAT was downgraded at Barclays as price increases to offset higher costs may pressure profit margins in the second half; ALSN 2Q revenues and EBITDA handily topped expectations, driven by double digit outperformance in most major segments and raised most components of its FY18 guidance, increasing sales expectations; ETN posted Q2 EPS and revenue beat on higher guidance; XYL Q2 EPS and revs topped views with 8% increase in organic revenue and orders, and strong double-digit growth in 2nd quarter 2018 earnings; AGCO mixed as Q2 EPS beat, but guided year EPS $3.70 vs. est. $3.79; RXN Q2 beat on stronger margins across both segments and raised the low end of its EBITDA guidance; CMI Q2 EPS missed estimates but boosts FY18 revenue view to 15%-17% from 10%-14%
· Transports; a standout to the upside, with the index rising as much as 200 points, as all 20-components trade higher, led by FDX and UPS in package delivery and airlines DAL, AAL; in rails, UNP traded to a 52-week high
· Aerospace & Defense; BAH was upgraded to outperform at Raymond James after “strong” 2Q results saying as far as booking and organic growth go, the best is still to come in their view as they run to the government’s fiscal year and as comps ease; Bank of America added GD to its US focus 1 list while removed NOC; ARNC said seeks to sell unit that made panels in London’s Grenfell fire, while posted earnings and revenue beat
· Metals & Mining; steel stocks active as AKS shares fall after Q2 EPS missed by 2c on lower sales and higher costs/2Q adjusted Ebitda of $148.4M missed an estimate of $161.1M; AUY was upgraded to outperform at BMO Capital saying over the last 18 months, shares have traded at a discount to peers on elevated development and financial risk
· Chemicals; HUN posted better than expected Q2 earnings that more than tripled, as product demand strengthened across most of its business segments/Q2 adjusted EBITDA was $415M compared to $405M in Q1 and $299M in the prior-year quarter
Technology, Media & Telecom
· Internet; SHOP shares slipped after earnings beat as cost surge clouds surprise profit, and shows slowing growth for Q2; TWTR was upgraded to neutral saying with shares down -34% from the 52-week high and -27% since reporting 2Q18 last Friday (July 27th), we believe expectations have been appropriately reset; CHGG strong Q2 results with another beat and raise
· Semiconductors; QCOM begins modified Dutch Auction for up to $10B of shares; IPGP shares drop as misses Q2 estimates for EPS and revenue, with downside Q3 guidance has revenue from $360M-$390M and EPS $1.80-$2.05, below $424.9M/$2.30); IDTI Q2 results and guidance slightly above estimates on ramping WC wins outside of smartphones, continued Purley ramp and better than expected strength in their Communication’s business; in semi-equipment, KLAC shares jump as posted a F4Q revenue and EPS beat, and offered F1Q guidance above consensus at midpoint; AEIS gained on earnings
· Software movers; CSLT shares dropped after announcing that Walmart will not renew its contract at year-end, overshadowing 2Q results that were slightly better than expectations; VRNS shares drop as reported an in-line quarter and guide as EMEA performed well, but reported a deceleration in 2Q sales growth driven by execution issues on the West Coast; INST shares downgraded at Oppenheimer noting decent 2Q results yesterday, but the magnitude of revenue beats keeps moderating and operating profitability is challenging to pinpoint
· Tech services, components; SANM reported better than expected revenue and Q4 guidance, though gross margins are still being impacted by component shortages; CGNX shares jumped as much as 20% as earnings and guidance both were solid; AAPL expected to report Q3 results tonight; Samsung net income fell short of analysts’ estimates as slowing growth in the global smartphone market hits demand for its Galaxy devices
· Media & Telecom; CHTR rises as the cable provider beat on top and bottom lines with upsides in broadband subscriptions in its Q2 earnings/residential video subscriptions saw net losses of 73,000 and voice losses of 45,000, while Internet saw net adds of 218,000 subscribers; in towers, AMT raised its outlook for U.S. property revenue and total billings growth for 2018 (sees 2018 total tenant billings growth >8%, saw ~8%)
· Earnings post-market: AAPL, AKAM, BAND, BIDU, COHR, DOX, EVTC, FISV, FTR, GLUU, MB, MOBL, MRCY, MTSI, NANO, P, PAYC, QLYS, QUOT, ROG, SEND, SIMO, UIS, ULTI, ZEN, ZIXI