Friday, August 3, 2018
Equity Market Recap
· U.S. stock markets close mostly higher on Friday, as market resilience remains impressive in the face of many macro factors weighing on sentiment over the last week. Stocks rose as Treasury yields fell back below 3% and the dollar slipped following a mixed U.S. jobs report, a softer ISM services reading (11-month lows) and renewed threats of trade retaliation from China which said it plans to levy duties at levels of 25%, 20%, 10% and 5% on about $60B U.S. imports. Markets got a late day lift to highs on a Reuters headline that White House said U.S. has had high-level discussions with China on trade over the past few months and is open to further talks (not exactly ground-breaking headline, but enough to push markets higher). Despite all the macro distractions (central bank comments by FOMC, BOE this week) and quarterly earnings (mostly better – but a few big blow ups weighed on tech over the last 2-weeks), markets are still chugging along as the S&P 500 index extended its weekly win streak to five, led by gains in consumer staples and a bounce in technology shares midweek following the quarterly beat and raise by Apple.
· Jobs report headline miss; nonfarm payrolls rose 157K for July, missing the 193K economist estimate, though the prior month was upwardly revised to 248K from 213K; the unemployment rate dropped to 3.9% from 4% last month (in-line with estimates), while the participation rate held steady at 62.9%; average hourly earnings rose 0.3% MoM, in-line with estimates while prior month was downwardly revised to 0.1% from 0.2%; nonfarm private payrolls rose 170K, missing the 190K estimate and down from prior 234K, while manufacturing payrolls rose 37K
· The U.S. trade deficit rose 7.3% in June to mark the first increase in four months, keeping the U.S. on track to post the largest annual gap in a decade. The deficit climbed to (-$46.3 billion) from a revised (-$43.2 billion) in May, and above the (-$46.5B) estimate; imports rose 0.6% in June to $260.16B from $258.53B in May while exports fell 0.7% in June to $213.81B from $215.34B
· ISM Non-Manufacturing (services) for July falls to 55.7 and 11-month low and below the 58.6 estimate as business activity fell to 56.5 vs 63.9 prior month; other segments mixed as new orders fell to 57.0 vs 63.2, while employment rose to 56.1 vs 53.6; prices paid rose to 63.4 vs 60.7 and backlog of orders fell to 51.5 vs 57
· Oil prices slipped by 47c, or -0.7% to settle at $68.49 per barrel in a week that saw larger than expected weekly inventory builds and a strong dollar which weighed on oil prices. Concerns surrounding U.S. sanctions on Iranian oil, however, continued to provide some support. For the week, oil declined about 0.3%–down a fourth week in five.
· Gold prices rebound $3.30 or 0.3% to settle at $1,223.20 an ounce as mixed economic data weighed slightly on the dollar, but still declined for a 4th consecutive week. Gold prices bounced off its lowest closing level (not intraday) in over a year yesterday, falling for a second session in a row as trade tensions between the U.S. and China resurfaced. For the week, gold prices ended lower by about -0.8%
Currencies & Treasuries
· The U.S. dollar was little changed as markets took the headline jobs number miss and softer ISM services data (lowest levels in 11-months) in stride. The dollar index (DXY) was down slightly against the yen, while flat vs. the euro as markets also deal with the renewed trade threats between China and the U.S. related to tariffs…but for the week, the dollar posted a modest gain. Otherwise, trade tensions were at the center of attention. On Friday China said they would retaliate with tariffs on $60 billion on U.S. goods.
· Treasury prices gained as yields pulled back from weekly highs above 3%, but remained above 2.95% the majority of the week. The 10-yr ended down about 3 bps from yesterday’s 2.98% level, while the 2-yr yield is down about 4 bps from its weekly highs above 2.68%. Weaker jobs headline data and a lower ISM services data took a little steam out of the dollar, though two additional rate hikes appear on track this year as per the FOMC policy meeting this week. The still dovish stances from the BoJ, ECB, and BoE, even as they try to talk about exit strategies, continue to exert significant downward pressure on rates and are helping strengthen resistance at the 3% level. Additionally, uncertainties over tariffs and trade, along with political jitters, are keeping a bid in global sovereigns. Busy week of supply next week as the Treasury is selling $78B in 3, 10, and 30-year maturities next week.
Sector News Breakdown
· Consumer Staples; CPB and KHC active after the NY Post reported KHC had recently opened exploratory talks with KHC saying it has pored over some of its financials ; KHC also reported Q2 EPS and revs that topped estimates but also said Q3 Ebitda dollars will probably be down by “a greater order of magnitude than what we saw in the first half of the year”; NUS was upgraded to hold at Stifel as the valuation discount to direct selling peers is likely to narrow given improving momentum which resulted in a 2Q18 sales and operating profit beat.
· Restaurants; SHAK shares slide as the burger chain’s quarterly same-sales growth came up just short of Wall Street’s expectations and it left its full-year revenue forecast; LOCOQ2 comps and EPS results topped estimates as management highlighted a re-emphasis on the core consumer in CA while continuing to evaluate the TX market; BOJA Q2 EPS missed by 5c due to higher impairment charges and announced plans to close 10 underperforming units in 3Q and refranchise 30 units in 2H18; WING Q2 EPS and revs topped consensus on comp store sales growth of 4.3%, though year profit view below estimates
· Housing & Building Products; FND was downgraded by both Piper and JPMorgan after weaker quarterly results yesterday; building materials company CBPX jumped after its earnings results
· Retailers; GPRO shares jump as 2Q revenue was above Street & management’s outlook range, and channel down to a healthy 10 weeks exiting the quarter; ELY shares to 52-week highs after better-than-expected earnings driven by the Rogue line of golf clubs and a new line of balls
· Energy stocks were a drag on broader markets, as oil prices bounced off 6-week lows yesterday. The Baker Hughes (BHGE) weekly rig count fell -4 to 1,048, with oil rigs down -2 to 859 gas rigs down -3 to 183, and miscellaneous rigs up 1 to 2.
· Utilities; ETR upgraded to buy at UBS saying shares no longer warrant a discount associated with nuclear decommissioning and operating performance risk in light of recent positive nuclear developments; ED reported another solid quarter with EPS topping expectations with some help from favorable weather that impacts ED’s regulated; ESupgraded to neutral at Bank America as see less risk and shares sufficiently discounted given CTWS deal uncertainty
· Solar sector weaker; SEDG shares dropped despite better Q3 rev guidance as Roth Capital said strong results would not necessarily invalidate the Huawei short thesis and strength in the stock from the beat may not be maintained (FSLR, SPWR, CSIQ also lower in solar). Recall Goldman Sachs said a few days ago that SEDG faces the most competitive risk to Huawei’s U.S. residential inverter offering; RUN was downgraded at Morgan Stanley saying now prices in favorable industry developments and a longer runway of growth
· E&P sector; EOG delivered a solid quarter with EBITDA coming in nicely ahead of consensus estimates while margins were up across the board driving ~13% EBITDA growth on flat revenue/also better NGL and gas realizations and lower transportation costs; NBL shares drop sharply after a 2Q earnings miss, a boost to 2018 capex guidance while production expected to be at lower end; SWN, BRS, ECR other movers on earnings
· Insurance; AIG shares fell after Q2 EPS of $1.05 missed the $1.21 est. as 2Q net income $937M vs. $1.13B YoY; Q2 net investment income $3.12B vs. $3.53B y/y, driven by lower investment returns on alternative investments; TRUP strong quarter, beating top/bottom line as its enrolled pets and brand continues to grow nicely; ATH Q2 EPS beat by 21camid retail sales growth
· Consumer finance and lending; CATM shares surged after reported Q2 adjusted EPS that beat the highest estimate and raised annual guidance (expects 2018 adjusted EPS of $1.70-$1.85 vs its prior forecast of $1.45-$1.65); SYF was upgraded to neutral from sell at UBS citing cost reductions and significantly greater expected share repurchases; DFS CEO David Nelms to step down after 14 years in the role;
· Payments stocks; WU falls on weak quarter as EPS miss mainly due to a lower adjusted operating profit margin, while cuts year 2018 view to “low single-digit” vs its prior forecast of “low to mid-single digit”; MGI shares drop after reporting Q2 results that missed estimates and cut annual revenue guidance; FLT also falls after mixed Q2 results
· Pharma movers; AGN was upgraded to buy at Mizuho and tgt to $210 form $194 as view the risk/reward more favorably after a strong beat & raise quarter, delayed introduction of Restasis generics (we conservatively model $231M in 2H:18), and a pending Sept 14 Aesthetics Day; PCRX upgraded to buy at Needham as expects Exparel is in the early stages of a growth inflection; 52-week highs for LLY, PFE, ZTS, PKI, ILMN in the healthcare S&P space; LLY announced that its subsidiary, Elanco Animal Health, has filed a registration statement for an IPO
· Healthcare software, services; MDRX reported Q2 results in-line with Street while bookings were disappointing (-32%) but the company held its 2018 guidance metrics; CERNposts healthy 2Q results as bookings were particularly strong at $1.775B (+9% y/y) and bookings guidance for 3Q18 was $1.45B-$1.65B (+40% y/y at the midpoint)
· Biotech movers; REGN was downgraded to neutral at Baird saying stock price reflects a fair valuation after strong Dupixent sales, ex-U.S. Eylea posting another quarter of double-digit y/y growth; ICPT was downgraded to hold by Laidlaw with $95 tgt as the stock has already gained a significant amount of steam; BIIB said it would buy back up to $3.5B in shares; TSRO falls after cutting its 2018 guidance for sales of Zejula to $225M-$235M from $255M-$275M; BMRN 2Q18 revenues of $372.8M, above consensus while reiterated 2018 top and bottom line guidance; ABUS sharp drop on earnings miss
· Medical equipment; TNDM 9M share Spot Secondary priced at $28.50; PODD lowers FY18 revenue view to $547M-$562M from $565M-$580M though U.S. OmniPod and Drug Delivery sales topped consensus and the company had its best quarter ever for new patient adds domestically; BRKR beat on the top-line on the back of 3% organic while raised FY organic sales
· Hospitals active (HCA traded 52-week highs) after the Centers for Medicare & Medicaid Services (CMS) set final fiscal 2019 Medicare payment rates for hospitals as 2019 final rule provides acute care hospitals an average payment increase of ~3%; General acute care hospitals participating in quality reporting and using electronic health records get ~1.85% boost in operating payment rates; CMS also plans to distribute ~$8.3b in uncompensated care payments for 2019, an $1.5b increase from 2018 (final rate was better than the proposed increase)
Industrials & Materials
· Industrial & Machinery; in E&P, FLR Q2 EPS beat by 10c on lower corporate G&A; segment performance was mixed with incremental charges, while 2Q backlog of $29.3B was up 1% q/q, down 22%y/y, helped by a $3B mining award; in waste, SRCL shares fall sharply as Q2 revenue of $883M missed the $897M estimate and guided year revs below estimates as well
· Heavy duty trucks; monthly Class 8 trucking data for July showed ACT Research Class 5-8 truck industry preliminary order data suggested orders increased 104% yr/yr and 4% from June. The sequential increase was driven entirely by superlative Class 8 performance. July is typically the weakest order intake month of the year, but July 2018 is now the all-time record order month for Class 8. Class 8 orders catapulted 180% yr/yr and 24% from June to 52,400. Class 8 order intake was an all-time record on an absolute basis (CMI, PCAR, ALSN, NAV among names)
· Paper & Packaging sector got a lift after the WSJ reported Australia’s Amcor in advanced talks to acquire BMS shares of packaging peers BLL, SEE, SLGN, SON all moved in reaction to article)
· Transports were little changed, but for the week, Dow Transports posted a gain of roughly 1% amid a bounce in truckers; airlines took flight today, leading the index higher (JBLU, AAL, ALK), while package delivery names were little changed on the week (FDX, UPS); in autos, group still trying to recover from a dreadful earnings seasons (F, GM, FCAU all lowered outlooks) as they still deal with the tariff fight between the US and rivals; AXL rose on earnings today
Technology, Media & Telecom
· Internet; GRPN initially slides on Q2 results that missed EPS and revenue estimates with revenue down 7% Y/Y while FY18 guidance has Adjusted EBITDA from $280M to $290M but rebounded late; TRIP was upgraded to hold at Needham after shares plunged yesterday on revenue miss; GDDY shares slipped despite raising guidance; overall Internet names (NFLX, TWTR, P, GRUB) fall
· Optical sector higher after ACIA Q2 results came in largely in line with expectations, albeit with slightly higher revenues and lower GM but guided Q3 revs up nearly 40% q/q to ~$90M, compared to an adjusted consensus of ~$77M including ~$7M from a recently unbanned ZTE (shares of AAOI, FNSR, NPTN, LITE were active)
· Internet security; SYMC shares plunge as top- and bottom-line beat was overshadowed by noticeable weakness on the enterprise implied billings line, which contracted 20% ($111M) from F1Q18; group was mostly higher yesterday after better FTNT results
· Software; DATA beat Q2 Street license revenue by 10% even as ratable license mix came in at the high end of guidance, while the midpoint of CY18 revenue guidance moves 1% higher despite increased subscription mix; IMMR shares plunge after Q2 surprise revenue decline; BNFT strong bookings in 2Q18 provide much higher conviction in CY19 revenue acceleration; APPN strong Q2 results but shares slid as BTIG noted raise in top-line FY18 guidance was driven primarily by expected growth in non-subscription revenue, further supporting our concerns regarding Appian’s ability to sustainably shift mix away from services to software; BNFT another winner after better earnings and customer growth
· Video game makers; earnings reports out of two names: 1) ATVI reported better than expected 2Q revenue and EPS but market appeared a bit disappointed with no change in management’s revenue outlook of $7.475B while the increase in EPS to $2.58 from $2.51 only reflected beat relative to 2Q guidance; 2) TTWO shares surge following a better than projected earnings report and an increased FY19 guidance (Non-GAAP FY19 EPS guidance was increased to $4.15-$4.39 from $3.99-$4.25 previously)
· Media & Telecom; DISH shares rally as Q2 Ebitda beat and posted stronger-than-expected Pay-TV results for the second straight quarter; CBS positive mention by several analysts on the company’s long-term prospects after its Q2 earnings beat despite a cloud of uncertainty stemming from sexual-harassment allegations against CEO Les Moonves