Thursday, October 25, 2018
Equity Market Recap
· U.S. stocks were in full-fledged rally mode on Thursday, with a broad “risk-on” attitude leading markets back after yesterday’s stock rout, as technology gains paced the way. Strong earnings results from Dow component and tech giant MSFT helped lead software higher, while better TWTR results lifted sentiment in the Internet sector ahead of key results from AMZN and GOOGL tonight. The Nasdaq Composite rose as much as 250 points or 3.5% above 7,360, with semiconductors and biotech stocks rebounding after yesterday’s collapse. Better results from XLNX helped offset weakness in AMD guidance in the chip sector, ahead of INTC results tonight. With today’s gains, the S&P 500 index snapped its 6-day losing streak, amid strength in consumer discretionary, industrials and transports. At least for one day, trade concerns/China slowing and other macro factors took a back seat as investors focused on fundamentals and earnings.
· The Dow gained as much as 500 points (after falling over 600 yesterday) while both it and the S&P 500 moved back into positive territory for the year. Pharma stocks were active on earnings (MRK, BMY, and CELG) and after the HHS proposes a payment plan for some doctor-administered drugs that it says would shift to a level more closely aligned with prices in other countries. Dow transports rise as much as 245 points or 2.5% at 10,150 (well off earlier lows 9,928 and yesterday lows 9,887) led by airlines as AAL rises over 8% on results. Autos another bright spot led by better earnings from TSLA, Ford and some suppliers (BWA). Central banks were in focus as the ECB reiterates plan to halt bond purchases in December and Mario Draghi said he remains confident in the Eurozone’s “broad-based economic expansion” despite a spate of “weaker than expected” economic data. Overall, there was no change in either ECB rates or the central bank’s expectation to end QE in December. Meanwhile the euro and Pound slumped as the dollar pushed near 2018 highs. Commodity prices also rebound despite the dollar strength while Treasury yields climbed.
· Weekly Jobless Claims rose 5K to 215K, in-line with economist estimates while the 4-week moving average was unchanged at 211,750, while continuing claims fell by 5,000 to 1.64 million in the week that ended Oct. 13 (the lowest level since August 1973)
· Durable Goods Orders for Sept rise 0.8%, beating the (-1.5%) estimate; Durable goods new orders revised up to 4.6% for Aug. from 4.4%; new orders ex-trans. rose 0.1% in Sept. after 0.3% rise and new orders ex-defense fell 0.6% in Sept. after 2.5% rise
· The US goods trade deficit has widened to the highest level ever recorded, just as trade tensions between the US and China escalate. The Sept. advanced trade deficit of goods widened to $76B from $75.5B in prior month, as imports rose 1.5% in Sept. to $216.988B from $213.878B in Aug., while exports rose 1.8% in Sept. to $140.952B from $138.422B in Aug.
· Pending Home Sales rise 0.5% MoM, above the estimate to hold unchanged, with declines in the Northeast and South, but gains in the Midwest and West. The 30-Year fixed mortgage rate rose to 4.86% this week from 4.85%, Freddie Mac said; the 15-year rate avg 4.29%, up from 4.26% a week earlier
· Oil prices held up well early despite the jump in the dollar, showing no ill effects from the day prior slide on bearish weekly inventory data. WTI crude rose 51c to settle at $67.33 per barrel after falling to 2-month lows this week with the downdraft in stocks. Overall, oil rose as a rout in global equity markets subsided and OPEC signaled it may curb output within months.
· Gold futures rose $1.30, or 0.1%, to settle at $1,232.40 an ounce, partially recovering some of its -0.5% drop on Wednesday, with prices moving back near multi-month highs (had traded as high as $1,236.80 on Tuesday, best levels since mid-July. December silver slipped 4.6c, or 0.3%, to $14.63 an ounce. A combination of rising stocks, a strong dollar and some upbeat economic data limited gold’s move higher.
· The U.S. dollar was broadly higher, as the dollar index (DXY) rose more than 0.25% to 96.70, its best levels since mid-August, powered by a decline in the euro and pound. The British Pound fell -0.5% to lows of 1.2809, its lowest level in about 7-weeks, while the euro reversed off earlier highs after the ECB meeting (kept rates unchanged as expected and language consistent with prior outlooks), falling to lows of 1.135 (-0.3%) also weakest level in 2 months (off earlier highs of 1.1432. A bout of better economic data helped the dollar, coupled with weaker reports out of the EuroZone this week, including softer German confidence data overnight.
· Treasury yields inched higher as bonds take a small breather following yesterday’s advance, as a rebound in major U.S. stock benchmarks rebounded after a sharp decline on Wednesday took some of the luster out of bonds. The yield on the 10-year note rose 1.4 bps to 3.136% from 3.122% late Wednesday (was 3.11% at one point midday), the lowest level for the debt since Oct. 2, while the 2-year Treasury note yield gained about 1 bps to 2.863%.
Sector News Breakdown
· Auto stocks rallied amid results from several: TSLA posted only its third quarterly profit ever and generated more cash than expected/reaffirmed its forecast for profit and positive free cash flow in the fourth quarter; Fiat rises as an Italian government official said the country doesn’t have the power to block Fiat’s sale of its Magneti Marelli unit to a foreign firm; Ford (F) Q3 profit and revenue both topped estimates; in suppliers, BWA Q3 sales beat the highest estimate, adjusted EPS also was above estimates while LEA and VC fell on its misses; DDAIF warned of the very challenging environment facing the automotive industry as it reported a sharp fall in Q3 profits; VNE warned it saw downside risk to its 2020 total sales target in auto parts space; other earnings reports in either auto parts, supplier or retailers included ORLY, PAG, MNRO, SUP and THRM
· Retailers; consumer discretionary names outperformed a second day (bright spot yesterday in market mess); YETI opened at $16.75 after 16M share IPO priced at $18.00; HIBB was downgraded to neutral at Susquehanna and tgt cut to $15 saying improving strength of HIBB’s digital initiatives are more than offset by deteriorating traffic in Hibbett store; CRI shares dropped after Q3 EPS missed by 12c, missing lowest estimate as revs also short; in mattresses, SNBR rises after Q3 sales top highest estimates
· Consumer Staples; CPB chairman urges shareholders to reject Third Point’s plan for company and says board will consider other options, including sale of company; BUD falls as announced a 50% dividend cut and posted both volume and sales that missed expectations in every region, with big miss from Latin America; HSY Q3 results and outlook disappointed investors while margins shrank in the quarter as it faced higher freight and shipping costs; MO said it would stop selling pod-based e-cigarettes in response to concerns from the US regulator about the growing use of such products by children
· Housing & Building Products; tools maker SWK shares fall after cutting its 2018 EPS forecast, blaming higher input costs, including tariffs, FX & commodities (SNA recently guided as well); OC was upgraded at Barclay’s following the recent rout in shares; homebuilders try and rebound, with Evercore/ISI upgrading KBH, MDC, MTH, PHM, TOL to outperform from in-line after pullback in sector; home appliance get a bounce after WHR EPS of $4.55 a blowout vs. $3.75 est. and sees EPS at the high-end of its prior annual guidance driven by tax and strong NA results
· Casino & Leisure movers; lodging stocks look to rebound as HLT was upgraded by two analysts today following its sell-off on Wednesday following mixed earnings; cruise lines active after RCL full year EPS missed views but raised yield view even as FX and fuel costs rise; in leisure products, boat make BC Q3 EPS and sales topped estimates on better forecast; ELY rises on Q3 beat; ASGN very strong Q3/18 results that beat across all lines, and Q4 guidance was nicely ahead of estimates; LVS reported mixed results for its quarter in gaming sector
· Restaurants; NDLS partial rebound after cancelling its secondary offering (fell -24% yesterday); DNKN tops third-quarter estimates for profit, sales posting adjusted EPS growth of 69% in Q3 for Dunkin’ Brands
· Energy stocks bounce with overall market and recovery in oil; COP reported earnings well above analysts’ expectations and a strong cash flow, boosted by higher crude; PTEN projects 4Q pressure pumping revenue of ~$330M-$340M with a gross profit of ~$55M-$60M and said plans to manage headcount in 4Q; EQT sinks to a 52-week low after coming in with a sharp Q3 earnings miss and in-line revenues of $1.16B/Q3 operating expenses were $586M higher YoY
· Utilities & Solar; utility sector lower after strong gains yesterday in rotation into defensive asset classes; AEP shares lower despite Q3 operating EPS topping estimates; DTE downgraded at CSFB on valuation; several names pulling back from 52-week highs yesterday
· Financials got a nice lift today with the broader market, with large cap and regional banks leading higher while asset managers bounce off recent lows after better results in the sector; in services, EFX shares plunge on its earnings miss; in insurance; AFL 3Q operating EPS of $1.03 was slightly above consensus reflecting stronger-than-expected earnings in the US segment/Japan third-sector new sales declined 2.6% y/y; UNM rallied on its results
· Asset managers/brokers; BEN Q4 EPS beat by 22c though revs of $1.53B missed estimates/AUM was $717.1B below $721.54B est.; TROW profit increases 40% as stock market returns fuel asset growth, with top and bottom line beating; LM profit slipped 4% this quarter while revs top views; LAZ and RJF both reported weaker than expected earnings
· Consumer finance and lending; CURO shares plunge after higher loan provisions hurt profit; Visa (V) reported ~12% payment transaction growth and lower incentives, which led to in-line revenue and a $0.01 EPS beat/issued FY19 guidance for low double-digit net revenue growth and mid-teens adjusted EPS growth, in line with consensus; ALLY posted net interest margins, cost of deposits and lower-than-expected auto loan originations lower but EPS beat
· REITs; KRC reported 3Q18 FF 2c above the Street and raised 2018 FFO/sh guidance by $0.055 to $3.575 at the mid-point primarily a result of disposition volume/timing; WRI Q3 FFO missed and tightened its guidance range to $2.27-$2.30 from $2.27-$2.33; GTY reported 3Q18 FFO/sh of 44c a penny below the Street and tightened its FFO/sh guide to $1.70-$1.74 from $1.68-$1.74
· Pharma movers; Large cap pharma was weak following results from MRK and BMY and amid concern the impact from the President plan that will make significant changes to the way Medicare pays for certain drugs; PTI and VRTX benefit after results from GLPG’s triple regimen for cystic fibrosis disappointed investors/ABBV will take over rights to Galapagos’s CF program for $45M up front and Galapagos may get up to $200M in milestones and royalties; separately VRTX Q3 revenue fell short of estimates as lower-than-expected sales of its two biggest drugs overshadowed a strong quarter for recently launched Symdeko
· Biotech movers; AMGN announced it is lowering the gross price for Repatha (its PCSK9) by 60% to $5,850 with the goal to open up access to the Medicare population by lowering the co-pay; SRPT reported strong Exondys51 sales of $78.5M, on track to meet 2018 rev guidance and Golodirsen NDA filing is on track; CELG Q3 top and bottom line beat on slightly better guidance; BIIB slid after partner Eisai presented an update on the companies’ experimental Alzheimer’s data that failed to impress markets
· Healthcare services, devices and providers; ALGN shares plunge after the maker of the Invisalign dental product reported better-than-expected Q3 earnings, but also said average selling prices (ASPs) declined and provided a downbeat outlook
Industrials & Materials
· Industrial & Machinery; little relief rally in heavily beaten up industrial names after bad week of guidance (CAT, MMM); IR was upgraded to overweight at KeyBanc to reflect a more positive view on IR’s premium execution, favorable late-cycle mix, and potential to benefit from a closer look into relative HVAC valuations; Ryder (R) upgraded to buy at Loop Capital
· Metals and mining, gold miners active on earnings, as GG falls to more than decade lows after reporting a larger than expected Q3 loss, as gold production fell 20% Y/Y and all-in sustaining costs rose 21%; AEM solid beat in 3Q, after two prior quarters of largely neutral results helped by hiking 2018-2019 production guidance; ABX mixed as EPS beat but revs missed
· Transports; Deutsche Bank said believe the rental car names (CAR, HTZ) are likely to meet or beat 3Q consensus expectations on the bottom line, even as the pricing environment appears to remain fairly anemic; in truckers, ODFL upgraded to hold from sell at Deutsche Bank as shares are off 26% from recent highs (XLI 13% over the same time period) and are now valued at just 16x our 2019 EPS (ODFL and LSTR report earnings overnight); UPS downgraded at Bank America; other movers on earnings ECHO, FWRD, KNX
· In rails, UNP Q3 EPS and op revs beat estimates; NSC was upgraded to buy at Stifel after earnings beat in the 3Q, an outlook for continued volume growth, and a slightly faster pace of operating ratio improvement; TRN falls as Q3 EPS misses the 41c estimate on in-line revs, though the real news was an unexpected early 2019 EPS guide for TRN rail remains 90c-$1.10, below Street
· In airlines; AAL 3Q profit and revenue matched estimates, as company adapts to the higher cost environment with lower planned capacity growth, and cancellation of unprofitable flying; meanwhile, LUV shares fell after 3Q operating revenue and adjusted EPS were slight beats, but the company’s cost outlook dampened investor enthusiasm; GOL will become the launch partner for GOGO’s Aircraft Data Service, Wireless Quick Access Recorder; ALK Q3 EPS and operating revs top estimates; ALGT Q3 EPS missed on slightly better revs; SAVE Q3 results beat as unit revenue (RASM) forecast of +6% y/y topped some analyst +5% estimate.
· Chemicals; PPG rises after activist Trian seeks ouster of company CEO blaming him for the company’s underperformance over the past three years; SHW shares fall after its 3Q miss and lower year guidance ($19.05-$19.20 vs. est. $19.23) with lower Q3 margins of 42.5%
· Paper and Forest products; IP shares surge after 10c EPS beat and slightly better revs of $5.9B as CEO sees continued healthy demand for Q4; PKG another beat in paper sector, with Q3 top/bottom line beat and guided Q4 slightly above views; Citi noted that since peaking in June, WY & RYN shares have fallen 24-28% on a combination of lower lumber prices, mediocre housing starts, a broader sell-off in Materials, and a tick-up in rates/expect modest rebound in lumber prices
Technology, Media & Telecom
· Internet; TWTR among the top gainers in the S&P following better fundamental results while user metrics were a tad light/beat on both top and bottom line and EBITDA was meaningfully ahead of views/MAUs were weak at 326M vs est. 330.1M; AMZN and GOOGL to report earnings tonight after the close; GRUBshares despite profit rises 75% on strong growth in active diners/CFO announced resignation/falls on weaker Q4 forecast; SNAP earnings tonight
· Semiconductors; AMD shares tank following mixed results and disappointing revenue guidance as the company is experiencing some near term growth headwinds as the previous blockchain-related tailwind to the company’s graphics products has now eased; ENTG reported Q3 revenue roughly in-line with EPS below expectations and gave disappointing Q4 guidance; XLNX rallied after Q2 top/bottom line beat and raises FY19 revenue view to $2.95B-$3B from $2.8B-$2.9B; TER was upgraded to buy at Craig Hallum as believes the risk/reward is attractive at current levels given the company’s ability to beat and raise in a challenging semi demand environment; TXN and SLAB slide to 52-week lows, while MLNX rises on results
· Software mover; MSFT delivered both accelerating revenue growth and significant operating margin expansion in Q119, with operating income +29% YoY and >20% for three Qs in a row now; TTWO gains ahead of its highly anticipated launch of “Red Dead Redemption 2” game as analysts expect new release to sell over 20 million units in the December quarter; NOW Q3 subscription revenue and billings beat on a combo of underlying strong demand and deals initially expected in Q4 closing early
· Media & Telecom movers; CMCSA squeezed out a rise in quarterly profits/added 363,000 internet subscribers in the period, a 70 percent increase from a year earlier; NOK reported in line Q3 results and reiterated full year 2018 EPS guidance; ad giant WPP plunges as the largest advertiser in the world after quarterly sales missed estimates and the U.K. advertiser cut its full-year outlook; NLSN broadly in-line results with EPS 2c ahead while Rev is essentially in-line while lowered FY FCF guidance
· Hardware & Component news; KN results better than expectations with December guidance in-line with estimates on continued China strength/upside in the quarter reflecting strong growth across audio and precision components; ZTE projected a net loss of Rmb6.2bn-7.2bn ($0.89-1.04bn) for 2018, underscoring the devastating impact of its brief ban on doing business with US companies earlier this year (AAOI, ACIA, LITE); FFIV reported a strong September quarter, with better-than-expected revenue and EPS. Product sales grew for the second consecutive quarter driven by momentum in software, while hardware grew as well