Tuesday, November 6, 2018
Equity Market Recap
· After stocks started the day with solid gains, caution prevailed in financial markets late, with major U.S. averages erasing gains in a flash (albeit on very light volume) as investors prepare for any fallout from the American midterm elections, particularly congressional races. After the brief blip lower, major averages worked their way higher in the final hour ahead of a busy night of politics. Expectations for the outcome for the midterm elections is that Democrats win back the House while Republicans would retain a majority in the Senate. Treasuries rebounded from near session lows after a mixed 10-year note auction, while the two-year climbed to its highest since 2008. The dollar pared early session losses but overall Treasury, currency markets were little changed. Energy prices a different story as WTI crude slid for a 7th straight session, hitting the lowest levels since April and now down more than 20% from its highs last month ahead of weekly inventory data tonight and tomorrow. Key sectors to watch for the election include financials, technology (regulatory) specific energy stocks, Pharma (amid battle on drug pricing) and industrials (infrastructure plan by Trump). Don’t forget after the elections tonight, the Fed still meets on Thursday, though no changes are expected at this time.
· Oil prices enter bear market territory, down over 20% from all-time highs; WTI crude prices fall 89c or 1.4% to settle at $62.21 per barrel. The move lower today comes ahead of weekly inventory data, as the API has reported six consecutive weeks of builds into tonight. A combination of US sanction exemptions for certain countries (announced yesterday) and the US-China trade war raising concerns over slowing global growth (China GDP recently disappointed as well) has led to the rout in oil prices over the last month.
· Gold prices slipped in afternoon trading, falling -%6.00, or 0.5% to settle at $1,226.30 an ounce, erasing earlier gains as markets took a cautious stance ahead of the outcome of U.S. midterm elections that will determine control of Congress. December silver settled 14.7c, or 1%, lower at $14.50 an ounce. Republicans currently have majorities in the House and Senate. Democrats are widely expected to take control of the House of Representatives in Tuesday’s election, while Republicans are seen maintaining control of the Senate.
· The dollar index (DXY) was little changed after a torrid October run pushed it to the highest since May 2017, but currencies were mostly flat today ahead of the election news tonight. Results will begin rolling in Tuesday evening, though the implications of the vote likely won’t be known until the early hours of Wednesday morning. Democrats are expected to take control of the House of Representatives, while Republicans will likely hang on to their majority in the Senate. Investor sentiment around the election has been cautious after the surprise outcomes of the 2016 presidential race and the Brexit vote. British Pound one of the few gainers, ending near the best levels of the day late vs. the dollar shy of the $1.31 level.
· U.S. Treasury prices had slid into mid-afternoon, with the yield on the benchmark 10-year rising above 3.22% (from earlier lows around 3.18%) ahead of a 10-year auction, as investors positioned themselves ahead of the midterm elections. Early on, it was muted trade ahead of the elections and a fresh policy statement from the Federal Reserve on Thursday. However, after the 10-year auction, prices rose and yields inched back lower. The U.S. Treasury sold $27B in 10-year notes at a yield of 3.209%, well below the 3.221% when issued prior while the bid-to-cover (demand) of 2.54 topped the prior 2.39 auction result; indirect bidders were awarded 73.8% of auction with only 1.2% to direct bidders.
Sector News Breakdown
· Consumer Staples; in cosmetics, ELF posts better results than feared (after shares dropped last quarter on miss) helped by gross margin improvement and cost management efforts that led to the quarterly beat; CORE mixed Q3 as EPS beat/sales miss and raises year EPS view/cuts year sales outlook; IFF reported solid organic sales growth of 4% in 3Q18, the last quarter of the legacy IFF business before the Frutarom acquisition will be consolidated, Bernstein noted; USFD shares rallied as Q3 EPS results topped estimates, though sales were weaker
· Restaurants; BOJA reports a definitive pact to be bought by Durational Capital Management and the Jordan Company LP for $16.10 per share in cash/$593M deal ; SHAK was upgraded to buy at Longbow; FRGI Q3 EPS 11c/$174.6M vs. est. 19c/$173.3M; Q3 Pollo Tropical comp sales +6.5% vs. est. +4.4% and Q3 Taco Cabana comp sales +12.2% vs. est. +8.40%
· Housing & Building Products; building material stocks mixed after SUM reported 3Q results below analysts’ estimates and lowered its full-year adjusted Ebitda forecast, citing inflationary cost increases and persistent weather conditions that hurt operations; MLM also with cautious full-year revenue forecast , with the midpoint falling below expectations (shares of peers VMC, EXP, USCR, CBPX, USG, GMS, AMWD, BLDR, AWI among movers); FTDR slashed its yearly Ebitda forecast in its first earnings report since its spinoff from ServiceMaster Global Holdings./cut 2018 adjusted Ebitda to $215-$225M from $245-$255M
· Retail & Leisure movers; in hotels, lodging give up recent gains after MAR cut its forecast for Q4 RevPAR below analyst estimates as now sees 4Q North America RevPAR up about 1%, had seen 1.5%-2% to reflect some uncertainty related to transient demand weakness in September; RL posted profit and revenue that topped analysts’ estimates, but shares slipped early amid flat sales growth/same-store sales were flat last quarter in constant currency terms
· Autos; TM raised its earnings forecast for the year, citing growing sales in China and the weaker yen and said it will buy back about $2.2 billion of stock; recent Chinese IPO NIO a wider loss than anticipated with its Q3 report while discloses 4,206 ES8 vehicles were produced and 3,268 were delivered during the quarter; Subaru rose in Japanese trading despite posting a Q2 loss, cutting its full-year forecast and expanding a vehicle recall on quality problems; GM tgt raised to $60 at Citigroup saying now is the time to seize opportunity to unlock value; MNRO tgt raised to Street high $86 at Oppenheimer saying key internal initiatives have started to take hold
· Energy stocks slip as WTI crude sliding a 7th straight session, falling to 7-month lows as it officially enters bear market territory (down from the summer highs of $76.90). The front-month contract back to a $61 handle. The 2% move lower today comes ahead of weekly inventory data, as the API has reported six consecutive weeks of builds into tonight. A combination of US sanction exemptions for certain countries (announced yesterday) and the US-China trade war raising concerns over slowing global growth (China GDP recently disappointed as well) has led to the rout in oil prices over the last month
· Few E&P names such as NBL, APC as well as PDCE, SRCI, XGO and driller HP among most exposed to a proposal to restrict drilling on Colorado’s Nov. 6 ballot/Stifel says most polls suggest Prop 112 will fail by narrow margin; though a recent poll conducted by the University of Colorado shows the measure passing 52% to 48%/says if Prop 112 passes, Stifel’s worst case NAV estimates suggest HPR, PDCE and SRCI would have another 12%, 15% and 30% downside
· E&P sector; OAS issued a modest earnings miss in 3Q, lower than expected 4Q production guidance and overall higher 2018 expense guidance; BE posted solid revenue, better than expected non-GAAP GM, and in-line EPS, but 4Q18 guidance was disappointing; LPI 4Q oil guidance that missed analyst estimates; CRZO strong beat and raise production quarter inclusive of an encouraging Delaware ops update but offers Q4’s oil guide coming up short of expectations; also watch names APC, NBL, PDCE, SRCI regarding Colorado ballot vote; the weakness in sand frac continues as HCLP the latest to cut guidance ($50M-$65M vs. $110M)
· Utilities & Solar; ITRI Q3 EPS beat but guided 4Q below consensus as supply chain constraints weighed on sales/margin outlook and lowered its year outlook
· Bank movers; banks remain a potential beneficiary following the mid-term election conclusion, while group has also been steady amid the rising rate environment; bank earnings mostly in the rear-view mirror and group has failed to rally with broader markets over the last year, but have been climbing off recent lows; BPFH fell after the company announced Anthony DeChellis will succeed retiring CEO Clayton Deutsch before the end of November; ISBC shares jumped after the WSJ reported it hired bankers to explore a possible sale ; ETFC preliminary Daily Average Revenue Trades (DARTs) of 302,000 for October, up 7% MoM
· Consumer finance and lending; SQ was upgraded to buy at Citigroup ahead of earnings as believes commentary about the overall health of the ecosystem, strong visibility into the coming year and progress on a search for a CFO will help bring momentum back to the shares; WU was downgraded at Wells Fargo as struggle to see the catalyst for acceleration in the fundamentals that will move the shares higher
· REITs; Office REITS such as VNO, SLG, FCE/A and ARE were active as most do bulk of their businesses in New York, getting a lift after AMZN is reportedly near naming Long Island City section of Queens as one of its two sites for HQ2
· Pharma movers; generics get a boost after MYL earnings beat estimates and it held on to its 2018 forecast, while BHC 3Q results beat and its year Ebitda view was raised; MNK rises after its 2018 earnings view topped estimates in a good round of earnings in generics/specialty pharma; NBIX matched 3Q expectations for Ingrezza sales, registering $111M vs $110M consensus, as Ingrezza performance was driven by continued script growth at 16% q/q, lower than the 34% 2Q growth; in large cap Pharma, LLY posted a Q3 beat and raise guidance, but shares slipped; IRWD shares slipped after Q3 EPS loss wider than expected
· Biotech movers; ONCS shares plunge after reporting preliminary data from KEYNOTE-695 Phase 2b clinical trial of TAVO in combination with KEYTRUDA for metastatic melanoma; SLDB initiated sell at Citigroup citing scant market opportunity for DMD candidate SGT-001 compared to SRPT and PFE competing products; NKTR falls after an abstract for the Society for Immunotherapy of Cancer meeting highlighted that a 50% response rate in melanoma patients has remained unchanged from the company’s last update in June; PTCT falls on larger quarterly loss and weak revs while cuts outlook for revs
· Cannabis sector active as Cowen noted that 57% of cannabis products in Canada are out of stock – the same percentage as last week/products, however, are being added at a speedy pace, with Cowen noting the SKU count as growing 20% weekly since pot was legalized three weeks ago (shares of stocks in the industry include TLRY, GWPH, CGC, ACG, CRON)
· Medical equipment and devices; NVRO shares fall after being downgraded to underweight at JPMorgan after reporting wider than expected loss; VCELshares amid the top gainers on the day following the company’s Q3 report
· Healthcare services and providers; hospital provider THC issued a guidance cut more than miss, prelim 2019E EBITDA in line/adj. EBITDA was $577M, 4% below consensus, and towards the low end of the guide on worse margins; IVC shares among the top underperformers in the S&P 500 after Q3 EPS and revenue lagged estimates; BDX shares drop after 4Q gross margin missed expectations, unfavorably impacted by FX, raw material costs and tariffs; other service related names moving on earnings included CVS, TVTY, ACHC, HSIC; AAC shares fell more than 40% after its quarterly results missed views
· Drug distributor sector hit after ABC 2019 forecast came in below analysts’ estimates, as saw EPS of $6.65-$6.95 below the $7.11 consensus and also forecast fiscal 2019 revenue would grow in the mid-single digits vs. estimate of 7% growth (shares of MCK, CAH active)
Industrials & Materials
· Industrial movers; MTW shares jumped on mixed results as EPS beat by 10c, though miss on revs and narrowed its FY revenue views; EMR Q4 results and full-year outlook missed analysts’ expectations; GE snapped its 9-day losing streak
· Transports; index was mostly higher, led by gains of MATX and EXPD after earnings for each while shares of CAR fall after its results, while airlines slide (DAL, AAL); CAR a drag on transports after the company misses estimates with its Q3 report for profit and revenue as its European business, with higher fleet costs and lower pricing leading to an 8.2% drop in international adjusted Ebitda for the quarter/raised year guidance
· Chemicals rise led by fertilizer companies after MOS and NTR each boosts forecasts; MOS raises FY outlook and points to “strong operational performance” in the business units and strong fertilizer demand; NTR raises FY outlook for net earnings/share and adjusted Ebitda, pointing to “the strength of market fundamentals and acceleration of merger synergies; WLK shares jumped after Q3 results, largely driven by higher polyethylene sales volume
· Materials; RYAM Q3 adjusted EPS missed by 5c and total net sales trailing analysts’ estimates; GLT shares dropped after flat EPS for Q3, well below the 37c estimate; LPX advanced after Q3 EPS and net sales topped consensus
Technology, Media & Telecom
· Internet; online travel higher after BKNG posted a beat & raise for Q3, while also marked the 1st qtr of accelerating bookings & room night growth in 6 quarters; broader Internet group playing some catch-up, with most major names higher; Pandora (P) shares surge on Q3 beat; AMD advanced on reports its data center chips were available on AMZN’s Web Services.
· Software movers; GSKY plummets after cutting full-year forecasts due to Q4 seasonal headwinds coupled with a much steeper yield curve than management initially expected/guides 2018 Ebitda $165M-$175M, below prior view $192M-$199M; SPLK was downgraded at Bernstein; CALX rises after Q3 earnings and analyst upgrade (Cowen); SYMC spiked late morning after Reuters reported Private equity firm Thoma Bravo has approached the company and express interest in acquiring it
· Media & Telecom movers; RNG another beat-and-raise quarter and very solid results in 3Q with increasing revenue beat magnitude and 30%+ growth trends across leading indicators; in media, NYT downgraded to underperform at Barclays on stretched valuation; VZ launched a new lower price of $65 for Verizon Prepaid Unlimited, which includes $5 per month Auto Pay discounts per line; ATUS rises after quarterly results
· Hardware & Component news; CVON enters into pact to be acquired by affiliates of CVC Fund VII in an all-cash deal valued at about $1.8B with holders to get $12.50/share cash ; LASR rises as reported 3Q18 earnings results ahead of expectations and provided an outlook ahead of views; FN shares rise as Optical communications revenue was strong in the quarter as both datacom and telecom revenue grew double-digits on a sequential basis