Wednesday, December 12, 2018
Equity Market Recap
· U.S. stocks were strong throughout the day, pulling back from intraday highs (the slide marks the fourth straight day that investors have sold an early rally) but managed to hold on to solid gains as an improved outlook for U.S.-China trade took a positive turn today. Headlines set the tone for the “risk-on” session as the WSJ reported China is working to replace its made in China 2025 plan and preparing to increase access for foreign companies. Overnight, President Trump said he would intervene in the arrest of Huawei’s CFO Meng Wanzhou if it would help ensure a trade deal with China, while the CFO was granted bail by a Canadian judge on Tuesday after more than a week in detention. Also today, Reuters reported that Chinese state-owned companies bought at least 500K metric tons of soybeans from U.S. producers, in China’s first major soybean purchase since President Trump and Pres. Xi met earlier this month. In addition to trade, tepid inflation data also helped sentiment, with monthly consumer prices (CPI) in-line with expectations, helping the bull case for the Fed to ease off the gas on raising interest rates aggressively in 2019. The debate between the White House and Congressional Democrats over a possible government shutdown (which dominated headlines yesterday) took a back seat today. Given the strength in U.S. equities today, interest rate sensitive names (which led markets recently) such as utilities and REITs, were among the day’s biggest decliners. Lastly, stock markets keep a watchful eye on the UK as Prime Minister Theresa May faced a vote of confidence in her leadership of the Conservative Party. The vote concluded at 3:00 PM this afternoon EST and the decision is expected around the close of US trading.
· Consumer Price Index (CPI) for November was unchanged MoM, in-line with economist forecasts and was the lowest reading since March while CPI ex: food & energy (core) rose 0.2% MoM, also in-line with consensus views. Gasoline prices fell 4.2% last month, suppressing any increase in overall consumer costs. CPI YoY rose 2.2%, in-line with consensus views as well
· Oil prices erased earlier gains, settling near the lows of the day down 50c or 1% to settle at $51.15 per barrel. Prices touched earlier highs of $52.88 per barrel following mixed weekly inventory data and a pullback in the dollar. Overnight, the API reported that U.S. crude supplies fell by -10.2M barrels for the week ended Dec. 7 and showed that gasoline stockpiles fell by -2.5M barrels, but the EIA showed weekly stockpiles of crude fell -1.2M, smaller than the est. -3.5M barrels. Gold prices inch higher, as Feb gold rises $2.80 or 0.2% to settle at $1,250 an ounce, just off recent 5-month highs, getting a boost as the dollar slides on the day.
· The U.S. dollar ended lower, pulling back after hitting its best levels in about two weeks yesterday (off highs above 97.50) as the Pound and Euro recovered from recent losses. The no confidence vote took place in the UK this afternoon with results expected around 4:00 PM EST. Sterling climbed to highs of $1.671 (off this week 20-month lows of 1.2478 earlier today) as reports indicated a majority of Theresa May’s MPs expressed their public support for the prime minister ahead of a vote of confidence in her. The euro, yen and Canadian dollar all gained.
· Treasury prices weakened as stocks surged, with investors rotating out of defensive/safe haven assets; a weaker Treasury auction also pushed yields higher as the U.S. government sold $24B in 10-year notes at a yield of 2.915% vs.2.91% when issued prior while the bid-to-cover (demand) was at 2.35 vs. 2.54 prior auction and indirect bidders awarded 63.1% and directs 10.8%. The yield on the 10-year rose above 2.91% (nearly 10 bps off last week lows), while the 2-yr stood at 2.77% and the longer term 30-yr up at 3.15%.
Sector News Breakdown
· Retailers; VRA shares fall after the company’s Q3 EPS missed lowest estimates/operating margin was 5.5% of sales vs. 11.4% a year ago and 7.2% est./comp sales fell (-16.5%) vs. est. (-13%); LULU was upgraded to buy at Citigroup calling it a brand to own in uncertain times – one with the strongest brand positioning, comp momentum, int’l prospects, margins and ROIC; AEO mixed Q3 results as EPS beat/sales misses while guided Q4 EPS 40c-42c, below the 45c estimate/Q3 comp sales rose 8% slightly missing the 8.4% estimate; UAA falls after investor presentation where they see sees negative low single-digit CAGR for 2017-2019 growing to positive low-single CAGR 2020-2022 and low-single digit revenue growth in 2023
· Consumer Staples & Restaurants; PLAY shares fall after Q3 results as Q3 revs of $282M topped views, but comp sales fell (-1.3%), more than the (-0.7%) estimate/raised low end of year revs; HAIN shares dropped to 52-week lows; defensive beverages (KO, PEP) failed to rally with the broader market with similar small gains for food names (K, HRL, CPB)
· Housing & Building Products; LOW held its analyst day, announcing $10B stock buyback as well as reiterated guidance for FY18; Barclay’s with several changes in the building/products sector as they designate OC as top pick & downgrade BMCH to Equal Weight as see roofing positioned to capture the benefit of potential asphalt price declines in 2019, while Insulation price should stick in a low-growth environment. Firm also reducing estimates and price targets for builders DHI, LEN, PHM, KBH, and TMHC following incremental demand weakening into November
· Casino & Leisure movers; Lodging and REITs mentioned at Citigroup as the firm downgraded H, HST, MAR and FRT to Neutral from Buy, while upgrading O to Neutral from Sell and adding INVH to Citi’s Best Ideas Focus List, replacing DRE which was top pick for 2018/says downgrades are driven from taking a more cautious view on lodging primarily driven by heightened macroeconomic concerns, tepid RevPAR expectations & a challenging env’t for operating margin.
· Energy stocks strong today behind a bounce in oil after mixed weekly inventory data: API reported that U.S. crude supplies fell by -10.2M barrels for the week ended Dec. 7/showed that gasoline stockpiles fell by -2.5M barrels (bullish), but the EIA showed weekly stockpiles of crude fell -1.2M, smaller than the est. -3.5M barrels
· E&P sector; FRAC guides Q4 revenue at the high end of its earlier forecast and adjusted EBITDA above the previously forecast range/now foresees Q4 revenue of $490M vs. $483M est. and adjusted EBITDA of $80M; E&P sector strong on oil recovery (APC, MU, PXD, EOG); PKD shares tumbled after the company announced it has filed for a pre-arranged Chapter 11 restructuring, as it works to reduce its debt burden
· Utilities & Solar; in solar, FSLR hosted its 2019 guidance call and issued a healthy guide vs. Street expectations/Revenue guidance exceeded expectations, but EPS missed largely due to impacts of higher-than-expected ramp costs/indicated the Series 6 margin profile (key driver of earnings growth moving forward) is meeting/exceeding initial expectations; 52-week highs for several utilities again today: NRG, WEC, FE, CNP, ETR, CMS, DUK, XEL, ES, AEP, PNW; regarding PCG, California Insurance Commissioner Dave Jones said preliminary claims data reflects about $9.05 billion in actual losses from the Camp, Woolsey and Hill fires in 2018
· Bank movers; German banks active after Bloomberg reported the German government is intensifying efforts to help fix DB, with officials studying ways to make it easier to merge with Commerzbank AG, people familiar with the matter said. ; banking stocks rebound, but generally lagged despite the broader rally, while analysts getting more cautious as KBW Inc. downgraded regional banks CMA and KEY downgraded to Market Perform (says CMA revenue and earnings growth are largely dependent upon future Fed funds hikes while see risk to revenue growth assumptions next year for KEY) and cut large cap banks BAC and MS as well saying each stock lacks tangible catalysts that can push shares higher near term; shares of WFC and STI both trade to new 52-week lows today
· Insurance; PGR November net premiums earned $2.53 billion vs. $2.11 billion y/y while Nov net premiums written $2.33 billion vs. $2.02 billion y/y; UNM says its 2018 adjusted operating EPS growth is trending toward the higher end of its prior outlook for growth of 17% to 23% in an investor presentation/sees 2019 EPS growth 4%-7%
· Asset Managers; LM preliminary assets under management of $741.6B at Nov. 30, 2018 rises 1.2% from October/includes long-term outflows of $2.9B, driven by fixed-income net outflows of $1.7B, equities of $1.0B, and alternatives of $0.2B; TROW preliminary month-end assets under management of $1.03 trillion as of November 30, 2018.
· Pharma movers; NBIX shares fall as its drug for children and adolescents with moderate to severe Tourette syndrome failed to reach its primary target in a mid-stage study/the 127-patient trial, dubbed “T-Force Gold”, showed Ingrezza did not benefit patients as expected when compared to a placebo; CORT extends yesterday gains, upgraded at Cantor with Street-high $29 from $17, sayings that a new patent issued yesterday creates an additional hurdle for attempts to genericize Korlym; MNK slides after its SpecGx received a complete response letter from the FDA for a reformulation of Roxicodone tablets; RARX 8.4M share Secondary priced at $15.50; Hemp stocks advanced (NBEV, MJNA, HEMP) as the U.S. farm bill, which would legalize hemp production and extraction, moves toward approval
· Medical equipment and/or services; FLDM 8.15M share secondary priced at $6.75; EW must pay BSX $35M after a federal jury in Delaware said its Sapien 3 device infringes a patent related to artificial heart valves; ESRX and WMT announced an extension to the companies’ existing network agreement to provide access to Walmart’s prescription services for Express Scripts clients’ covered members; NEO 10.835M share Spot Secondary priced at $12.75
Industrials & Materials
· Industrial & Machinery; CAT estimates were cut at Jefferies citing lowered expectations for mining and oil & gas growth and capex into 2019 (hold rated and $130 tgt); URI shares rise after the company forecast strong 2019 revenue and Ebitda, and dismissed the fears of an impending slowdown; LII rises after boosting its year EPS forecast to $9.21-$9.61 from prior $8.70-$9.10 and ups capex to about $125M from $100M view prior; FLR removed from conviction buy at Goldman
· Transports; truckers slip after XPO reaffirmed that it remains on track to generate about $625M of free cash flow for 2018 in a meeting with a group of investors on Dec. 11 while sees 2019 free cash flow $650M; JBLU said Nov capacity rose 10.6%, traffic up 9.7% while load factor 83.5%, down 0.7% from year ago
· Metals & Materials; KeyBanc lowers EBITDA view on CLF on lower pricing realizations and volumes in USIO; steel producers get a boost (X, AKS, STLD) on hopes of improved trade talk with China (few steps forward the last 2-days); MOS was downgraded to neutral at JPMorgan and tgt cut to $33 on signs of increased phosphate exports from China, which could lead to weaker prices in 2019
Technology, Media & Telecom
· Internet; strong returns in the FAANG space, with AMZN, FB, NFLX and GOOGL all rising, along with smaller Internet players; EBAY downgraded to equal-weight at Morgan Stanley and slashed tgt to $33 from $55 saying they were wrong about how quickly core marketplaces would deteriorate
· Software movers; PVTL reported F3Q results with revenue, billings and OCF ahead of Street expectations while current subscription billings grew +57% y/y and a rebound to 30%+ current billings; in opticals, CIEN to report earnings tomorrow morning; ADBE the highlight this week with earnings expected Thursday night
· Media & Telecom movers; VZ downgraded at Morgan Stanley noting the stock has appreciated 11% YTD (15% including the dividend), outperforming the S&P by 12.6% and AT&T (T) by 35%/expect Verizon to report just 1% EPS growth, reflecting in part a 3% ASC 606 headwind, on broadly flat revenues; AMTwas downgraded at Morgan Stanley in tower space (remain OW on CCI/SBAC) after company has seen strong relative performance in 2018, outperforming peers by over 10pp ytd; UNIT was downgraded to underweight at Morgan Stanley as see cost of capital, elevated leverage, and Windstream uncertainty potentially driving a cut in the dividend
· Hardware & Component news; ROKU tgt cut to Street low $45 at Needham from $85 and also cut its earnings, revenue and user addition expectations for 2019; says lower FY19 user adds is based on rising political tensions with China that may negatively impact Chinese-made TV sales in the US; SPA to be acquired by an affiliate of Cerberus Capital for $18.50 per share in cash, which represents a 41% premium to yesterday’s closing price.