Closing Recap

Tuesday, April 07, 2020

Equity Market Recap

·     U.S. stocks lost steam late day, dragged down by a sharp reversal in energy as oil prices ended the day lower by nearly 10% ahead of Thursday’s OPEC+ virtual meeting, and reversing earlier gains of more than 3%. Major U.S. averages turned negative in the final hour of trading, erasing gains of more than 3% earlier as the hopes of a slowing pandemic faded. U.S. stocks are now more than 20% off its recent lows, but still remains down over 20% from their record highs last month. Investors try and weigh the Fed liquidity measures, rate cuts, and QE programs as well as the stimulus/relief programs for American citizens and small business from the gov’t against the global shutdown of work, school and life in general from the coronavirus “social distancing” forced upon citizens to offset the spreading of the virus. With today’s late market slide, the Nasdaq Composite failed to closed higher for back-to-back days for the first time since March 2^nd as markets remain volatile filled with uncertainty.

Commodities

·     Oil prices with a nasty reversal midday, falling -$2.45 or 9.4% to settle at $23.63 per barrel and well off its earlier session highs of $27.27 per barrel shortly after the Energy Information Administration lowered its U.S. and global benchmark crude price forecasts for this year and next and on fears the expected production output cut by OPEC+ on Thursday won’t be big enough to make a meaningful impact to offset the oversupply and lack of demand due to the virus. At this rate, expectations are for an effective trade deal, the U.S., Saudi Arabia and Russia will all need to participate in cutting production. Gold futures declined as well, slipping -$10.20 or 0.6% to settle at $1,693.90 an ounce, but well off its earlier highs of $1,742.60 an ounce. Prices had finished at their best levels in 7-years Monday.

Currencies & Treasuries

·     The U.S. dollar was weak, as the dollar index (DXY) dropped back below the 100 level (down -0.8%), pulling back broadly as stocks surged early as the euro rose over 1%. Treasury market’s slip as yields rise across the board as investors have been adding to riskier bets and paring investments in safe haven assets; 10-year yield tops 0.75% for its highest levels in about 2-weeks

Sector News Breakdown

Consumer

·     Retailers; a massive bounce in retailers carries into a second day as KSS, CPRI, JWN, TPR, PVH, among the top gainers in the S&P early, all rising around 20% or better as investors look to scoop up heavily beaten sectors most impacted by the COVID-19 virus, as stores remain closed throughout the month, but hopes are won’t be much longer afterwards

·     Consumer Staples; KHC said surging demand driving about 3% expected q1 net sales growth, about 6% organic net sales growth while does not expect full benefit from incremental sales in Q1 to flow through to net income/(loss) from continuing ops, eps; STZ was upgraded to buy at UBS on attractive valuation for 10% underlying EPS CAGR over the F21-24E period driven by +HSD Beer growth and +MSD W&S growth along with +280 bps in op margins; tobacco stocks MO and PM helped pace the gains in staples sector

·     Housing & Building Products; very busy sector of news as two homebuilders with updates, with DHI order backlog of homes under contract at March 31, 2020 increased 14% to 19,328 homes and 18% in value to $5.9B. At March 31, 2020, the company had 33,400 homes in inventory, of which 16,700 were unsold; BZH March cancellation rate surged to 25% of gross new orders vs. 15% in March 2019/net new orders for the month of 405 fell 26% Y/Y and Q2 ending backlog of 2,231 is up 12% Y/Y; In home improvement retail, LOW upgraded to buy at Loop Capital citing expectation that the home improvement retailer will take share from smaller competitors.

·     Building products, distributors; RBC Capital cut tgt prices by 28% on average, reflecting a combination of lower earnings ests. (EBITDA by 19% and EPS by 34%) and multiple contraction given a weaker demand outlook, plant shutdowns/under-absorbed fixed costs, supply chain disruptions, and elevated costs (upgraded MAS, MHK and downgraded OC). For Building Products Distributors lowers tgt by 27% for the group as decrease reflects a 21% reduction in CY’20 EBITDA ests. (38% decline in EPS ests) and multiple compression given a weaker demand outlook (downgraded BECN, FBM, GMS, and SKY)

·     Auto sector; GM downgraded to hold from buy at Deutsche Bank and cut the firm’s price target on the shares to $25 given the additional downside risk seen for U.S. autos stocks and significant liquidity concerns due to their prolonged production shutdown; SunTrust lowered estimates on auto dealers (AN, ABG, PAG) based on a proprietary state-by-state market analysis of each dealer’s franchise network across the US and internationally due to the impact of COVID-19; AZO suspended its share repurchase program

Energy

·     Energy stocks; in major oil news, XOM said it is reducing its 2020 capital spending by 30% and lowering cash operating expenses by 15% in response to low commodity prices resulting from oversupply and demand weakness from the COVID-19 pandemic/cap investments for 2020 are now expected to be about $23B, down from the previously announced $33B; HAL said it cuts more jobs, executive pay, and suspends some retirement contributions

·     Energy, E&P sector; XOM said it is reducing its 2020 capital spending by 30% and lowering cash operating expenses by 15% in response to low commodity prices resulting from oversupply and demand weakness from the COVID-19 pandemic/cap investments for 2020 are now expected to be about $23B, down from the previously announced $33B; CLR the latest E&P to suspend its quarterly dividend as it looks to manage cash and said with global crude oil and product demand estimated to be down 30% as a result of the COVID-19 pandemic, it is reducing its production by a "similar range" for April and May; SND cuts its 2020 capital spending budget by as much as $20M, including a significant reduction in its SmartSystems manufacturing plans due to declining oil prices and reduced demand

·     MLP Sector; PAA reduced 2020-2021 cap program by $750M, or 33%; cuts Q1 distribution by 50% and says ended Q1 with about $2.5B committed liquidity/total expansion capital for 2020/2021 is now targeted to be about $1.55 billion

Financials

·     Mortgage Finance; NRZ, TWO, MFA, NYMT, COOP, PMT among those active again after Bloomberg reported you may see investors looking to buy distressed mortgage-related assets on the cheap noting banks will force asset sales to meet margin calls, while hedge funds and P-E players may be more flexible, i.e. accepting an equity stake in return for a capital infusion; COOP was downgraded at Wedbush saying results reported yesterday were better than feared, challenge going forward will be around the demands of funding servicer advances

·     Bank movers; KEY was downgraded at Morgan Stanley and lowered tgt to $13 from $19 saying despite a relatively low valuation of just 5.9x our 2021e EPS, they believe KEY’s consistently weaker credit quality and lower loss-absorbing capital will make it difficult for the stock to outperform – at the same time, Wedbush added KEY to its Best Ideas list saying selloff overdone and is better positioned than most of its peers to handle this unprecedented low rate environment due to its hedging strategy

·     Consumer finance and lending; GPN said that it expects Q1 adjusted net revenue to be up only slightly on a combined basis vs. a year ago/sees Q1 adjusted EPS to grow approximately mid-teens vs. a year ago and withdrew its full year outlook.

·     REITs; CIM announces $250 mln 3-yr convertible notes offering and to use part of net proceeds to pay cost of capped call transactions, remainder to buy non-agency and agency residential MBS, and non-agency commercial MBS/cuts dividend to 30c from 50c; Citigroup downgraded RPAI and WRI to neutral from buy in strip mall REITs as acknowledge the potential for further near term pressure on the shares, and as such are hesitant to have any absolute Buy ratings…but longer-term, ultimately expect the stocks to be in a better position than mall REITs for a recovery

Healthcare

·     Pharma movers; BMY said it is expanding existing patient support programs to help eligible unemployed patients in the U.S. who have lost their health insurance due to COVID-19 outbreak; MNK inks agreements with certain institutional investors to exchange ~$495M of its outstanding 4.875% Senior Notes due 2020; CANF reports positive top line result from its phase II NASH study with Namodenoson as main study endpoints were dose dependent and significantly achieved

·     Biotech movers; REGN announces that it has restructured its Praluent (alirocumab) agreements with collaboration partner SNY as it will increase efficiency and streamline operations; KPTI to evaluate low dose selinexor as a potential treatment for hospitalized patients with COVID-19 and will initiate global randomized clinical trial/says BOSTON sNDA Submission on target for 2Q; LVGO rises early as guided Q1 revenue $65.5M-$66,5M vs. est. $61.2M and above its prior guidance of $60M-$62M

·     Healthcare services and providers; in the dental industry, Goldman Sachs upgraded HSIC to buy from neutral with $59 tgt noting it faces lower earnings risk than dental peers from the COVID outbreak and its business may be quicker to recover, while the firm downgraded XRAY to neutral from buy and cut tgt to $40 from $58 and cut SDC to sell with a $3 tgt as thinks rising unemployment and increased financial pressure will hurt demand for its aligner treatment

·     Medical equipment and devices; HOLX guided Q2 revs $756.1M, mostly in-line with estimates saying the pandemic and related economic disruption had a significant negative effect on its business in late March and is implementing a number of measures to reduce expenses (separately was upgraded at Wells Fargo to overweight)

Industrials & Materials

·     Transports; airlines jumped early (AAL, DAL, JBLU, LUV, UAL) after Treasury Secretary Mnuchin notes he is meeting with advisers on airline program this week; CNBC noted the TSA screened just 108K people yesterday, down 95.9% same day a year ago; Credit Suisse lowers rail ests (CSX, UNP, NSC) cutting 2020 by ~13% on average and cut target prices; in trucking, SAIA was downgraded at KeyBanc saying they are incrementally cautious ahead of 1Q20 LTL earnings as they expect manufacturing outages to be more pronounced in tonnage trends going forward (said combined with relatively high fixed costs and lower fuel surcharges, we lower our 2020E and 2021E by ~20% on top of prior revisions mid-quarter)

·     Metals & Materials; Credit Suisse bullish on copper space near-term as they upgraded FCX to neutral from underperform saying there would clearly be significant opportunities for alpha generation coming out of this pandemic driven recession, but lower TP to $8 from $10 while upgraded First Quantum to Outperform (TP C$12) to reflect significant P/NAV discount

Technology, Media & Telecom

·     Internet; SHOP was downgraded to Market Perform at Raymond James as believe near-term demand headwinds could create a more challenging near-term narrative/viewed last week’s retraction of 2020 guidance as an indication that demand trends slowed dramatically in March; IQ shares dropped late morning after Wolfpack Research released a new short report on the video-streaming company alleging overstated subscribers and revenues

·     Semiconductors; NXPI sees preliminary Q1 revenue of $2.02B, below the $2.2B guidance midpoint due to a stronger than expected coronavirus impact as adjusted gross margin is expected at 51.8% (consensus: 53.1%) with a 24.8% operating margin/said chose not to ship roughly $150M in orders to distribution partners to maintain normal channel inventory

·     Hardware & Software movers; TWLO was downgraded to neutral at Rosenblatt saying given the major decline expected in G7 nations GDP due to COVID-19 impacts, they reduce CY20 and CY21 revenues and earnings for a sharp Q2 decline and extended recovery for many consumer segments; SEAC reported results below est due to timing of deal closure but isn’t providing formal FY21 guidance due to COVID-19; ZM shares fell as Reuters noted the co has been responsive to concerns over its software, the U.S. Department of Homeland Security (DHS) said in a memo recently distributed to top government cybersecurity officials and seen by Reuters.

·     Media & Telecom movers; in the tower sector, AMT and SBAC both upgraded to overweight at Wells Fargo and reiterate OW on CCI saying given the large percentage of recurring revenue (90%+) in the models, they expect the overall outlooks from the companies to be fairly stable (beyond FX) in the face of COVID-19; AT enters a term loan agreement with Bank of America acting as agent/says loan will be used for general corporate purposes.