Closing Recap

Friday, February 07, 2020

Equity Market Recap

·     U.S. stocks snapped their four-day win streak amid concerns that the coronavirus could dampen global economic growth, overshadowing better-than-expected U.S. jobs growth in January. Despite today’s downturn from record highs for the S&P 500 index (and the NASDAQ touched record highs this week as well), stocks still posted strong returns this week on better US data, China stimulus measures to boost its economy in the wake of the virus, and well received quarterly earnings results where over 300 names have so far reported in the S&P 500, with a 70% beat rate. Stocks failed to rally today on the second good jobs report this week (ADP private payrolls beat on Wednesday) as the monthly nonfarm payrolls beat on headline, while unemployment ticked higher due to a rising labor participation rate and wages rose less than expected.

·     Still the rising number of cases and deaths from the coronavirus that originated in China remains a market concern, as China delayed trade figures for January due to the virus and said it would combine the data with next month’s release while the S&P revised its estimation of China’s GDP growth for 2020 from 5.7% before the outbreak to 5%. As of last night, China’s National Health Commission reported 31,161 confirmed cases in China, with 636 deaths, with the next update expected later tonight. Several companies over the last week have noted store closures in China that could impact further earnings/revs (MCD, YUMC, SBUX, LK, VFC, among them as well as casinos impacted WYNN, MGM, MLCO, cruise lines RCL, CCL and airline impact UAL, AAL, DAL). The Federal Reserve said Friday that risks of weaker-than-expected U.S. growth had declined late last year but that the possible spillovers from the effects of the new coronavirus in China present a new risk to the outlook in its semiannual report to Congress. Europe, along with the U.S. and Asia posted solid gains this week as France’s Cac 40 rises 3.8% for the week, best since February 2019, while the UK’s FTSE 100 advanced 2.5% on the week as global stocks rebounded. Italy’s FTSE MIB jumped 5.3% on the week (best since March 2017).Oil prices dropped for a 5^th straight week while the dollar hit 4-month highs and Treasuries gained.

Economic Data

·     Jobs data very strong as the US economy added more jobs than forecast in January, as nonfarm payrolls rise 225K topping the 165K estimate and private payrolls 206K vs. est. 155K, while manufacturing jobs fell slightly more than anticipated (strong data confirms the big ADP private payroll report earlier this week). Unemployment ticks higher to 3.6% from 3.5% and wages rise 0.2% vs. est. up 0.3%. The U.S. labor force participation rate 63.4% vs. prior 63.2%

·     U.S. wholesale sales dropped -0.7% in December (vs. est. +0.1%), while inventories fell -0.2% (vs. est. and prelim figure down -0.1%), missing estimates on both fronts. Follow a downwardly revised 0.9% increase in November sales (was 1.5%), and a 0.1% gain in November inventories

Commodities

·     Oil prices end the day higher, rising 63c or 1.2% to settle at $50.32 per barrel, erasing earlier declines heading into the weekend, but for the week, oil prices slipped 2.4%, its 5^th straight week of declines on slowing demand concerns in Asia and Europe. Fears that the deadly coronavirus is weakening demand for oil in China, the world’s largest oil importer drove price declines over the last two-weeks while it is expected that OPEC+ was expected to announce additional production cuts to offset the weaker global demand concerns. – but Russia said this week was undecided.

·     Gold prices edged higher, rising $3.40 or 0.2% to settle at $1,573.40 an ounce, erasing earlier declines as stock market declines provided a safe-haven for investors looking to less risky assets. For the week, gold prices fell roughly 1%, pulling back from 7-year highs last week. In the end today, the virus fears overshadowed the better jobs data.

Currencies & Treasuries

·     Treasury prices gained on Friday despite a stronger than expected reading for monthly payroll data (followed solid ADP private payroll data mid-week as well), as fears of the coronavirus spreading, and the implications to economies overshadowed the data, as investors fled to safe-haven instruments. The yield on the benchmark 10-year ended the day near the lows below 1.58% (10 bps below yesterday 1.68% high, but still off Monday lows just above 1.5%). The Federal Reserve also warned today that the outbreak posed a “new risk” to the economy.

·     The U.S. dollar ended near the highs of the day, rising 0.2% to its best levels since October, extending weekly gains against the euro (new 4-month lows at 1.095), British Pound (which fell below the 1.29 level – 2 month lows) and the Canadian dollar as oil prices fall for a 5^th straight week. Stronger U.S. economic data (jobs and service data this week), along with disappointing data out of Europe (Germany had two negative data points) has helped buoy the dollar.

Sector News Breakdown

Consumer

·     Auto’s; UBER posted a smaller than expected loss but shares rallied further after saying it now expects to be profitable on adj. EBITDA basis by Q4 2020, ahead of its earlier target of FY 2021; Ford (F) was downgraded to neutral at Credit Suisse with $9 tgt with Ford posting a third straight quarter of weak guidance, and there are increasingly questions of execution risk clouding the path of recovery; separately, Ford names a new strategy chief; TNAV rises after reported earnings and revs above estimates (13c vs. year ago loss of 10c)

·     Retailers; footwear retailer SKX rises after posting better-than-expected quarterly sales, helped by increase in international sales while U.S. comp sales rose 9.9% (though guided Q1 EPS 70c-75c, below the 78c estimate); GOOS shares slide after lowering guidance, warning that the coronavirus outbreak is having a material negative impact on results (sees full-year revenue growth of +13.8% to +15.0% after originally guiding for +20% growth); HBI Q4 profit of $263M missed est. of $268M, while sales fell 1% to $1.75B, and constant-currency organic sales increased slightly (guidance for Q1 below views)/announces stocks buyback of up to 40M shares; VFC warned that it shuts 60% of China stores due to coronavirus impact; COLM downgraded at Pivotal after earnings as reported a 4Q19 sales and EPS beat, albeit the EPS beat was on tax, as EBIT came in below expectations, primarily due to a GM shortfall

·     Restaurants; DPZ upgraded to buy from neutral as sees headwinds easing up this year for Domino’s and see a clearer path for the company to return to a stronger same-store sales comp trajectory in 2020 (raise tgt to $320); YUM was downgraded to neutral at BTIG after reported 4Q19 adjusted EPS of $1.00, well below their $1.17 estimate, due to higher G&A, tax rate and slightly higher franchise expense and investment loss on Grubhub

·     Housing & Building Products; homebuilder CCS rises as reports Q4 home sales revenue $775.67M; introduce our full year outlook for home deliveries to be in the range of 8,500 to 9,500 homes and our home sales revenues to be in the range of $2.6B-$3.0B

·     Casino & Leisure movers; WYNN shares fall following earnings and more selling pressure to stocks most affected from the coronavirus as more cases and deaths reported; cruise lines (RCL, CCL, NCLH) pressured after NJ Governor said CDC officials boarded a cruise ship docked in Bayonne this morning and screened 27 passengers who recently traveled from mainland China. After being assessed by the CDC, 23 of those passengers were cleared and four individuals are being evaluated at an area hospital.

Energy

·     Energy stocks continue to move in conjunction with the price of oil which ended lower for a 5^th straight week on slowing demand concerns; in the E&P sector, BRY was upgraded at KeyBanc as a result of increased permit issuance in California, which reduces the likelihood of a major impact on BRY’s production; NOV a standout to the upside in a generally weak oil equipment space after earnings as Q4 adjusted EBITDA totaled $288M, or 12.6% of sales, increasing from $262M in Q3 and $279M in the year-ago quarter, with sequential gains in all three of the company’s operating segments. The weekly Baker Hughes (BKR) total rig count holds steady at 790, while US drillers add rigs for the 3rd time in four week rising 1 to 676 while the gas rigs count down -1 to 111, and miscellaneous rigs unchanged at 3

Financials

·     Bank movers; in consumer finance, FLT shares slide after Q1 profit and revs missed estimates (WEX shares down in sympathy) while guided year EPS $13.35-$13.75 misses the $13.66 estimate; CBOE shares slide on mixed results as firm says Q4 results reflect "lower year-over-year trading volumes industrywide as lower volatility dampened trading, particularly in our suite of proprietary products, which experienced exceptionally strong trading in 2018’s fourth quarter.” In insurance; FG to be acquired by FNF for $12.50 per share, representing an equity value of approximately $2.7B https://on.mktw.net/39ehMaF ; 52-week highs today in the S&P 500 for financial stocks: WRB, AJG, AON, MMC, RE

Healthcare

·     Pharma movers; ABBV Q2 EPS beat narrowly with in-line revs of $8.7B and forecasts 2020 adj. profit above analysts’ estimates ($9.61-$9.71 vs. est. $9.48), as it sees sales of its new treatments for psoriasis and rheumatoid arthritis reaching $1.70B; ZGNX shares tanked after saying its lead investigational drug, Fintepla, to treat a type of rare epilepsy did not meet a secondary goal in a late-stage trial that was testing a lower dose of the drug (showed a 13.2% reduction in drop seizures among patients, but was statistically insignificant compared to placebo); COLL to acquire the U.S. rights to the Nucynta Franchise from ASRT for $375M in cash; CBIO announces positive results from an open-label Phase 2b clinical trial evaluating its next-generation Factor IX (FIX) therapy, Dalcinonacog Alfa in six patients with severe hemophilia B; in cannabis sector, ACB announced its founder and CEO steps down while also saying it has cut about 500 jobs, including ~25% corporate positions and will bring down its year cap-ex spending

·     Biotech movers; TWST FQ1 revenue beat consensus by 1MM driven by strong Synbio and NGS revenues while affirming FY20 revenue guidance – and reached a settlement agreement with Agilent (A) that removes a major stock overhang; ADMA 23.5M share Spot Secondary priced at $3.50; AGTC 6.5M share Spot Secondary priced at $5.00; ADRO said it earned a $10M development milestone payment under its worldwide licensing agreement with Merck

·     Medical equipment and devices; BDX downgraded by three analysts (KeyBanc, Cowen, Raymond James) following results and as coronavirus impact, new tenders in China, and other headwinds (DCB) increase uncertainty; MYGN shares plunge over 30% overnight as reported Q2 loss vs. profit a year ago as cash collection issues hit its prenatal business, while its CEO and President Mark Capone resigned (posted Q2 revs $195.1M vs. est. $209.6M and below last year $216.8M); MTD was upgraded to neutral from sell at UBS and raise tgt to $786 after Q4 results

·     Healthcare services and providers; Baird upgraded shares of distributors ABC, CAH and MCK to outperform from neutral acknowledging something of a contrarian call on an inflection in U.S. Distribution macro, company-specific self-help initiatives, and low valuation

Industrials & Materials

·     Industrial & Machinery; MTW posted Q4 sales $463.4M, below the $493M estimate while guiding its year sales $1.6B-$1.7B, missing the $1.73B estimate weighing on shares; GE was upgraded to neutral from sell from longtime bear Gordon Haskett and raised tgt to $11 from $7; SRCL agreed to sell its Domestic Environmental Solutions business, excluding the healthcare customer and unused consumer pharmaceutical take-back services, to HSC for $462.5M

·     Transports; HUBG traded to 52-week highs in follow-through strength off earnings yesterday, with EPS beating on lighter sales but guided year profit above views ($3.39-$3.60 vs. est. $3.36)

·     Metals & Materials; CBT was upgraded to buy at UBS as believe recent stock weakness (down ~15% since November, vs S&P 500 up 8%) reflects temporary China risk (coronavirus), and see upside as the company moves past what will likely be a negative comp in MarQ20; metals and mining stocks were all broadly lower after S&P cut China growth outlook on coronavirus impact; UFS shares fall as reports Q4 loss compared with year-ago profit, hit by lower avg. selling prices, unfavorable productivity in pulp and paper, higher costs

Technology, Media & Telecom

·     Internet; PINS bounces back after prior quarter miss after beating Q4 revenue estimates, as it added more monthly active users and earned higher revenue per user/said monthly active users jumped 26% to 335M globally, beating analysts’ estimates of 331.3M; AMZN shares trade to new record highs (follows recent earnings results); VRSN profit falls short of expectations for first time in at least last eight quarters, sending shares lower while ended Q4 with 158.8M .com and .net domain name registrations, a 3.9 % increase from a year earlier

·     Semiconductors; SYNA shares soar after a beat and raise quarter as for March quarter, guided to sales and GM of over $60MM and 200bps above street estimates, respectively citing stronger than expected demand for its PC products and from its largest mobile customer (upgraded at JPMorgan – Needham ups tgt to $100); MRVL downgraded to underperform and cut tgt to $18 from $27 at Cowen as sees downside risks to investor expectations through CY2022 driven by "elongated 5G infrastructure spending and unbalanced 5G provider exposure”

·     Video gamer software; ATVI rises following its better outlook while TTWO shares tumble after missing misses holiday qtr adjusted revenue est. amid competition from other big-budget titles from rivals (Q3 revs $888.2M below est. $922.1M) while also narrowed its full-year forecast range but still remains the consensus estimate

·     Software movers; FTNT 4Q19 top line beat/raise, as revenue, product and billings all beat and were guided above consensus for 2020 though 2020 EBIT margin guide was 70 bps below the Street, impacted by recent acquisitions; ZEN posted a good 4Q, with reacceleration in bookings and RPO – beat 4Q billings w/ growth of 34% above Street of 31%/FY20 rev guidance of 30% was in-line w/ Street while operating income guide was below; NLOK rises as billings growth beat consensus and operating margins were stronger than expected; lowered its stranded costs estimate in conjunction with significantly raising its asset realization estimate as per Mizuho

·     Media & Telecom movers; VRTU rises after mixed results (EPS beat/revs miss) while mid-point of Q4 revenue guidance above views; VZ announced to buy back up to 100M shares; in media earnings, NWSA shares sump after Q2 revenue fell short of consensus while LGF jumps after its mixed results (revs top views while profit fell as expenses in the quarter rose around 23%); TMUS rises in Telco after quarter tops estimates with 1.9M total net additions in Q4 2019 and 7M in in 2019; Intelsat (I) downgraded to underweight at JPMorgan as see little to no fundamental equity value in shares given the details of FCC Chairman Pai’s C-Band proposal; IPG, OMC, OUT, CCO all weak in the advertising sector (on no specific news)

·     Hardware & Component news; VCRA reported generally in-line 4Q results and offered F20 revenue guidance that wrapped consensus revenue expectations; SGH shares slide after earlier announced $200M notes offering; UI tumbles as posts Q2 revenue of $308.3M, below estimates of $335.4M, due to distributor ordering patterns related to Service Provider Technology products, revenue in segment fell ~14% from a year earlier