Closing Recap

Thursday, February 13, 2020

Equity Market Recap

·     U.S. stocks bounced off overnight lows, recovering despite new coronavirus outbreak figures that were significantly higher than earlier in the week, though stocks struggled for direction with major averages pulling back off highs to end the day in negative territory. Stocks sunk overnight after China reported overnight that the death toll hovered around 1,365, an increase of more than 250 cases from the previous day, and the number of confirmed cases surged by around 15,150 to more than 59,500. The news pushed European markets lower, falling from record highs in some instances, while US markets opened lower. Stocks got a boost midday after the World Health Organization (WHO) said that the spike in coronavirus cases reported by China aren’t all new cases of the disease. In stock news, semi’s got a boost following a beat and raise quarter from equipment maker AMAT, while CSCO was a drag on the Dow after its forward outlook. Oil prices rise despite the IEA saying global oil demand will drop this quarter for the first time in over a decade as the coronavirus batters China’s economy. In bond news, the U.S. government’s sale of 30-year bonds Thursday drew a record low yield of 2.061% (prior low was 2.17% in October). The fourth-quarter reporting season is nearing its final approach, with 378 companies in the S&P 500 having posted results. Of those, 71.2% have surprised consensus estimates to the upside, according to Refinitiv data.

Economic Data

·     Weekly jobless claims rose 2K to 205K, but below the 201K estimate while prior week claims revised to 203K form 202K); continuing claims fell 61K to 1.698M (vs. est. 1.745M) in the latest week and at the lowest level since Nov; the 4-week moving average was unchanged at 212K

·     Consumer Prices (CPI) for January rose 0.1% , below the 0.2% estimate while ex: food, energy MoM 9core prices) rose 0.2%, in-line with views; Consumer prices YoY rose 2.5%, its largest rise since Oct. 2018 and slightly above the 2.4% estimate

Commodities

·     Oil prices closed modestly higher, as WTI crude gained 25c, or 0.5% to settle at $51.42, getting a boost on hopes that the coronavirus impact was overstated after the WHO said that the jump in the number of diagnoses doesn’t necessarily reflect a sudden surge in new infections, soothing investors’ nerve after the change in diagnosis methodology. Gold prices end higher by $7.20 or 0.5% to settle at $1,578.80 an ounce as stock markets bounce off earlier lows, but struggle for direction in afternoon trading.

Currencies & Treasuries

·     Treasury prices gain while yields slipped (10-year yield to 1.60%) as U.S. stocks struggled for direction late day after erasing earlier declines. The U.S. Treasury sold $19B in 30-yr notes at a yield of 2.061% vs. 2.068% when issued prior to auction with the bid to cover at 2.43 vs. 2.54 prior and indirect bidders awarded 61.5% and directs 19.4%. The British pound appreciated by to just under $1.31 (1.307 high) while the U.S. dollar index was little changed to up slightly, holding around the 99 level (2020 highs) while the euro continues to decline – down below its 2017 low of 1.0839 (touched low 1.0834) briefly.

Sector News Breakdown

Consumer

·     Retailers; RL provided a financial update due to the virus saying it sees a negative impact of $35M-$45M in operating income in Asia driven by current trends in China, Japan, and Korea while firm notes about 2/3 of the Company’s stores in the Chinese mainland have been temporarily closed over the past week; ZBRA reports Q4 misses with in-line Q1 guidance that sees EPS of $2.90-3.10 (consensus: $3.01) while FY20 outlook sees revenue growth of 4-6% to $4.66-4.75B (consensus: $4.76B); HEAR shares slump as announced prelim Q4/FY’19 results slightly below guidance and the holiday quarter was weaker than anticipated due to the atypical timing of next gen console announcements

·     Consumer Staples; PEP Q4 EPS and sales top views as sees year organic revenue growth up 4% after Q4 organic rev growth was 4.3% vs. est. 3.72% but guides 2020 core EPS $5.88 vs. est. $5.95; PM raised to outperform at Cowen citing accelerating user growth and better geographic diversity; NUS shares slide after a softer Q1 and 2020 outlook weighed on shares, guiding below views – sees 2020 revs $2.17-2.30B vs. est. $2.47B and EPS $2.00-2.40 vs. est. $3.32) as the coronavirus outbreak has led to the cancellation of all in-person meetings in China; KHC posted further declines in sales but avoided another cut to its quarterly dividend; THS reported a -4.5% drop in Q4 sales (missing estimates) while organic sales were down -3.8% and volume was down -4.0% and gross profit fell 130 bps to 19.8% of sales; IFF slides on Q3 revenue miss while guidance also falls short of views for Q4 revs

·     Autos; TSLA said it intends to offer about $2B of common stocks and CEO Elon Musk to purchase up to $10 of common stock in this offering and board member and Oracle co-founder Larry Ellison to buy $1M worth – also TSLA recalls Model X SUVs because of a potential issue that can lead to a loss of power steering assist that could make steering harder and increase the risk of a crash; NSANY posted a net loss of 26.09 billion yen ($237.0 million) in the quarter ended December which compared with a Y70.41 billion net profit a year earlier and missed estimate for net profit of Y46.12 billion (Q3 revenue dropped 18% to Y2.504 trillion); BWA Q4 EPS topped views even as revenue fell back 0.4% as engine segment sales were down 0.5% to $1.533B and issues soft rev guidance or year ($9.750B-$10.075B vs. $10.12B est.); separately, TSLA said the SEC issued a subpoena on Dec.4 seeking information concerning certain financial data and contracts including Tesla’s regular financing arrangements; RUSHA drops after Q4 results well below consensus (64c/$1.32B vs est. 97c/$1.46B

·     Casino & Leisure movers; MGM slides as Q4 adj EPS 8c missed the consensus 26c with in-line revenue $3.19B while CEO Jim Murren to step down and said Q4 results below expectations on Far East weakness and withdraws FY20 guidance (did announce stock buyback); cruise lines resume downward momentum following the jump in virus cases (CCL, RCL, NCLH)

Energy

·     Energy stocks bounced off lows outside of a few names down on weaker earnings while the IEA said oil demand this year will see the slowest rate of growth since 2011 as the coronavirus outbreak hits Chinese consumption and its impact spreads across the global economy

·     E&P sector; MRO shares fall after earnings results as 4Q revenue, other income $1.22B, down -31% YoY vs. est. $1.26B, 4Q adjusted EPS 7c vs. est. 10c and 4Q production 413 mboe/d, -3.1% QoQ; LPI posted Q4 results that fell short of consensus; for AR missed production by 4%, but reported an adj. EBITDA beat of 9% driven by slightly better than expected price realizations and meaningfully lower operating expenses

·     Utilities & Solar; BE said it will restate nearly four years of financial statements due to accounting errors related to its managed services agreement/says revenues for the transactions will now be recognized over the duration of the contract instead of upfront; CPYYY shares fall as the U.K. electricity and gas provider said 2020 adjusted operating cash flow is likely to fall to the bottom end of a range of £1.6 billion to £1.8 billion; in solar, SPWR was downgraded to market perform at Cowen after earnings, citing current valuation and lack of near-term catalysts until after the proposed Maxeon spin in 2Q (though longer-term is optimistic)

Financials

·     Financials; in insurance; AIG posted better-than-expected Q4 profit (beating by a nickel), as it booked an underwriting income in its general insurance business, compared with a loss last year (said net pre-tax catastrophe loss at the general insurance unit narrowed to $411M from $826M YoY); in finance, RDN announces stock buyback of $475M and boosted its dividend to 12.5c

·     REITs; RDFN posted a quarterly revenue ($233M vs. est. $217M) and gross margin beat; EQIX posted strong 4Q19 results that were highlighted by strong bookings and generally better than expected metrics across the income statement; FR posted in-line 4Q19 FFO, but provided initial 2020 FFO guidance that fell just short of the Street; IRT 4Q19 core FFO and initial 2020 guidance were largely in line with expectations while the Company’s same-store revenue growth decelerated modestly more than expected in 4Q19; 52-week highs for AIZ, AVB, MAA, ARE

Healthcare

·     Pharma movers; BMY said under priority review status, the FDA accepts its marketing application for lisocabtagene maraleucel, its autologous anti-CD19 chimeric antigen receptor (CAR) T-cell immunotherapy with a defined composition of purified CD8+ and CD4+ CAR T cells for the treatment of adult patients with relapsed or refractory large B-cell lymphoma; SNGX said the FDA granted fast-track designation to its RiVax development program to prevent ricin intoxication; AKRX shares slid after saying it may pursue sale of its business via chapter 11 bankruptcy protection to address its litigation-related overhangs; ADXS said a combo of its experimental cancer drug and MRK’s Keytruda helped prostate cancer patients survive for 16.4 months vs est 11 months with the current standard of care; CBIO 4.62M share Spot Secondary priced at $6.50

·     Biotech movers; SGEN said the FDA has accepted for priority review its New Drug Application for tucatinib for the treatment of locally advanced or metastatic HER2-positive breast cancer; AVRO 4.35M share Spot Secondary priced at $23.00; CRSP reported 4Q19 & FY19 results, and announced enrollment in the phase I trial of CTX120, the company’s 2nd wholly-owned allogeneic CAR-T asset, had begun

·     Medical equipment and devices; QDEL tgt raised to $92 at Raymond James after earnings noting despite no formal revenue guidance, management does expect at least $10M from new products in 2020 (2H weighted), with the opportunity to double that contribution in 2021; ISRG was initiated buy and $725 tgt at Goldman Sachs as expect durable installed base growth, strong US robotic market adoption trends, new geographic drivers; MDT was initiated sell at Goldman noting stronger competition on multiple fronts; APT rises after saying it has booked over $10.4M in orders for its N-95 Particulate Respirator face mask since January 27 due to increased demand from the COVID-19 outbreak

Industrials & Materials

·     Machinery; Goldman Sachs with a broad machinery call as they upgraded CAT to buy with 20% upside to our new $168 tgt as see a combination of tightening US construction equipment capacity utilization, dealer inventories and backlog approaching trough levels, and margin tailwinds in 2021, and upgraded CMI to buy with $200 tgt as believe US truck leading indicators have inflected, and estimates have been de-risked following 2020 guidance – the firm downgraded AGCO to neutral as no longer feel comfortable underwriting a margin recovery in South America where AGCO continues to face further risk of share loss and downgraded FRTA to neutral noting input costs have started to re-accelerate and we would expect margin expansion to slow down until offsetting price increases can be introduced.

·     Industrials; WCN reported 4Q19 adjusted EBITDA of $419M, which came in above consensus of $407M driven by better than expected core price while 2020 revenue and EBITDA guidance came in below consensus; GNRC reported $1.53 vs $1.37 on better revs $591M vs. $589M and EBITDA $129M vs $125M as GM 37.6% vs 36.2% expected; WSO reported Q4 EPS miss along with revs

·     Transports; LUV said it is proactively removing Boeing (BA) MAX from flight schedule through Aug. 10, cites continued uncertainty around timing of MAX return to service; Ryder (R) Q4 EPS loss that missed the lowest estimates on slightly better Q4 revs of $2.28B while said it expected softer conditions in rental throughout the year; UAL said it is extending China flight suspension until Apr 24th

·     Metals & Materials; CF reported 4Q19 adjusted EBITDA of $325M, missing the $327M estimate while sales were lower YoY as a result of lower selling prices across all products, partially offset by higher YoY ammonia and ammonium nitrate sales volumes; LIN reported Q4 earnings from continuing operations that topped analyst expectations, driven by volume and price increases, and targeting 10%-13% growth in earnings for 2020; HUN Q4 EPS in-line and revs slightly better while sees 2020 ebitda above 2019 level

Technology, Media & Telecom

·     Internet; BABA shares initially fell on the rising coronavirus cases and deaths in China, but company reported Q3 beats with 38% Y/Y revenue growth and Q3 Adjusted EBITDA was RMB 55.88B compared to the RMB 53.41 consensus/said cloud revenue totaled RMB 10.72B, up 62% Y/Y and above the 10.68B yuan and mobile MAUs beat ests with 824M vs. 804.7M estimate; AMZN shares jumped after CNBC reported that a court grants Amazon Web Services request for MSFT to temporarily halt work on JEDI Cloud contract.

·     Semiconductors; AMAT delivered another beat and raise quarter while reiterated the strong WFE outlook LRCX provided earlier this earnings season (suggests a 2020 WFE of $55-58 billion, up 10-15% from ~$50B in C2019) – warns of a $300MM impact from the coronavirus in the quarter; XLNX initiated equal-weight at Wells Fargo citing another quarter or two of more downside risk than upside potential

·     Software movers; SSNC posted a strong 4Q19 report featuring top- and bottom-line beats, a healthy sequential jump in margins and adjusted organic revenue growth above the upper end of management’s guidance range; PEGA quarterly beat & impressive guide – 50% + cloud growth

·     Media & Telecom movers; ATUS was upgraded to strong buy at Raymond James saying mgmt has removed cost and can begin to reap the benefits of network upgrades, SME expansion, advertising, and mobile (note Q4 revs missed estimates); newspaper publisher MNI said it’s filing for Chapter 11 bankruptcy protection; MTCH and IAC both names as new “short” calls at Kerrisdale Capital weighing on shares; CTL posted in-line Q4 EPS and revenues

·     Hardware & Component news; NTAP shares fell after company’s Q3 results missed expectations and Q4 profit forecast came in below estimates and announced CFO retirement (Q3 sales of $1.40B missed $1.46B est on 2c EPS miss); CSCO reported Q2 results and Q3 guidance largely in line with consensus while product revenue of $8.67B came in below consensus of $8.79B and was back to negative territory with down -3% YoY (impact for EMS companies such as SANM, FLEX, and SANM) and also mentioned tough comp from 2019 and challenged product orders.