Closing Recap

Thursday, February 20, 2020

Equity Market Recap

·     U.S. stocks slipped on Thursday, led by a precipitous drop late morning that pushed stocks firmly into negative territory, where they held the remainder of the trading session. While there was no clear-cut reason behind the late morning drop, concerns remain that markets are stretched, Q1 earnings beat mostly for S&P components (to the tune around 70%) but are declining YoY and there is still no clarity on the coronavirus. You can also add fears that the strong economic data (Philly Fed today was) could derail hopes for additional FOMC rate cuts this year. Prior to the decline, stocks had enjoyed small early gains which has been boosted on dovish/accommodative central banks, offsetting any fears from the coronavirus impact on companies. Note China has stepped up efforts to limit the fallout of the outbreak by lowering both short- and long-term lending rates this week. For the most part, investors have shrugged off the outbreak that has killed more than 2,100 people and infected more than 74,000, mostly in mainland China – but concerns remain with companies on a daily basis noting the economic impact in their businesses due to the virus. Gold prices extend gains to fresh 7-year highs (despite the dollar moving higher), oil edges higher and Treasuries remain well bid. There was also a big deal in the banking sector today as Morgan Stanley acquired E*Trade in a $13B deal.

Economic Data

·     Philly Fed Survey surges to 36.7 reading vs. est. 11.0 (prior month was 17), its highest level in three years. New orders increased 15 points to 33.6, its highest level since May 201 while the shipments index rose 2 points to 25.2 and six-month business outlook rose 7 points to 45.4

·     Weekly jobless claims – the number of Americans filing for unemployment benefits rose modestly last week, as initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 210,000 for the week ended Feb. 15 (in-line with estimates), as the four-week moving average of initial claims fell 3,250 to 209,000 last week and the number of people already collecting unemployment benefits, meanwhile, rose by 25,000 to 1.73 million.

·     Leading Index for January reported at 0.8%, above the 0.4% estimate

Commodities

·     Oil prices edge higher as WTI crude gains 49c, or 0.9% to settle at $53.78 per barrel, finishing off its best levels of the day above $54, but still its best levels in about a month following bullish inventory data, while natural gas prices erase early gains, falling nearly 2% to $1.92 mn btus. Bullish factors multiplying from China to Libya to Venezuela over the last few weeks. Gold prices make it a 6^th straight day of gains, with April gold rising $8.70, or 0.5% to settle at $1,620.50 an ounce, at best levels since March of 2013 – more impressively rising in the face of a surging dollar which touched 3-year highs, as the view as a haven in the face of the coronavirus offset any strength in the economy.

Currencies & Treasuries

·     The U.S. dollar took a small breather initially after surging to 3-year highs, but the dollar index resumed its upward momentum following another round of stellar US economic data including a huge beat on the Philly Fed Business outlook and a jump in the LEI along with in-line jobless claims data. The buck rose 0.6% against the Japanese yen – above the 112 level for the first time since April touching highs of 112.23 (52-week high stands at 112.40 on 4/24). The U.S. Dollar Index approaches the 100 level for the first time since 2017. Treasury prices once again gained as yields tumbled even further, as the 10-year slipped over 4 bps to 1.52% (touched lows of 1.50%) when the stocks market pulled back aggressively late morning).

Sector News Breakdown

Consumer

·     Retailers; LB shares slump as the company to sell control of Victoria’s Secret to private equity firm Sycamore Partners in deal valuing brand at $1.1B, as the PE firm buys 55% of LB’s lingerie business and take it private/CEO of L Brands, Leslie Wexner, to step down (co expects same-store sales to fall 2% in Q4, with a 10% fall at Victoria’s Secret) https://on.mktw.net/2Pc41Sx ; GIL reports in-line quarterly earnings while raises its dividend; Gun maker RGR slides after the company’s Q4 results disappoint; ULTA tgt raised to $330 at Guggenheim; SNBR delivered a solid quarter, with sales, EBIT/EBITDA and EPS all exceeding expectations.

·     Consumer Staples; SAM shares fall as reports Q4 EPS below Wall Street estimates ($1.12 vs. est. $1.47) as gross margins fell to 47.4% compared with 51.9% a year earlier on higher processing costs while midpoint of forecast FY 2020 EPS missed views ($10.7-$11.7 vs. est. $1.44); COT reports strong adjusted EBITDA growth in Q4; BUD was downgraded to neutral at JPM saying 2020 is shaping up to remain challenging, leading to pressure on both GM and EBITDA margin

·     Restaurants; DPZ jumps as revenue and profit beat estimates along with strong comp sales of 3.9% (vs. est. 1.9%), buoyed by the company’s focus on faster delivery and new promotions; YUM warns it is unable to accurately predict the impact that the coronavirus will have on results of operations, due to uncertainties including the ultimate geographic spread of the virus; CAKE report Q4 EPS miss and lower Q1 guidance for revs ($715M-$720M vs. est. $728.15M); JACK also with Q1 EPS miss ($1.17 vs. est. $1.38) but revs beat as system same-store sales increased 1.7%, company same-store sales increased 2.9%

·     Housing & Building Products; ZG shares rise as beats on Q4 revenue, posts smaller-than-expected loss, prompting several analysts to raise their price targets as the Premier Agent business saw growth accelerate for the second consecutive quarter

·     Casino & Leisure movers; in theme parks, SIX shares drop on unexpected quarterly loss and slashes its quarterly dividend to 25c from 83c while warns year guidance assumes significantly lower revenue contribution from the company’s international development agreements, organic revenue growth trends consistent with 2019, and operating cost headwinds (SEAS, FUN move in sympathy); HOG boosted its dividend and also authorized a stock buyback program of up to 10 million shares of the company; in cruise-lines, NCLH with a Q4 beat, but guided next quarter lower and warned on year outlook due to coronavirus uncertainty; in lodging, Hyatt (H) shares jump after sound Q4 beat (EPS 47c/$1.28B vs. est. 24c/$1.19B), while HST reported a $0.01 beat vs consensus while RevPAR fell 0.1% while Total RevPAR rose 1.9%

Energy

·     Inventory data: the API reported that U.S. crude supplies rose by 4.2 million barrels for the week ended Feb. 14, showed stockpile declines of 2.7 million barrels for gasoline and 2.6 million for distillates. This morning, the EIA said weekly crude stockpiles rose a smaller 415K barrels (est. 3.2M barrels), while gasoline stockpiles fell -1.971M barrels (vs. est. build 200K barrels) and distillates fell -635K barrels, smaller than the expected draw of -1.6M barrels

·     E&P sector; PXD reported better than expected 4Q results, a healthy 25% dividend increase, and a more capital efficient 2020 outlook than consensus assumed; PE 4Q19 Adjusted EPS was 8% above expectations due to higher realized pricing, but 4Q19 total production was 0.9% below consensus; SM posted a 16% beat in 4Q EPS, which was mainly driven by 4Q19 oil production that was 11% above consensus and 4Q production was 3.1% above consensus on lower capex; XEC shares jump after a 4% EPS beat while capex was 26% below consensus, and 4Q19 oil production was 2.4% above consensus (issued 2020 production guidance below consensus). MLPs and pipelines active; WMB higher after its Q4 results; KMI trades to fresh 52-week highs; ET posts quarterly results and announces multi basin strategic alignment

·     Refiners; MPC shares rose overnight after reports Seven & i Holdings Co., the Japanese company that controls 7-Eleven, is in exclusive talks to acquire Marathon’s Speedway gas stations for about $22 billion https://yhoo.it/2PaQhYh ; HFC missed Q4 earnings estimates, hurt by a slump in refining margins and a rise in expenses due to heavy maintenance across its refining system as adjusted net income fell to $78M from $394M a year earlier

·     Utilities and Solar mover; SEDG rises, following up after good results from ENPH yesterday, as the company reported Q4 revenue and non-GAAP EPS that were ahead of consensus as momentum carried into Q1’20 with mgmt guiding above estimates, while continues to ramp facilities; ETR delivered an earnings beat in 2019 driven by predictable rate increases and execution, and aided by a 2H weather rebound

Financials

·     Bank movers; ETFC +23%; after agreeing to be acquired by MS in a $13B deal, with holders getting $58,74 per share as MS will pay 1.0432 of its shares for each E*Trade share (ETFC has more than 5.2 million client accounts with over $360 billion of retail client assets) https://on.mktw.net/39O1FRr (shares of IBKR also active on the news); ASB upgraded at Raymond James following investor meetings with its CEO and CFO

Healthcare

·     Pharma & Biotech movers; TEVA shares slide after saying registration trials of deutetrabenazine in pediatric patients with Tourette syndrome did not meet the primary endpoint/most commonly reported adverse events in two separate study groups were headaches, sleepiness and fatigue; PTCT downgraded at Citigroup to neutral saying they have very high conviction that Risdiplam will be approved for the treatment of spinal muscular atrophy by the May 24 FDA action data, but believes Risdiplam is now fairly valued in the stock and has a lack of conviction that catalysts over the next year will lead to upside (RBC Capital also downgraded shares)

·     Medical equipment and devices; OSUR shares slide after mixed 4Q, including a 6% revenue beat but a 3c EPS miss driven by outperformance from HIV-ST offset by a miss for DNAG, tough comps from the cryo divestiture and mix negative from growth in microbiome services; ALGN launches its ClinCheck "In-Face" Visualization tool for the Invisalign Go system

·     Healthcare services and providers; TVTY shares plunge, downgraded by several analysts on low confidence in co’s nutrition business and lack of catalysts over next 6-9 months to drive valuation levels higher/Cantor notes that its 2020 nutrition unit forecast of $560 mln-$590 mln implies a 7%-8% decline from 2019 results; in hospitals, CYH was upgraded at Raymond James following the company’s 4Q19 results that were cleanly ahead of consensus (beat EBITDA by 3.8%) and saw net debt actually decrease sequentially by $258M; NVTA shares drop after larger than expected quarterly loss and revenue miss; MCK and two other opioid distributors have sweetened a settlement offer by proposing to pay more than $1B in legal fees for states, as per Bloomberg; HSIC slides after in-line results and reaffirmed guidance – falling from record highs; MD shares fall after saying that UNH is cancelling contracts in four states

Industrials & Materials

·     Transports; CAR leading the transport index higher after 4Q EBITDA and revs came in ahead of consensus and volumes came in higher in the Q and were guided +2-5% (vs. +3 and +2% at the high-end of initial guides in 2018 and 2019) – boosted shares of HTZ; TRN jumps in railcar sector after Q4 earnings results were well received

·     Metals & Materials; CLF earnings decreased in the fourth quarter, as revenue fell and the company’s year-earlier results were boosted by a big tax benefit (revs fell 23% to $534.1M vs. est. $556.4M); in the steel sector, shares of RS and AKS active after earnings results; KALU shares advanced on its earnings beat and said it expects Boeing 737 Max effect will be offset by higher general engineering and automotive shipments; gold miner NEM 52-week highs following its earnings results and miners in general helped by surging gold prices

·     Chemicals; ALB posted sales and EPS that came in slightly below consensus (but shares rise) as delays in the start-up of new FCC units dragged on catalysts sales growth, while higher costs associated with increased tolling volume in ALB’s Lithium business weighed on margin (though lithium stocks SQM, LTHM rise on positive 2020 outlook comments)

Technology, Media & Telecom

·     Internet; STMP shares soared after much stronger Q4 results as EPS of $2.12 handily topped the 98c estimate on better sales of $160.9M vs. est. $142.3M; WIX mixed Q which saw revs light, collections better and collections still growing 23-24%

·     Semiconductors; AMD was downgraded to equal-weight from overweight at Wells Fargo, but raise its tgt to $64 saying sees shares approaching more balanced risk/reward levels; Dialog Semiconductor (DLGNF) will acquire IOTS for $12.55/share in cash, or for ~$500M enterprise value (IOTS shares soar over 50% on takeover news); MX rises as Q4 rev of $200M and EPS of 32c topped consensus and forecasts Q1 revs to be $180M-$195M vs. est. $179.1M; ADI was upgraded at Citigroup following earnings results

·     Media & Telecom movers; VIAC shares fall after lower Q4 sales ($6.87B vs. est. $7.32B) and profit of 97c per share missed the $1.44 estimate while quarterly ad revenue falls 2% to $3.03B as domestic ad revenue was hit by a decline in political ads; CTL cut to underperform at Bank America saying all parts of the business, minus the enterprise and IGAM segments, remain structurally challenged; Intelsat (I) shares rise on top and bottom line quarterly beat while overnight the company said it believes it should receive 60%-67% of the total of all acceleration payments, according to a filing with the FCC

·     Hardware & Component news; Foxconn warns of a hit from the coronavirus outbreak, though it did not elaborate on how big the impact to revenue might be/its plants in Vietnam, India and Mexico continue to operate at full capacity with expansion plans under way, though in mainland China manufacturers are grappling with a logistical nightmare

·     Software movers; FIVN with a solid beat and raise with billings solidly ahead and ARR increasing but shares dipped following another increase in Op-Expenses; SNPS solid beat for the Q and reiterated 2020 with a speed bump next Q on revs coming in below mid-point and sees less upside on SIG business