Closing Recap

Wednesday, February 26, 2020

Equity Market Recap

·     U.S. stocks gave up solid gains early, with the Dow falling as much as 100-points after earlier rising over 400-points, with stocks turning lower mid-afternoon amid fresh reports of individuals in the U.S. near NYC being monitored for possible coronavirus exposure (though mayor Cuomo said no one has been tested positive). Stock market action remains at the mercy of additional coronavirus headlines as stock sectors such as airlines, cruise lines have been hit very hard over the last few days. Following the pullback midday and stocks tumbling over the last few sessions, fed fund futures now show an 85% chance for a 25 bps FOMC rate cut at the April meeting to help offset the potential of slowing economic growth due to the virus. Investors were hoping for markets to stabilize after the Dow fell more than 1,900 points Monday and Tuesday in its largest two-day point decline on record, while the S&P posted declines of over 3% the last two-days and the Russell SmallCap index plunged. President Trump said this morning that he will hold a press conference on the subject at 6:30 p.m. Washington time to discuss the virus. Helping markets this morning was a standout new home sales data point out of Washington, easily topping consensus (helping offset a weak earnings/outlook from homebuilder TOL). Oil prices reversed earlier gains, falling below $48 per barrel to its lowest in 13-months while Treasury prices resumed upward momentum as the 10-year yield hit a fresh record low (below 1.3%).

Commodities

·     Oil prices reversed earlier gains, with WTI crude slipping -$1.17 or 2.3% to settle at a 13-month low of $48.73 per barrel as fears the fast-spreading coronavirus will take a major toll on the global economy outweighed a bullish weekly inventory report. The declines added to a 7% drop in futures over the last three sessions as top U.S. health officials warned of a domestic outbreak of the infection, triggering another sell-off on Wall Street and in commodities.

·     Gold prices dropped -$6.90, or 0.4% to settle at $1,643.10 an ounce, paring earlier losses but closing lower for a second consecutive session on profit taking as global stock markets remain pressured on the economic hit from the coronavirus. Gold dipped on the day as the dollar remains resilient against other currencies.

Currencies & Treasuries

·     In currency markets, the dollar bounced after yesterday’s brief pullback while Treasury markets advanced after stocks took another leg lower early afternoon on reports on possible new cases in the U.S., as the yield on the 10-year and 30-year touching new record low prints (10-yr low 1.2988% and 1.785% for the 30-year) in flight to safety trades.

Economic Data

·     January new home sales rose 7.9% to 764,000 annual rate, strongest pace since July 2007 and above estimates for 718,000 while the previous three months’ new home sales data revised up by 11,000. The median new home price rose 14% y/y to $348,200; average selling price at $402,300; 21% of new homes sold in Jan. cost more than $500,000, up from 18% prior month

Sector News Breakdown

Consumer

·     Auto sector; Credit ratings agency Moody’s said global auto sales will fall 2.5% in 2020, more than the 0.9% drop estimated earlier, as demand deteriorates due to the coronavirus outbreak. Chinese auto sales, which were projected to rise 1% before the virus outbreak, will fall 2.9% in 2020. U.S. sales will remain weak, while Western European car sales will decline in 2020 after a stronger-than-expected demand at the end of 2019; TSLA and Panasonic have decided to end their partnership in producing solar cells after years of struggling to ramp up output at the Gigafactory 2 in upstate New York, according to reports in Asia

·     Retailers; ODP trades higher after topping Q4 EPS ($0.12 vs. $0.09 consensus) EBITDA ($156M vs. $123 consensus) and operating income ($92M vs. $79M consensus) expectations; RCII reported 4Q earnings that were above expectations, driven by better than expected expense leverage and revenue growth; TJX Q4 same-store sales of 6% beat est of 3%, helped by Marmaxx business, with rise in customer traffic across stores, though EPS guidance was below views; NKE cut at HSBC to hold from buy as Chinese profit risks from virus hit limiting near-term upside; RVLV reported lower-than-expected Q4 sales/gross margin, while EBITDA/EPS were ~in line; BGFV shares tumbled after issuing Q4 results and guidance; The National Retail Federation (NRF) forecast retail sales during 2020 to increase between 3.5% and 4.1% to more than $3.9 trillion and says 2020 online sales expected to grow between 12%-15% to $870.6B-$893.9B

·     Consumer Staples; BYND rises after SBUX to sell BYND’s plant-based breakfast sandwich in its Canadian stores, starting next week (BYND already has partnerships with DNKN and MCD); WW Q4 results topped estimates and a better-than-expected projection for new subscribers in the first quarter (Q4 subscribers rose 8% Y/Y to 4.2M, of which 3.0M were digital subs); DANOY has scaled back its sales growth and profit margin targets for 2020 as the coronavirus dents demand in China, its second-largest market; DEO warned the coronavirus outbreak will knock its profits this year by up to £200m, around 5 per cent of last year’s total

·     Restaurants; PZZA reported Q4 EPS, sales and comp sales all above consensus views , but shares slipped early after guiding 2020 EPS to $1.35-$1.55 vs. est. $1.53; WEN guided 2020 EPS below views (60c-62c vs. est. 65c) and also forecasts bigger-than-expended capital costs for 2020 after lower YoY operating profit and adj EBITDA in Q4 mainly due to the investments to support the U.S. system ahead of its breakfast launch; PBPB mixed results as EPS missed views but sales beat and comp sales fell less than expected; RRGB falls a 4^th straight session Q4 adj EPS loss of (36c) on in-line revs of $302.9M missed the est. loss (17c)

·     Housing, Home Retail & Building Products; LOW reported Q4 comp sales of 2.5%, below the 3.7% consensus as comp sales for the U.S. home improvement business were up 2.6%, while EPS beat and sales were just short of ests on slightly lower margins; in housing, TOL was cut at Raymond James following Q1 results that not only missed key expectations on several fronts, but also included guidance for the remainder of FY20 that, in their view, raises serious questions about 1) internal cost controls and 2) management’s financial visibility; SunTrust downgraded builders DHI, KBH and PHM to hold from buy saying their thesis has played out better than anticipated, and see a more balanced risk/return profile over the next 6-9 months

·     Casino & Leisure movers; SEAS reports attendance increased 2.2% in Q4 to 4.6M guests, posted EBITDA of $83.9M (+29% Y/Y) during the quarter vs. +73.5M consensus; CCL, RCL, NCLH ests and tgt cut at Morgan Stanley saying channel checks point to double-digit booking volume drops in the U.S. and Europe in recent weeks for the major cruise lines and he has lowered his EPS forecasts by 25-30%; PLNT declines after 2020 sales growth outlook misses expectations, guiding to $771.5M below the $782.7M estimate which one analyst said embeds a deceleration in new store equips

Energy

·     Inventory data: the API reported that U.S. crude supplies rose by 1.3 million barrels for the week ended Feb. 21, showed gasoline stockpiles edged up by 74,000 barrels, while distillate inventories fell by 706,000 barrels. The EIA reported weekly crude stockpiles rose 452K barrels vs. estimate build of 2.6M barrels, gasoline inventories fell a greater -2.691M barrels vs. estimate for draw of -2M barrels and distillates fell -2.115M barrels vs. estimate for draw of -1.5M barrels

·     Energy movers; a day after several 52-week lows for oil majors, equipment, services and E&P names, the group tries for modest rebound; in refiners, DK shares sunk after 4Q earnings missed estimates; in the E&P sector; MTDR reported higher than estimated 4Q19 earnings though SunTrust said most importantly their previously indicated 2020 plan remained consistent; CHK another active mover after quarterly earnings results

Financials

·     Bank movers; banking stocks rebounding after plunging the last few session on declining Treasury yields (record lows 10 and 30 yr yield) which weighs on lending margins for banks; HBAN was upgraded at Bank America; CME was upgraded to buy at UBS and raise tgt to $233 from $214 as heightened levels of volume and volatility are driving our near-term estimates higher, while the current valuation does not yet reflect a more uncertain environment

Healthcare

·     Pharma movers; ENDP Q4 profit beat analysts’ estimate helped by higher sales in its sterile injectables unit while Q4 revenue of $764.8M was above consensus est of $731.43M; TNXP rises on collaboration to develop vaccine for coronavirus; SUPN shares dropped after quarterly sales missed consensus estimates; MRNA reported weaker earnings, but shares rise after saying its third CMV vaccine cohort is rapidly enrolling; NVAX said it has produced and is currently assessing multiple nanoparticle vaccine candidates for COVID-19 in animal models

·     Biotech movers; MNLO falls as its mid-stage study to evaluate Serlopitant as a treatment of chronic pruritus of unknown origin failed to meet its main goal/there were no meaningful differences observed between it and the placebo groups; GHSI rises after saying a Malaysian company has selected it to develop a new formula designed to enhance the immune system; TBIO receives FDA fast track designation for mrt5005 for the treatment of cystic fibrosis; ICPT upgraded to buy at Citigroup as continue to see significant risk that the first couple of years of OCA’s NASH launch will be slow, and base case is that a large number of payers will place barriers early on; REGN was upgraded at Canaccord and Bernstein noting its competition decreased when the ASRS warned about 14 cases of vasculitis in patients that received NVS Beovu

·     Medical equipment and devices; NVRO rises after Canaccord upgraded to buy with $153 tgt from $120 saying NVRO’s Q4 print – in line with the firm’s preannouncement – capped off a remarkable turnaround year for the business and stock, catalyzed by stellar execution promulgated by new CEO Keith Grossman, who has clearly changed the culture at a firm about which we were originally bullish upon our initiation of coverage some time ago.

·     Healthcare services and providers; SDC posted sequential decline in 4Q profitability/cash flow, a lower revenue outlook than anticipated, and guidance for another year of negative adj. EBITDA in 2020 and also provided a 5-year revenue outlook for 20-30% growth that fell short of consensus of ~35%; EVH 4Q and ’20 guidance surprised to the upside on sales but were light on adj. EBITDA; APT shares once again rising on virus fears (makes protective equipment, masks)

Industrials & Materials

·     Industrial & Machinery; DY shares declined as Q4 EPS miss entirely attributable to profitability, as revenues were in line with estimates, driven by a slow start with a customer whose activity is expected to increase in F21 (weighed on either E&C names)

·     Transports; MATX a drag on the Dow Transport index, falling after quarterly earnings missed views and warns of COVID-19 impact on its business as sees 2020 net flat with 2019; Dow Transports dropping below the 10,000 level this afternoon (1st time below 10K since mid-October) – 52-week low stands at 9,676 on August 28th – MATX leading decline after EPS miss down while CAR extends losses followed by airline declines JBLU, UAL, AAL

·     Metals & Materials; NTR CEO said potash inventory not moving at Chinese ports and that the coronavirus may also slow exports of phosphate; BCC was upgraded to buy at Davidson as reported 4Q results that exceeded on the top- and bottom-lines, driven by strong EWP volumes and stronger results in the Distribution business

Technology, Media & Telecom

·     Internet; ETSY is introducing a service called Offsite Ads under which it will pay upfront costs to promote sellers’ listings on other internet platforms; SINA falls as posts Q4 loss vs year-earlier profit as total operating expenses jump 37%; said ad rev falls 5% primarily due to weakness in Weibo and portal advertising revenue; WB reports a mixed Q4 that beat on EPS but missed on revenue with downside Q1 outlook of 15-20% YoY revenue decline to about $331-339M (below the est. $391.64M) due to the coronavirus impact while MAUs fell -23% YoY and DAUs -21%; SABR tumbles as Q4 revs missed and notes negative impact of coronavirus while Q4 operating income was $97.6M, down from $157.9M in last year’s quarter due to increased expenses

·     Semiconductors; Needham lowered estimates across the board in the Smartphone handset supply chains (NXPI, QRVO, SLAB, SIMO, CRUS, MCHP, SWKS, SYNA) to account for the worsening effects of the Coronavirus on the near-term demand environment as see manufacturing production challenges for those semiconductor companies that have back-end/front-end facilities in China and customer order push outs possibly leading to demand destruction; TER ests and tgt lowered at Citigroup to reflect the negative impact of the Coronavirus on China’s industrial and global smartphone supply chain

·     Software movers; CRM said that co-Chief Executive Officer Keith Block had stepped down, making Marc Benioff the sole CEO of the company, while announced financial results that beat across all key area and disclosed an agreement to acquire long-time partner Vlocity

·     Media & Telecom movers; DIS announced that Bob Iger is stepping down as CEO of DIS, effective immediately. He is to be succeeded by Bob Chapek who is best known for his leadership of Parks, Experiences and Products; QRTEA melts to 52-week lows erasing earlier gains after EPS, sales beat; AMCX shares fell after its profit miss

·     Hardware & Component news; UIS Q4 report missed on the top and bottom lines. Services revenue was up 2% Y/Y to $630.9M, and Technology dropped 20% to $108.4M; NOK said to work with advisers to weigh asset sales, mergers as per Bloomberg (Reuters later reported there is no truth to the report, a source close to the company said, while Nokia declined to comment).