Mid-Morning Look

Tuesday, February 18, 2020

U.S. equities open the trading week lower, falling after Apple Inc. said its quarterly sales would miss forecasts due to impacts from the coronavirus which has weighed heavily on semiconductor stocks and others in the supply chain of the Apple iPhone, etc. This is just the latest company warning of the impact the virus has had on plant and operation closures – though the full economic impact is still unclear. As of yesterday, China reported 1,886 new virus cases and 98 more deaths in its update Tuesday and the update raised the number of deaths in mainland China to 1,868 and the total confirmed cases to 72,436. In economic data, U.S. manufacturing data jumped from the prior month, while German sentiment data disappointed, as the dollar rises to 2019 highs (and best levels in over 2 years vs. the euro). Safe-haven assets rise with the pullback in stocks as gold and Treasury prices rise. In retail, Wal-Mart reported a miss on for quarterly EPS, sales and comp sales for the holiday quarter. In M&A news, BEN agreed to acquire LM in a $4.5 billion dollar deal. Earnings results for the quarter begin to slow up after this week.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar extends gains, especially against the euro which slipped below the 1.08 level vs. the dollar to its lowest since April 2017 (follows weak German data overnight – coupled with better US manufacturing data). Overall, the US dollar at YTD highs, and remains just below its 52-week best levels for the dollar index (DXY 99.66 year high – today 99.47 best). Commodity prices are mixed as gold prices back above the $1,590 an ounce level, while oil futures dip with broader stock market weakness. Treasury market’s rally early, with yields slipping as the 10-year yield drops to 1.56%, down over 2 bps and the 2-yr yield drops 2 bps to 1.40%.

Economic Data

·     The NY Empire State manufacturing index rises to 12.9 in February, easily topping consensus of 5.0 and was above the 4.8 reading in January, led by a surge in the new orders index to 22.1 in Feb vs. 6.6 in January while the prices paid index was 25.0 vs. 31.5 in Jan; the employment index was at 6.6 in Feb vs. 9.0 in Jan and six-month business conditions index 22.9 from 23.6 prior

·     U.S. Home Builders’ Confidence index (NAHB) in February falls to 74 vs 75 last month as the present single family sales falls to 80 vs 81 last month and the future single family sales falls to 79 vs 80 last month

Sector Movers Today

·     Retailers; WMT reports U.S. comp store sales rose 1.9% in Q4, missing the 2.4% estimate along with a miss on the top and bottom line for profit and sales/transactions were up 1.0% during the quarter, while average ticket was 0.9% higher/comparable sales were up 0.8% for the Sam’s Club business (ex-fuel) vs. +1.2% consensus/guides year EPS $5.00-$5.15 vs. est. $5.22; AAP reported a Q4 profit that beat expectations, while same-store sales came up short (EPS $1.64/$2.1B vs. est. $1.35/$2.12B – while 4Q comparable sales +0.1% vs. estimate +1%); AEO was downgraded to Market Perform at Cowen given concerns on downside risk to sales traffic and promotions; KTB downgraded at Stifel as expect coronavirus weighs on Lee brand sales in China (~25% of brand revenue) and impedes the planned 1Q Wrangler China launch to weigh on FY20 guidance

·     Casino & Leisure movers; boating stocks BC, MCFT, MBUU and HZO all upgraded to outperform from market perform at Raymond James, more bullish saying 1) consumers willing and able to make big ticket purchases, 2) industry fundamentals have improved and 3) valuations still reasonable even after recent run-up; the Chinese territory of Macao will allow casinos to reopen Friday January 21st after a 15-day closure imposed to help block the spread of China’s virus outbreak (shares of WYNN, LVS, MLCO have been among the casinos affected by the closures)

·     Industrial & Machinery; EMR was downgraded at RBC Capital as their bull case for a breakup appears to be postponed following its Feb-13 analyst meeting comments/is now in a “cost reset” mode focused on restructuring, rather than in growth mode; ETN was upgraded to buy at UBS and raise tgt to $121 from $98 as believe the market does not yet ascribe enough value to the margin benefit from the sale of the fluid conveyance business; in E&C sector, FLR shares tumble after earnings and said the SEC is investigating its past accounting and financial reports for possible errors/ says it does not expect to complete and file its form 10-K annual report for the period ended Dec. 31, 2019; GE slipped on reports the Trump administration might bar CFM International, the conglomerate’s JV with Safran, from selling jet engines to China.

·     Chemical movers; WLK shares slipped after Q4 profits fall sharply on lower prices, falling short of consensus and net sales of $1.88B, missed the $1.93B estimate and was down from $2.0B YoY; DD announced a management shake-up where CEO Mark Doyle and CFO Jeanmarie Desmond will leave and the board has appointed Edward Breen, the current chairman, to take on the additional role of chief executive officer, effective immediately; LTHM downgraded at Credit Suisse to neutral citing challenging conditions in China, the company potentially slowing its pace of expansion and unchanged lithium fundamentals

·     Credit Cards and Finance; ADS was downgraded to market perform from market outperform at JMP Securities, as they have less conviction in the company’s near-term portfolio growth targets; separately, monthly master trust credit cards data showed: 1) ADS reported delinquencies for Jan. of 6% vs. 5.80% YoY, Jan charge-offs 7.2% vs. 6.60% YoY and Jan net charge-offs $113.6 million, +21% YoY; 2) SYF 30+ day delinquency rate of 4.5% in January rises from 4.4% in December; three-month average is 4.5%, while adjusted net charge-off rate of 5.2% declines from 5.4% in December; three-month average is 5.2%; 3) COF January credit card delinquency rate of 4.10% increases from 3.93% in December; three-month average is 3.98%, while net charge-off rate of 4.31% declines from 4.55% in December and compares with three-month average of 4.43%; 4) JPM January credit-card delinquency rate of 1.14% is roughly flat with 1.13% in December and compares with the three-month average of 1.15% and January 2019’s 1.21% and net charge-off rate was 2.19%, down from 2.28% in December and vs. three-month average of 2.22% and January 2019 rate of 2.26%.

Stock GAINERS

·     AAP +7%; Q4 profit that beat expectations, while same-store sales came up short (EPS $1.64/$2.1B vs. est. $1.35/$2.12B – while 4Q comparable sales +0.1% vs. estimate +1%)

·     BIIB +2% after Berkshire announced stake last Friday

·     BLPH +88%; shares surge on positive top-line data from a recently completed acute, intra-patient, dose escalation, hemodynamics study of INOpulse for the treatment of Pulmonary Hypertension associated with Pulmonary Fibrosis

·     DD +1%; announced a management shake-up where CEO Mark Doyle and CFO Jeanmarie Desmond will leave and the board has appointed Edward Breen, the current chairman, to take on the additional role of chief executive officer

·     KR 7%; after Berkshire Hathaway reports new stake in 13F filing Friday

·     LDOS +10%; reports Q4 beats with FY20 guidance that has upside revenue of $12.6-13B (consensus: $11.38B) and EPS of $5.30-5.65 (consensus: $5.50)

·     LM +23%; shares rise after BEN agreed to acquire LM in an all-cash deal valued at $4.5 billion, with Franklin Templeton paying $50 per Legg Mason shares and take on about $2 billion of its outstanding debt. https://on.mktw.net/2SCrkH1

·     VG +16%; said it is initiating a strategic review of its Consumer segment, including the feasibility of its divestiture, to further the Company’s goal of becoming a pure-play Business SaaS company

Stock LAGGARDS

·     AAPL -2%; preannounced that the company would not meet its March quarter sales guidance of $63-$67 billion (consensus at $65 billion) provided during their January earnings call due to the Coronavirus that had two negative impacts to Apple

·     CAG -7%; after it lowered its outlook, as now anticipates FY organic sales to be flat or to grow only 0.5%, down from prior view for growth forecast of 1% to 1.5%; lowers year EPS view to $2.00-$2.07 a share, from prior $2.07-to-$2.17 (est. $2.11)

·     FLR -25%; after earnings and said the SEC is investigating its past accounting and financial reports for possible errors/ says it does not expect to complete and file its form 10-K annual report for the period ended Dec. 31, 2019

·     MDT -4%; reported mixed Q3 results as EPS beat while sales of $7.7B missed the $7.81B estimate as expects a negative impact from coronavirus in the fourth quarter

·     SCCO -4%; downgraded to underweight at Morgan Stanley saying despite good cash flow generation, the stock’s premium valuation relative to peers and own history seems unwarranted

·     WLK -5%; after Q4 profits fall sharply on lower prices, falling short of consensus and net sales of $1.88B, missed the $1.93B estimate and was down from $2.0B YoY