Mid-Morning Look

Thursday, January 30, 2020

U.S. equities are trading lower to start, but well off the overnight futures lows, and much better than markets in Asia and Europe, as investors try to focus on the positive earnings results from large cap companies (MSFT, TSLA, LRCX) as the death toll from the spreading coronavirus rose to 170 overnight and the number of cases jumped, with China says coronavirus cases rise above 7,700 (death toll not as severe at this point at SARS was, but those infected surpass at a much faster rate). The rapidly rising number of cases is fanning concerns of a slowdown in China’s economy, with those markets still closed until next week for its long week holiday. Earnings overload with today marking the busiest day of the quarter for S&P related earnings results that saw many in tech space outperforming, chemicals lower on results and leisure/travel stocks decline on the spreading virus fears ahead of another update from the World Health Organization (WHO) later today. U.S. Treasury prices edge higher, driving the two-year yield 2 bps lower to 1.40% and the 10-year yield down a basis point to 1.57%. The Bank of England on Thursday decided to hold interest rates at 0.75% by a 7-2 vote, while in US economic data, The U.S. economy (GDP) grew at 2.1% in the prior quarter, slightly above estimates for 2% growth, while Dow components MSFT and KO helping boost the index after better earnings.

Economic Data

·     The U.S. economy (GDP) grew at 2.1% in the prior quarter, slightly above estimates for 2% growth as personal consumption rose 1.8% in 4Q after rising 3.2% prior quarter (vs. est. 2%) and the GDP price index rose 1.4% in 4Q after rising 1.8% prior quarter (below 1.8% est.). Core PCE q/q rose 1.3% in 4Q after rising 2.1% in the prior quarter (and below the 1.6% estimate)

·     U.S. jobless claims fell 7K to 216K, in-line with the 215K estimate (prior week revised up to 223K from 211K) while the 4-week moving avg fell to 214,500 from 216,250 prior week; continued claims fell to 1.703 mln vs. est. 1.733 mln and down from 1.747 mln prior week

Sector Movers Today

·     Casino & Leisure movers; once again, the overnight news of more infected cases of the coronavirus has taken its toll on casino operators (WYNN, LVS, MGM), cruise operators (CCL, RCL, NCLH) and online travel booking firms (EXPE, BKNG, TCOM) as the death toll from the coronavirus outbreak in China rose to 170 – airlines also lower, while CCL announced news of potential coronavirus infection at its cruise ship – said two passengers being tested for coronavirus, a spokesman for CCL’s Costa Crociere cruise says; hotel stocks (MAR, H) also on watch given slowing travel

·     Consumer Staples; MDLZ posted Q4 adj. EPS of 60c, narrowly topping estimates and Q4 revs of $6.91B beat the $6.84B estimate driven by high demand for its snacks in emerging markets, where they saw rev growth of 4%; GO 16M share Secondary priced at $33.00; MO reported in-line results while saying the value of its stake in Juul fell by $4.1B in Q4 as it now values the e-cigarette maker at about $12B, down from its $38B valuation when it invested in 2018; Dow component KO reports organic revenue growth of 7% in Q4 to sail past the consensus expectation of +5% with in-line EPS of 44c on slightly better sales of $9.1B while anticipates FY20 revenue growth of 5% and EPS of $2.25 vs. $2.10 consensus; SFM downgraded to neutral at UBS citing heightened competition, NT supply chain challenges and questions about the sustainability of the company’s produce pricing strategy; HSY forecast 2020 profit and sales largely above Wall Street expectations, after the candy maker posted sales that beat estimates on higher prices and investments in healthier snacking options

·     Industrial & Machinery; URI outperformed on the top and bottom lines in 4Q19, but its adjusted EBITDA underperformed expectations due to the “absorption of higher rental operating costs in a slower-growth environment.” IEX downgraded to sell at Janney after Q4 results noting it was the 2020 guidance that caught their attention after the company sees flat to a 2% organic sales decline for 2020, with a 4 to 5% sales decline in 1Q20; Bloomberg reported GE is exploring a sale of its steam-power unit; TSCO shares weighed on machinery names (DE, CNHI, AGCO) after the company said 4Q comparable store sales fell below its expectations, given a warmer-than-expected weather that hurt sales of seasonal products

·     Transports; The Baltic Dry Index, a measure of commodity shipping costs, slumped to the lowest since April 2016 after dropping -5.14% to 498 points, falling for a 10th day as Capesize fell -9.05% to $4,081, Panamax -6.89% to $4,015 (DSX, EGLE, NMM, SBLK, GOGL among names to watch); in package delivery, UPS sees 2020 earnings below estimates ($7.76-$8.06 vs. est. $8.03), as it grapples with weakness in global industrial production, hurting shipments as U.S. domestic package revenue of $13.4B (+6.5% Y/Y) in Q4 to just miss the consensus mark of $13.5B; LSTR shares tumble after Q4 EPS of $1.27 missed the $1.42 estimate as trucker said shortfall was “entirely due to higher insurance and claims costs than (we) anticipated in (our) initial estimate (follows weak earnings from CHRW yesterday)

·     Semiconductors; a day after semi’s declined on weaker forward looking revenue estimates from AMD and XLNX, CRUS shares rose overnight as Q3 revs and profit beat expectations, as they experienced higher-than-anticipated volumes for certain smartphone components shipping (guidance for Q4 of $250M-$290M was well above the $245.7M est.); QRVO another chipmaker rising as Q3 revs and profit beat on strength in their end markets of 5G, Wi-Fi and Defense and continued strong operating performance (sees Q4 revs $800M-$840M vs. est. $727.8M); in the semi-equipment space, LRCX posts a 2Q earnings and revenue beat (multiple positive analyst upgrades) as the firm said they are executing at a high level in an improving wafer fabrication equipment environment and building a powerful pipeline of new products to fuel future growth; a California jury ruled AAPL must pay $837.8M in damages for infringing on Wi-Fi patents held by California Institute of Technology, while the jury also ruled against AVGO saying it owes damages of $270M for infringing on the same patents; CREE issued a Q3 outlook that was weaker than expected, sending shares lower

·     Chemicals; DD shares slide after reporting a ~36% fall in Q4 adjusted profit, though was in-line with estimates and sales fell 5% missing estimates on lower guidance (sees FY20 adj EPS of $3.70-$3.90 on sales $21.5B-$22B vs. est. est. $4.11/$21.98B/sees further nylon pricing declines; DOW downgraded to sector perform at RBC Capital citing a cloudy outlook on PE margin recovery, weak MDI margins on the commodity end markets and conservative view on JV earnings growth; SHW shares dropped after Q4 results and guidance for the year came up short due to items

·     Medical equipment and devices; ALGN shares dropped after warning it expects Q1 2020 net revenue $615M-$630M, below the $657.3M estimate saying the forecast reflects about 20K-25K fewer shipments of its key teeth aligner product, Invisalign on lower revs in products sold in China due to the uncertainty caused by coronavirus; in life sciences, TMO reports mostly in-line quarterly results as sales in the life-sciences segment grew 8% and laboratory-products grew 9% but analytical-instruments and specialty-diagnostics segment sales each fell YoY; ILMN posted 4Q19 results slightly above prior view but issued 1Q20 guidance significantly below expectations with ~1% topline growth at the midpoint

Stock GAINERS

·     ADM +4%; beat Q4 profit estimate, driven by gains in its nutrition business and refined products unit as operating profit for refined products unit jumped to $363M from $72M a year earlier

·     INO +15%; said it is collaborating with Beijing Advaccine Biotechnology to develop INO-4800, a vaccine against the strain of coronavirus, in China

·     LRCX +3%; posts a 2Q earnings and revenue beat (multiple positive analyst upgrades) as the firm said they are executing at a high level in an improving wafer fabrication equipment environment

·     MDLZ +4%; posted Q4 EPS of 60c, narrowly topping ests and Q4 revs of $6.91B beat the $6.84B est driven by high demand for its snacks in emerging markets, where they saw rev growth of 4%

·     MSFT +3%; touched new all-time highs, as cloud growth accelerates as intelligent cloud segment’s revs were up 27% to $11.9B in the quarter

·     NOW +7%; posted beats across top-line, billings, and margins, as well as adjusted cRPO growth of 34%, and initial FY20 guidance above expectations

·     TSLA +10%; new all-time highs overnight topping the $650 level overnight after a big Q4 beat that’s saw EPS of $2.14 topping the $1.74 estimate and revs rising to $7.38B from $7.06B a year ago while saying deliveries should “comfortably exceed” 500,000 units in 2020

Stock LAGGARDS

·     AZPN -13%; shares dropped as posts Q2 revenue and profit below analysts’ estimates, and forecasts FY revenue of $575M-$615M which falls below analysts’ estimates at midpoint

·     CCL -3%; on news of potential coronavirus infection at its cruise ship – said two passengers being tested for coronavirus, a spokesman for CCL’s Costa Crociere cruise says

·     DD -7%; after reporting a ~36% fall in Q4 adjusted profit, though was in-line with estimates and sales fell 5% missing estimates on lower guidance

·     FB -6%; as quarterly results were good, though metrics were either only slightly better or in-line with sell-side expectations, but markets were looking for more with stock at record highs

·     I 23%; as Intelsat and fellow satellite service providers Telesat and SES lost their bid to get “fair compensation” for the spectrum clearing costs they’ll incur as the US FCC stood by its plan to hold a public auction to free up frequency spectrum in the key C-band, Reuters reported

·     LSTR -12%; after Q4 EPS of $1.27 missed the $1.42 estimate as trucker said shortfall was “entirely due to higher insurance and claims costs than anticipated in initial estimate (follows weak earnings from CHRW yesterday)

·     MNRO -10%; shares fall after Q3 EPS missed and lowered its year profit outlook to $2.25-$2.35 from $2.45-$2.55 on weaker revs

·     MO -5%; reported in-line results while saying the value of its stake in Juul fell by $4.1B in Q4 as it now values the e-cigarette maker at about $12B, down from its $38B valuation when it invested in 2018

·     SPR 6%; after the company promoted Mark Suchinski as CFO, replacing outgoing CFO Jose Garcia after identifying non-compliance in certain accounting processes, and said it would restart production of 737 MAX parts

·     UPS -6%; sees 2020 earnings below estimates ($7.76-$8.06 vs. est. $8.03), as it deals with weakness in global industrial production, hurting shipments as U.S. domestic package revenue of $13.4B (+6.5% Y/Y) in Q4 to just miss the consensus mark of $13.5B