Mid-Morning Look

Wednesday, July 15, 2020

U.S. equities in full-blown rally mode to start the day, getting a boost on positive COVID-19 vaccine related news from Moderna (MRNA), boosting sentiment higher for hopes of a cure (and lifting travel, leisure, consumer related names in conjunction), while financials rebound after disappointing earnings yesterday from Wells Fargo, as Dow component Goldman Sachs (GS) delivers a blow-out quarter on EPS/revs, boosted by increased trading and IB revenues. “Stay-at-home” stocks that have benefitted greatly from the coronavirus-induced lockdowns slip today amid the positive vaccine news as Moderna’s (MRNA) experimental COVID-19 vaccine shows it’s safe and provokes immune response in ongoing early-stage study. Shares of NFLX, ZM, WORK as well as video gamers EA, ATVI, TTWO, home fitness PTON, among the names pressured early. At the same point, airlines, cruise are among the top gainers on the day. Markets ignoring for the time being potential rising tensions with China after President Trump signed an order ending Hong Kong’s special status with the US and the UK banned Huawei from its tech infrastructures – China said it plans to retaliate. Trump signed the bipartisan law that requires sanctions on Chinese officials who crack down on the rights of Hong Kong residents to free speech and peaceful assembly, as well as the banks that do business with those officials. Oil prices pulled back following headlines this morning at OPEC+ meeting that both Saudis and Russia support oil-cut tapering as demand recovers. Economic data continues to show improvement in the U.S. with NY manufacturing, Industrial Production and trade data all topping views.

Economic Data

·     Empire Fed Manufacturing Index reported at 17.2, above the 10.0 estimate as business conditions first positive reading since February (general business conditions were -0.2 in the last month); prices paid fell to 14.9 from 16.9 prior, new orders rose to 13.9 from -0.6, employment rose to 0.4 vs -3.5 prior while the six-month general business conditions fell to 38.4 from 56.5

·     Industrial output for June rises +5.4% from May’s 1.4% and was above consensus up +4.3%; Capacity Utilization rate 68.6% tops the 67.7% estimate and above May figure 65.1%; Manufacturing output rose +7.2% topping the 5.6% estimate and above May 3.8%

·     Import prices for June rose 1.4%, topping the 1% estimate while June export prices also rise +1.4% topping the 0.8% estimate; June YoY import prices fall -3.8% and export prices -4.4%

Sector Movers Today

·     Bank movers; GS with a blowout Q2 result as EPS of $6.26 topped the $3.78 estimate handily and revs of $13.3B crush the $9.7B estimate as Q2 FICC sales and trading revenue $4.24B topped the $2.64B estimate and equity trading revs were $2.94B also above views – Q2 Investment banking revs were $2.66B, up 36% YoY; USB posted a Q2 EPS beat while revs of $5.84B (+0.3% y/y) beats by $300M/provision for credit losses $1.74B vs. $993M in Q1; PNC Q2 EPS tops views (includes BlackRock sales) on in-line revs of $4.1B while net interest income of $2.5B increased $16M, and net interest margin (NIM) decreased 32 bps to 2.52% QoQ – provision for credit losses increased to $2.5B for Q2 compared with $914M in Q1; BK Q2 EPS $1.01 vs. est. 87c as Q2 Net-interest margin 0.88% and Q2 provision for credit losses $143M; WFC upgraded to outperform and raise tgt to $27 at Evercore/ISI as the steep dividend cut and bolstering of reserves help clear the decks on capital & credit uncertainty, while pending expense actions bode well for earnings

·     Retailers; HBI receives its 3rd analyst upgrade in two days as Bank America upgraded to neutral from underperform with $14 tgt and Raymond James upgraded to strong buy with $20 tgt saying that the potential positives are “piling up” for the company (was upgraded at Credit Suisse yesterday); GPS was upgraded to Outperform and tgt to $18 from $13 at RBC Capital saying with secular tailwinds at Old Navy and Athleta’s backs post-COVID, see potential for value unlock at the Gap brand; PVH said to cut 450 jobs in North America, affecting 12% of its office workforce, that would save ~$80M; overall retail sector seeing strength on the vaccine hopes

·     Casino & Leisure movers; CZR said operating income for reopened destination properties for period operating in June through June 30, 2020 down about 75% to 85%; PENN and BYD tgts raised at JPMorgan as continue to see upside for both stocks given the prospect for higher margins and sports betting optionality; RV stocks get a boost after LCII said it expects net sales in a range of $515M-$530M for Q2 above the $387.2M estimate saying increased demand for RVs drove accelerated outdoor recreational products sales (shares of other RV companies WGO, CWH, PATK active); HOG gets the 5th upgraded in about 3-weeks today with UBS joining the fray upgrading to buy (also RBC, Northcoast, Wolfe, and BMO during that time frame)

·     Transports; airlines soar (AAL, DAL, UAL, JBLU, LUV) on the COVID-19 vaccine hopes after data from MRNA today and hopes for positive AZN news coming up – helping lift pandemic related names that have suffered the most; in trucking, UBS raised 2Q EPS estimates for WERN by 19% and for KNX and SNDR by 12% as freight demand improved more than anticipated off the bottom in April while reduces ests for JBHT

·     Restaurants; delivery related restaurant names (WING, DPZ, PZZA) that have been the big winners during the pandemic seeing a little weakness today amid the positive vaccine news from Moderna – while dine-in stocks rally (EAT, DRI, CAKE, BLMN, BJRI, RRGB); WING was downgraded to hold at Northcoast saying it has done a good job of sustaining double-digit comp sales growth, but sees potential headwinds, including a slower recovery in Mexico, moderating US sales; Raymond James said the magnitude of the pullback in certain Outperform rated names (BLMN, CHUY, EAT, RUTH) seems overdone compared to what has been a relatively modest recent deterioration in industry trends (softened 3-5% vs. June trends)

Stock GAINERS

·     AAPL +1%; after the General Court of the European Union today annulled the European Commission’s decision that Apple owed $14.9B in taxes to Ireland

·     AZN +5%; shares rise on vaccine hopes after reports indicate positive news may come Thursday on initial trials of the Oxford Covid-19 vaccine that is backed by the company, according to a report from U.K. television broadcaster ITV

·     CANF +10%; after saying based on feedback from U.S. FDA, company has amended design of its planned mid-stage trial testing experimental drug Piclidenoson on top of standard-of-care treatment in patients with moderate COVID-19

·     FSCT +15%; as private equity firm Advent International agrees to buy FSCT in a revised deal for about $1.43B, settles a legal battle after it pulled its previous bid/in May, FSCT had sued Advent for pulling out of a previous deal to buy company for $1.9B

·     GS +2%; with a blowout Q2 result as EPS of $6.26 topped the $3.78 estimate handily and revs of $13.3B crush the $9.7B estimate as Q2 FICC sales and trading revenue $4.24B topped the $2.64B estimate and equity trading revs were $2.94B also above views

·     LCII +7%; said it expects net sales in a range of $515M-$530M for Q2 above the $387.2M estimate saying increased demand for RVs drove accelerated outdoor recreational products sales

·     MRNA +12%; after its COVID-19 vaccine candidate showed rapid and strong immune responses in patients, according to interim Phase 1 study results

·     NSANY +7%; unveiled a new electric vehicle model that helped its shares rise; the Japanese auto maker said it would start selling a midsize electric sport-utility vehicle called the Ariya next year starting at around $40,000.

·     WAT +16%; after guiding Q2 revenue to $517M-$523M view earlier, above the $485.4M estimate while also naming a new CEO (formerly of Life Science business of Merck KGaA

Stock LAGGARDS

·     BK -7%; top decliner in the banking space despite mostly better earnings

·     FTNT -4%; downgraded to neutral at Goldman Sachs (while raise tgt to $140) as its potential for rapid growth in the SD-WAN market is well priced in to current valuation

·     QUMU -18%; guides Q2 revenue to be ~$9.3M vs. $6.7M consensus, while raised FY2020 revenue outlook from ~$28M to ~$29M (+14% Y/Y) vs. consensus of $28.2M

·     UNH -2%; provided mixed earnings results (beat on earnings while revenue missed estimates) and reaffirming its FY20 EPS guidance

·     WING -2%; downgraded to hold at Northcoast saying it has done a good job of sustaining double-digit comp sales growth, but sees potential headwinds, including a slower recovery in Mexico, moderating US sales