Mid-Morning Look

Wednesday, June 05, 2019

U.S. equities are mixed early on, fading from earlier highs led by a decline the technology space amid a lower outlook from chip maker SWKS citing the Huawei product ban as well as mixed earnings in the software sector (CRM rises on results, PVTL, GWRE shares fall). Overall, the attention has firmly turned from trade tensions with China (no deal imminent with G20 at the end of the month) and new talk of tariffs to Mexico in the next few weeks (though still very important and a big market overhang) – to talk of the Fed potentially lowering interest rates in 2019 given the increased dovish rhetoric from Fed speakers this week (Powell, Bullard, Evans and even Clarida to some respect). Today’s weaker private payrolls report (ADP posted gain of 27K jobs, smallest figure in 9-years), certainly increases the probability amid fears of growth slowing at a rather quick pace in the U.S. Yesterday, Powell suggested trade tensions could lead the central bank to cut interest rates, saying that the Fed would “act as appropriate” to lengthen the U.S.’s economic expansion. Banks are again under pressure given the weaker data as it raises the chances of rate cuts and pressuring lending margins. Energy stocks resume downward momentum after weekly inventory data showed bigger builds in stockpiles (WTI crude prices falling as much as 4% this morning), while gold prices jump again.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar slipped again as another round of weaker economic data (private payroll big miss) raises expectations for the Fed to get more aggressive on stimulating the economy with calls for rate hikes later this year; the peso erases losses vs. the dollar after White House trade Peter Navarro said tariffs on Mexico may not go into effect; the dollar also falling vs. the euro, yen and Pound as prospects for Fed rate cuts ramp up. In commodity prices, gold pushing higher trading above $1,300 an ounce buoyed by the dollar pullback and the dovish Fed commentary the last few days while WTI crude erase gains on bearish inventory data from EIA and API weekly reports. Treasury markets are little changed with the 10-year yield around 2.10% and the 2-yyear 1.81% after the mixed economic data.

Economic Data

·     Private payrolls slowing as ADP private payrolls rose 27K (9-year lows), well below the 185K est. while the prior month reading was revised down to 271K from 275K; Breakdown of private payroll data: Small businesses fell -52K, Medium business +11K, and Large Businesses +68K

·     Markit Services PMI at 50.9 in-line with est. 50.9 (but was at lowest since early 2016)

·     ISM Non-manufacturing index for May reported at 56.9 vs. est. 55.4 (prior 55.5); the new orders index at 58.6 vs. 58.1 prior month, prices paid 55.4 from 55.7 and employment index at 58.1 vs. 53.7 in April (highest since Oct 18)

Sector Movers Today

·     Software movers; CRM Q1 results beat across major metrics including billings, revenue, and OCF, while current RPO growth came in slightly below guidance due FX headwinds, according o Piper; PVTL the latest software maker to disappoint on its outlook, having cut its FY 2020 subscription revenue outlook to a range of $530M-$538M from prior $542M-$547M view and overall revs cut to $756M-$767M from prior view of $798M-$806M and forecast a wider adjusted loss – that despite beating on the top/bottom line for Q1; GWRE cut its full-year rev outlook despite Q3 results that beat (guides Q4 EPS 47c-53c on revs $199M-$207M well below est of 61c/$226.41M)

·     Consumer finance and lending; Visa (V) announced a new strategic agreement with WU that will implement Visa Direct, Visa’s real-time1 push payments platform in an effort to bring speed and transparency to the process of sending money around the world; Goldman Sachs upgraded both FLT ($305 tgt) and WEX ($225 tgt) to buy from neutral and upped tgts saying each have substantially improved their execution over the past year and are on track to deliver consistent, mid-to-high teens earnings growth over the next two years; FISV upgraded to buy at SunTrust

·     Medical equipment and devices; RWLK shares surge after the company said the FDA cleared the company’s ReStore soft exo-suit system for sale to rehabilitation centers across the United States; MDT was upgraded to outperform with $110 tgt at Wells Fargo saying the company’s late stage pipeline will accelerate its growth into fiscal 2021; SIEN priced a 17.4M share secondary at $5.75 per share, while Wells Fargo raised its rating to outperform with a $10 tgt

·     Healthcare services and providers; CVS mentioned positively by several analysts after its investor day, with Leerink raising tgt to Street high $100; LH disclosed a data breach affecting 7.7M customers that occurred between Aug 1 2018 and March 30 2019/company also announced mgmt changes; HQY reported Q1 results well ahead of expectations at 41c/$87.1M vs. 34c/$84.1M and increased guidance for the full year based on the performance in the quarter and increased expectations for the remainder of the year

·     Transports; ODFL said revenue per day increased 4.2% Y/Y to due to an increase in LTL revenue per hundredweight that was partially offset by a 5.8% decrease in LTL tons per day; in rails, UNP said at UBS conference that Q2 volumes running down about 3% affected by weather, intermodal and high inventories; KSU at Deutsche Bank conference estimated impact to Q2 2019 operating ratio due to the loss of the Mexican fuel excise tax credit; AAWW announced a new CMI agreement to operate two of DHL’s recent 14 plane order from Boeing for the 777 aircraft

Stock GAINERS

·     AEO +3%; positive Q1 results as EPS of 24c beat by 3c while Q1 comp sales up 6%, topping the 3.1% est though guided Q2 EPS 30c-32c vs. est. 35c

·     AMBA +4%; after posting a Q1 EPS beat on in-line revs while Q2 revenue guidance of $51M-$53M was above est. $48.81M and announced a $50M share buyback plan

·     CPB +9%; Q3 earnings and revenue topped expectations, boosted by higher demand for its snack brands, while guided FY19 adjusted EPS to $2.50-$2.55, above consensus of $2.47

·     CRM +3%; Q1 results beat across major metrics including billings, revenue, and OCF, while current RPO growth came in slightly below guidance due FX headwinds, according to Piper

·     CRON +7%; was double upgraded to buy from underperform at Bank America amid improved confidence that Cronos is near announcing a launch in the U.S

·     RWLK +202%; said the FDA cleared the company’s ReStore soft exo-suit system for sale to rehabilitation centers across the United States

·     ROKU +5%; was upgraded to buy from neutral at Guggenheim and its tgt raised to $119 from $75 to reflect strong secular tailwinds for streaming video consumption

·     VRA +7%; posted Q1 rev beat of $91M and better year revs at $425M-$440M vs. est. $426.33M on strong comp sales of 5.2% (topping views)

Stock LAGGARDS

·     GIII 10%; slide on Q1 sales miss ($634M vs. est. $650.45M) and softer guidance

·     GME -36%; new 52-week lows hours following a miss on its Q1 revenues (fell 13% to $1.55B vs. $1.64B est.), despite an unexpected profit in GAAP terms, while comp sales dropped (-10.3%) and the company decided to eliminate its dividend to preserve cash

·     GWRE -4%; cut its full-year revenue outlook despite Q3 results that beat expectations (guides Q4 adjusted EPS 47c-53c on revs $199M-$207M well below est of 61c/$226.41M)

·     IFRX -85%; after its drug for an inflammatory skin disorder called Hidradenitis Suppurativa failed to show a statistically significant response in patients receiving the treatment compared with those on placebo (CCXI shares fell in reaction as has competing drug)

·     PVTL -42%; cut its FY 2020 subscription revenue outlook to a range of $530M-$538M from prior $542M-$547M view, overall revs cut to $756M-$767M from prior view of $798M-$806M and forecast a wider adjusted loss – that despite beating on the top/bottom line for Q1

·     SWKS -4%; lowered its Q3 outlook based on the impact of the BIS ban on Huawei, saying revenue/EPS guidance for the JunQ goes from $825M/$1.50 to $765M/$1.34