Mid-Morning Look

Wednesday, June 19, 2019

After markets closed at their best levels since early May on Tuesday, with the S&P 500 index but a few points away from record all-time highs on hopes of a dovish Fed (and rate cuts) and improved trade relations with China after President Trump and Chinese leader Xi agreed yesterday to meet at the G20, it appears stocks are priced for perfection at this point ahead of the afternoon FOMC meeting. The FOMC statement and press conference from Fed Chairman Powell needs to be worded very carefully for stocks to maintain their dovish outlook on rates. Whether they confirm the markets expectations for a rate cut in July (currently above 80%), or lower economic projections, Powell will likely need to tread carefully not to disrupt the current market environment. As you’d expect, stocks are trading sideways, with bonds paring recent gains (yields inch higher) and the dollar mixed ahead of the statement.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar inching lower early, falling vs. the Canadian Loonie after its inflation report, while dropping modestly vs. the Pound and euro ahead of the FOMC (euro fell yesterday on dovish comments by ECB Draghi); commodity prices are mixed as well, with oil slipping and gold little changed after surging the last few weeks on low rate expectations from the Fed. Treasury market’s rally as the 10-year yield inching higher at 2.09% ahead of FOMC later – touched lows of 2.054% earlier and yesterday low was 2.014%.

Sector Movers Today

·     Metals & Materials; U.S. Steel (X becomes the 3rd steel producer to temper guidance the last 3-days as guides Q2 adjusted EPS to 40c below est. 52c and sees Q2 adjusted EBITDA approximately $250M, which excludes approximately $15M of estimated Q2 impacts from the December 24, 2018 fire at the Clairton coke making facility; in iron ore, RIO shares slide after cutting its full-year iron ore output est. (to 320M-330M tons from prior 333M-343M tons); VALE active after Brazil’s Superior Court of Justice revokes an injunction stopping Vale from using its Laranjeiras dam in Brucutu, opening door for operations to resume in 72 hours

·     Casino & Leisure movers; HOG said it will partner with a manufacturer in China to produce a smaller bikes for that fast-growing market by year-end 2020/says the new bike to be manufactured by Qianjiang Motorcycle; in towables, WGO shares slid after Q3 revs of $528.9M missed the $569.4M estimate, while Q3 revenue for Motorhome segment fell 35% YoY, driven by decreases in both Class C and Class A unit sales (shares of RV makers THO, LCII, PATK active); SIX was upgraded to outperform at Wedbush in theme parks as believes that a number of potential catalysts line up nicely for Six Flags, most notably Per-Capita spending improvements

·     Transports; LUV better guidance as sees Q2 CASM ex-fuel +11.5%-12.5% vs. 10.5%-12.5% prior and sees Q2 RASM up 6.5%-7.5% (had seen up 5.5%-7.5%); sees Q2 capacity down about 3.5% (had seen down 2%-3%); GWR carloads are tracking down ~8% y/y in 2QTD (same railroad traffic is down ~3% y/y), which compares to our Q2 estimate of +1% growth y/y for CSFB; Stifel reduced 2019 industry volume and yield estimates again for truckers (CVTI, KNX, HUBG) and believe the Street has anticipated a good chunk, if not all of this, by the stock action in recent months

Stock GAINERS

·     ADBE +4%; as Q2 EPS and revs topped consensus (Q2 EPS $1.83/$2.74B vs. est. $1.78/$2.70B) though guided Q3 results below consensus/also posted $1.55B in FY19 net new Digital Media ARR and ~43% 4Q19 exit operating margin

·     AKTX +8%; reports positive results for nomacopan in moderate to severe atopic keratoconjunctivitis (AKC) as there was an overall improvement in clinical score

·     AXTA +15%; says its board begins review of options, including a possible sale, and has formed a Strategic Review Committee/review of alternatives also explores changes in capital allocation, and ongoing execution of strategic plan

·     BTU +4%; and ARCH agreed to combine their Powder River Basin and Colorado assets in a joint venture which they expect to unlock synergies with a pretax net present value of about $820M

·     IQV +5%; rally’s to record highs following investor day yesterday, as management provided investors with a better than expected three-year outlook for revenue growth of 7-10%

·     LZB +3%; shares slipped after Q4 EPS missed by 6c on lighter than expected sales of $453.8M (vs. est. $469M), but shares bounced after conference call commentary

·     MLNT +135%; FDA accepted its supplemental New Drug Application (sNDA) for BAXDELA for priority review to include adult patients with community-acquired bacterial pneumonia

·     PCG +4%; reached a $1 billion settlement with local government agencies that were harmed by blazes its equipment ignited

·     VIAB +2%; WSJ reported late yesterday that CBS is preparing to make an offer for sister media company VIAB in the coming weeks, following a meeting of CBS directors last week in which a potential deal was discussed https://on.wsj.com/2ZGBxmP

Stock LAGGARDS

·     ENR -4%; downgraded to underweight at JPMorgan saying although trends for ENR’s organic business appear solid, negative sell-through rates have worsened for the acquired Rayovac battery business

·     GPRE -10%; has decided to suspend its quarterly cash dividend in order to retain and redirect cash flow to the company’s Project 24 opex equalization plan and plans to offer $100M of notes

·     MTSI ; announced restructuring plan/cuts Q3 EPS view to loss of (45c)-(41c) from (8c)-(4c) and cuts Q3 revenue view to $107M-$109M from $120M-$124M on lower

·     NCR -5% after the NY Post reported yesterday the company put itself up for sale in early May, attracting two bidders who have walked away in recent weeks without striking a deal, https://nyp.st/2IQHhTV

·     RIO -4%; after cutting its full-year iron ore output est. (to 320M-330M tons from prior 333M-343M tons) and as capacity from VALE expected to come back online within 72 hours

·     SABR -4%; downgraded to sell at Goldman Sachs and cut tgt to $20 from $23 on industry challenges which are likely to impact revenue growth over the next year

·     WGO ; after Q3 revs of $528.9M missed the $569.4M estimate, while Q3 revenue for Motorhome segment fell 35% YoY, driven by decreases in both Class C and Class A unit sales

Syndicate

·     Biohaven Pharmaceutical (BHVN) 6.98M share Secondary priced at $43.00

·     Calithera Biosciences (CALA) 12.5M share Secondary priced at $4.00

·     Kosmos (KOS) 23.3M share Block Trade priced at $5.99

·     Kura Oncology (KURA) 5.9M share Secondary priced at $17.00

·     Sesen Bio (SESN) 20.41M share Spot Secondary priced at $1.47

·     Stoke Therapeutics (STOK) 7.89M share IPO priced at $18.00