Closing Recap

Friday, April 24, 2020

Equity Market Recap

·     U.S. stocks surged late day Friday, ending near session highs and helping pare weekly losses as better-than-feared earnings and improving sentiment about the economy helped rally stocks. Stocks initially got a boost after Congress passed a $484B relief package to boost funding for small businesses, hospitals and virus testing, as the country continues to grapple with the COVID-19 fallout. Sentiment improved as states prepare to relax curbs imposed to contain the coronavirus pandemic as Georgia opened parts of their economy today, while other (Ohio, Montana, Tennessee, South Carolina) governors announced their plans as well. Cases and deaths slowed once again in hotspots for the coronavirus (NY), as markets hoping that the peak of cases has been reached. Oil prices rise a 4^th straight session, but still end the week lower (its 8^th loss in nine-weeks) as global production cuts could not keep pace with the collapse in demand. Consumer and tech giants helped pace gains ahead of a big week of upcoming earnings (AAPL, FB, GOOGL, MSFT), with over 140 S&P companies expected to report next week, the most of the quarter. Treasury prices remain strong as the 10-year yield dipped below 0.60% while the dollar was mixed. For markets to continue their epic bounce off recent lows, economic better will need to improve, and COVID-19 cases will need to fall as economies begin to open up. In Europe, leaders signed off on a $540B euro plan to deal with the immediate fallout from the pandemic but couldn’t reach a longer-term building program.

Economic Data

·     Durable Goods Orders for March fell a slightly greater (-14.4%), worse than the est. down (-12%), while Durable goods new orders revised down to (-1.1%) for Feb. from 1.2% prior. New orders ex-transportation fell (-0.2%) in March after (-0.7%) fall

·     University of Michigan sentiment falls to 71.8 from 89.1 last month and compared to est. 68.0; the expectations index fell to 70.1 vs. 79.7 last month, while the current economic conditions index fell to 74.3 vs. 103.7 last month

Commodities

·     Oil prices edged higher by 44c to settle at $16.94 per barrel, rising a 4^th straight day after settling in negative territory for the first time ever earlier this week. For the week, WTI crude dropped on the week on persistent demand concerns and lack of storage capacity. Gold prices fell -$9.80 or 0.6% to settle at $1,725.60 an ounce, though posted a weekly gain of about 2.2%, failing around the $1,740 level. The move today might have been profit taking after two days of strong gains.

Sector News Breakdown

Consumer

·     Retailers; SKX 1Q EPS of 39c was in-line with consensus, with sales 1.5% better vs. expectations and gross margins beat by 20 bps while noting they were on track for record sales in 1Q before the Covid impact/Q1 comp sales were +9.7% the first 2 months of the quarter, though ended down (-8.1%) for 1Q after March fell significantly

·     Consumer Staples; TSN was downgraded at Bernstein given increased near-term uncertainty around the company’s ability to maintain production levels amidst plant closures and worker absenteeism/expect the plant closures to weigh on Tyson’s production capacity in 3Q:20

·     Restaurants; DNKN was downgraded at Wedbush as believe Dunkin’s current valuation appropriately incorporates the balance of potential risks from its relative sensitivity to an extended economic downturn, on the one hand, and its relative strength to withstand near-term headwinds; BJRI said the decline in comp sales peaked during the week ended March 24 at -82%, and have since improved to -70% during the week ended April 21

·     Auto sector; VNE said it will exit the brake control business to a well-established automotive supplier following a strategic review/expects to achieve total reductions of negative cash flow of more than $80M for 2020; TSLA raising prices for two China-made Model 3 variants after China cut subsidies on electric vehicles; ALV posted a forecast-beating first-quarter net profit, saying its task force set up to manage the situation in China was expanded globally with timely cost-reduction actions to offset much of the headwinds from weak light-vehicle production.

Energy

·     E&P sector; WLL shares fall after saying it intends to convert over $2.3 Billion of its unsecured notes and certain other claims into a 97% ownership interest in the newly reorganized Company and exit Chapter 11 within the next 5 months; in refiner sector, Citigroup downgraded MPC to neutral and PSX to sell saying COVID-19’s demand shock poses a three-part challenge for the refining investor while saying PSX is best chance for non-negative 2020E EPS, steepest/fastest earnings recovery ramp; the Baker Hughes (BKR) rig count showed a decline of 64 rigs to 465, while oil rigs dropped -60 to 378 the lowest since July 2016 and gas rigs fell -4 to 85

·     Utilities sector Jefferies noted covered utilities came under considerable pressure as COVID-19 fears spread in March, economic repercussions expanded, and indiscriminate selling took hold – firm notes they had upgraded at that point but as the group has now sharply recovered, they downgraded NI & SWX to Hold, from Buy; Wells Fargo upgraded PNW to overweight as consider the current valuation discount to be excessive considering the regulated business model and long-term outlook (but lower tgt to $87 from $110), while downgraded WEC, XEL rating reflect relative valuation considerations as the COVID-19 driven flight to quality within the sector has resulted in material expansions to the P/E multiple premiums vs. Regulated Electric peers; in earnings, POR with in-line earnings and revises year EPS lower while FE Q1 EPS slightly ahead of estimates on weaker revs and reaffirms year outlook

Financials

·     Bank movers; PBCT Q1 operating EPS of 33c/$527.5M revs topped the 30c/$500M est. while Q1 provision for credit losses of $33.5M, includes a $22.9M increase reflecting the application of current expected credit loss accounting and the impact of COVID-19; SIVB with a Q1 EPS miss of $2.55 vs. est. $3.56 (and $5.44 YoY) and Q1 provision for credit losses $243.5M vs. $17.4M in Q4; ASB 1Q core EPS missed by 4c as the adoption of CECL drove an elevated provision, and beyond that quarterly trends were generally within expectations; TRV downgraded to Underperform at Raymond James in insurance sector after reported 1Q20 results that included an $86 million pre-tax charge or ~1.2 points on the combined ratio related to COVID-19

·     Consumer finance and lending; AXP topped quarterly profit estimates while they reigned in its expenses in Q1, helping it weather the impact of coronavirus crisis on its businesses/set aside $2.6B to cover potential losses stemming from the coronavirus outbreak; mortgage servicers COOP, NRZ, PMT, PFSI volatile after Treasury Secretary Steven Mnuchin said there’s no plan to create a Federal Reserve facility to inject funding into non-bank mortgage servicers, because recent government moves have addressed servicer liquidity concerns; COF jumped on earnings

·     REITs; in mortgage REITs, Credit Suisse upgraded ANH to neutral as do not see additional downside potential with the shares trading at 54% of 1Q book value and raised NYMT to neutral as well as do not see additional downside potential with the shares trading at 45% of 1Q book value and company having satisfied its margin call requirements; STOR was downgraded to neutral at Mizuho and lower 2020 Triple Net REIT AFFO estimates by ~10% saying combined with lower applied multiples result in a 39% PT reduction for our coverage names

Healthcare

·     Pharma & Biotech movers; FDA cautioned against the use of malaria drug hydroxychloroquine in COVID-19 patients even as President Donald Trump, who has touted it as a "game changer," advocated for an additional review; EBS rises after JNJ struck a deal valued at ~$135M to use EBS’ manufacturing plants to make a vaccine being tested for the coronavirus; PSTI rises as the European Investment Bank (EIB) approves financing of €50M for the co to support its R&D activities in the EU to advance its pipeline and regenerative cell therapy platform; BCRX filed a $500M mixed shelf registration; Late-stage study data shows MRK’s Lynparza, co-developed with AZN helped men with advanced prostate cancer and certain genetic mutations live longer (the news pressured shares of CLVS which has its competing Rubraca drug under FDA priority review)

·     Medical equipment and devices; EW 1Q results were well above COVID-adjusted estimates as TAVR (+30% y/y) demonstrated surprising resilience, especially during the second half of March, while company guided Q2 and year revs below consensus; ILMN was downgraded to neutral at Citigroup following the stock’s significant outperformance since COVID-19 concerns began negatively impacting broader stock performance on 2/20/20 with ILMN shares +4%; insulin pump companies TNDM, PODD both downgraded at Leerink driven primarily by estimate reductions prompted by the COVID-19 impact to the installed base and thus 2H20 and 2021 sales estimates

·     Healthcare services and providers; EHTH reported strong 1Q results that were above consensus and raised its 2020 revenue and adjusted EBITDA guidance, but concerns arise as churn was somewhat elevated vs. the percentage of the company’s 4Q18 cohort churning in 1Q19

Industrials & Materials

·     Industrial & Machinery; TEX said it has begun a comprehensive cost reduction program to help support its financial position, while was also downgraded at Credit Suisse given the economic uncertainty as believe the profitability of the Access Equipment business could be under significant pressure for longer, delaying the margin improvement story for the medium term

·     Transports; HTZ fell as Reuters reported the co is working with debt restructuring advisers to explore options for shoring up its finances after the coronavirus pandemic killed demand for car rentals; Latin American airlines GOL, AZUL, LTM all downgraded at Morgan Stanley saying CPA remains top pick and though riskier, also stay OW Volaris/high uncertainty leads us to shift from OW to EW on Gol & Azul, but of the two, prefer Gol on its better liquidity position and a more resolved fleet situation

·     Metals & Materials; FCX said it is cutting 2020 estimated operating costs by $1.3B, or about 18%, reducing planned capex spending by $800M, or about 30%, cutting exploration and administrative costs by $100M, or about 20%, and cutting estimated copper sales volumes by 15% after reported Q1 revs $2.8B, down 26% YoY vs. est. $2.86B

·     Aerospace & Defense; BA is expected to announce a significant production cut to the 787 Dreamliner program when it reports earnings next week, according to reports – says the company plans to lower monthly output to a single-digit level from the 14 per month that were being churned out at the beginning of the year

Technology, Media & Telecom

·     Internet; EBAY was upgraded to buy from hold and raise tgt to $45 from $40 at Stifel saying the stay-at-home directives and widespread retail store closures have shifted a substantial portion of consumer spending online/3^rd  party data indicates eCommerce sales have accelerated dramatically beginning in March with strong momentum continuing through April; GOOGL will cut its marketing budgets by as much as half for the second half of the year; FB shares jumped following announcement of new video chatrooms on its platform; news pushes ZM lower, well off its 52-week highs earlier in day after news it was being added to Nasdaq 100

·     Semiconductors; INTC shares slumped early despite strong quarterly results with Q1 sales up +24% YoY, $1B above consensus on better margins/EPS at 62%/$1.45 were 110bp/11% better/Q2 sales guide also 3% above, but GM outlook and EPS disappoint (shares moved higher late day); COHR was upgraded to buy at Goldman Sachs as see a structural shift to OLED (away from LCD) driving a tailwind for spending through the next several years

·     Software movers; ZM was added to the Nasdaq 100 index on April 30th (replaces WLTW) but later shares fell on FB competition news; Cowen downgraded WDAY to market perform and cut tgt to $160 (from $220) as see it carrying outsized disruption risk to its growth trajectory and given new firm forecast of mid-teens growth the next 2 years, shares likely to be range-bound; Cowen also downgraded SPLK rating as it was already entering the year with a lot of business transition to absorb and now add in COVID-19 related disruptions along with SPLK’s heavy reliance on large deals; SunTrust downgraded shares of NET and ZS to hold from buy; CALX was upgraded to buy at Jefferies lifting shares

·     Media & Telecom movers; VZ reported mixed Q1 results as EPS narrowly beat while revenues were slightly below views ($31.6B vs. est. $32.2B) and guides full-year EPS to down -2% up 2% below its prior view up 2%-4%/Q1 wireless postpaid net adds -50,000 vs. +61,000 YoY; WWE shares rise after Q1 EPS topped estimates and revs of $291M rose 60%, beating est of $266.5M while announced cost cutting initiatives and delayed about $140M in cap-spending and said operating income $53.3M compared to loss of $6.8M last year