Closing Recap

Wednesday, October 14, 2020

Equity Market Recap

·     U.S. stocks slipped for a second a day, but finished well off the early afternoon lows as markets appeared “tired” over the failure for compromise in Washington regarding the pandemic aid stimulus bill while investors eased into earnings season with another round of mixed bank results (GS better, BAC, WFC disappoints). Concerns about the global spread of coronavirus heading into flu season are rising, especially with two paused trials for vaccines from LLY and JNJ announced yesterday. Stimulus talks remain ongoing, as Steve Mnuchin called on U.S. House Speaker Nancy Pelosi to abandon an all-or-nothing approach to coronavirus relief talks. Markets appear to be baking in a Democratic White House as polls showing Biden with a good lead, and if they can also take the Senate, could raise prospects of an even bigger stimulus deal that they have been pushing for if no deal is reached before then (less than 3-weeks away). Inflation data today (PPI) came in a bit hotter than expected for September after CPI was in-line with views yesterday. Energy stocks were one of the better performing sectors following M&A speculation in the E&P sector after Bloomberg reported COP was in talks to buy CXO (lifting shares of other E&P’s). Gold prices closed higher along with oil prices ahead of inventory data, while the dollar slipped.

Economic Data

·     Producer Price Index (PPI) for Sept rose 0.4% above the 0.2% estimate while core prices MoM also rose 0.4% vs. est. 0.2%; PPI YoY rose 0.4% as well vs. est. 0.2% and core prices YoY jumped 1.2% vs. est. 0.9% (rising inflation data points)

Commodities

·     Oil prices climbed a second day, with WTI crude up 84c or 2.1% to settle at $41.04 per barrel, helped by reports that Saudi Arabia and Russia reiterated their commitment to their production-cut agreement. Prices also getting a boost ahead of weekly inventory data due out to tonight (API) and tomorrow morning (EIA), pushed out a day due to the Columbus Day holiday. Separately, the IEA said the outlook for oil remains fragile, especially with more supply expected next year. Nat gas futures drop over 7% on lower demand forecasts, rising output

·     Gold prices edged higher (butt off the best levels of the day), rising $12.70 or 0.7% to settle at $1,907.30 an ounce as the dollar traded lower despite higher than expected U.S. producer-price index figures (rose 0.4% vs. est. 0.2%).

·     Yields on longer-term U.S. Treasuries drifted a touch lower as the market awaited developments from Washington on measures to combat the economic fallout from the coronavirus pandemic. The benchmark 10-year yield was last down less than a basis point at 0.725%.

Sector News Breakdown

Consumer

·     Retailers; BBBY announced that it has entered into separate agreements to sell its Christmas Tree Shops retail banner, its institutional Linen Holdings business and a distribution center located in Florence, New Jersey and expects to generate a total of approximately $250M in aggregate from the monetization of these assets; AEO upgraded to hold from sell at Loop Capital and increasing our price target from $9 to $15 as we see business slowly improving – still believe the back-to-school season was down YoY, but there is a likelihood for sequential improvement that is greater than our previous estimate; PTON tgt raised to Street high $144 at Truist and $142 at Barclays; NLS had Street-high estimates raised at Truist and 12-mo PT to $28 as a result of solid 3Q trends and favorable commentary from a recently-conducted consumer survey suggesting that the elevated demand environment should continue well into 2021; GME rises as Senvest Management disclosed a 5.5% (3.4m share) stake in the company last night

·     Auto sector; TSLA tgt raised to $450 from $400, GM to $41 from $36 and Ford (F) to $8 from $7 in autos at Goldman Sachs; AZO upgraded to strong buy at Raymond James saying only get few chances over an entire career to acquire at a discount. and raise tgt to $1,565 from $1,500; NIO shares jumped over 20% after being upgraded to buy at Citigroup with a price target of $33.20 after raising his volume and margin assumptions and JPMorgan raised to overweight with a $40 tgt saying China’s new EV penetration is set to accelerate from here and quadruple by 2025

·     Housing & Building Products; Jefferies upgraded BECN to buy from hold noting shares have lagged the building products group over the past few years, but the company has a new mgmt. team focused on the turnaround, and have seen good execution so far; TREX resumed buy at Stifel and $85 tgt and also resumed AZEK with a buy and $42 tgt for further margin expansion; SKX tgt raised to $33 from $25 at Morgan Stanley saying a faster wholesale restart and transitory GM benefits suggest upside to our 3Q20 estimates

·     Consumer Staples; PPC has agreed to a plea deal with the U.S. Justice Department to resolve price-fixing charges, and will pay a fine of $110.5M; KR downgraded to EW from OW at Wells Fargo saying it remains a key beneficiary of the COVID pandemic, but the risk/reward no longer looks favorable with the benefit past its peak and the stock still close to its recent high; PG, CL, EL, SPB top picks in consumer products preview at Bank America as expect a strong Q320 earnings season, with staples still benefiting from heightened demand; Nielsen data showed Sept. grocery sales grew 9.2% YoY (vs. Aug. 8.5%) for All Outlets Combined helped by accelerating tonnage; STZ was downgraded to neutral from buy at Atlantic Equities

·     Restaurants; stay-at-home related dining plays (CMG, DPZ) have outperformed of late with rising coronavirus cases; DIN tgt raised to $70 from $55 at Wedbush saying checks at Applebee’s point to SSS growth in-line to above expectations; PLAY said comparable store sales have steadily improved during Q3, down 62% in September vs. down -75% in August

·     Leisure and Gaming; SIX said in a filing that it’s committed to reduce its full-time workforce by 10% as part of transformation productivity initiatives (effects about 240 employees); RCL 8.33M share Secondary priced at $60.00; SGMS tgt raised to $45 from $30 at Truist as continue to see a positive read from regional gaming strength, with an ongoing SGMS Gaming turnaround story

Energy

·     E&P sector; CXO rises after Bloomberg reported COP is in talks to buy Concho saying the deal may come in the next weeks, and would represent a big shale bet https://on.mktw.net/2GO1bSN (shares of APA, PXD, FANG rose in sympathy); FANG Oil production of 170 Mboe/d (total production: 287.3 Mboe/d) was roughly in line with the consensus estimate of 169.5 Mboe/d. Capex came in at $281M, which was also basically in line with the consensus estimate of $279M

·     Utilities & Solar; FSLR tgt raised to $87 from $80 at JPMorgan as increasing FSLR module shipments and associated revenues in 2022 to better map against planned Series 6 capacity, raising the valuation multiple slightly; PCG warned that it might cut off power to about 54,000 customers in 24 California counties Wednesday due to weather forecasts showing the potential for strong, dry winds that could lead to increased wildfire risk; RUN 8M share Block Trade priced at $62.00

Financials

·     Large cap bank movers; GS shares rise as reports a 94% rise in quarterly profit, driven by a resurgence in deal-making and continued strength in its trading and underwriting businesses – said earnings per share doubled to $9.68 from $4.79 and easily topped estimates ($5.57) with FICC sales & trading revenue $2.50%, trading revs $4.55B and IB revs $1.97B 9all above views; BAC posts a 15.8% drop in quarterly profit, hit by higher provisions for credit losses due to COVID-19 pandemic (provisions for credit losses $5.12 billion vs. $779 million YoY) – EPS of 51c topped the 49c estimate while Q3 revenue net of interest expense $22.33 billion, -2.1% YoY; WFC reports a 57% slump in Q3 profit as the bank’s loan book shrank and near-zero interest rates as well as higher costs hurt its bottom line – (EPS of 42c missed the 44c est.) Charge-offs for loan losses and provisions for future credit losses were stable during the quarter

·     Regional banks; USB reported better Q3 revs of $5.96B vs. est. $5.72B though Q3 net interest margin 2.67% vs. 3.02% YoY on lower rates and Q3 net charge-offs $515 million, +46% YoY; PNC Q3 EPS and revenue topped estimates while Q3 loans fell -7% QoQ to $249.28B and Q3 provision for credit losses $52 million, down -72% YoY

·     Insurance; ACGL estimates Q3 catastrophe losses of $190M-$210M; AXS announced a preliminary net loss estimate in the range of $225M-$255M pre-tax, or $190M-$220M after-tax, for third quarter catastrophes and other events; RNR estimates Q3 losses from catastrophe events will have an estimated net negative impact of approximately $325M in quarter; THG estimates Q3 catastrophe losses to be slightly above expectations

Healthcare

·     Pharma movers; CYCN shares slide after saying results from its Phase 2 study of olinciguat for sickle cell disease don’t support further internal development; ETON 2.8M share Secondary priced at $7.00; THTX rises after the USPTO issued U.S. Patent No. 10,799,562, directed to the treatment of Nonalcoholic Steatohepatitis (NASH) and/or Nonalcoholic Fatty Liver Disease (NAFLD) in patients using tesamorelin

·     Biotech movers; MRNA gets ema confirmation to submit marketing application for its covid-19 vaccine candidate; CDAK 5.5M share IPO priced at $15.00; ANAB upgraded to buy with $36 tgt at Guggenheim after speaking with ANAB mgmt following the release of additional Phase II GALLOP data on imsidolimab in GPP; OCUL 7.18M share Spot Secondary priced at $9.75

·     Healthcare services and providers; MDRX shares surged after agreeing to sell its CarePort Health business to WellSky, a global health and community care technology company for an agreed price of $1.35B; in managed care, UNH tops Q3 profit estimates, helped by growth in Optum unit that manages its pharmacy benefits business as revs rose 21.4% to $34.92B, while also raises FY20 adj. EPS view to $16.50-$16.75 from $16.25-$16.55 (though medical and op cost rose)

Industrials & Materials

·     Transports; the Dow Transport index neared the 12,000 level for the first time, led by strong sector strength as rails and package delivery (FDX) paced the gains; XPO tgt raised to $103 from $88 on continued improvement at Oppenheimer as view XPO’s 3Q adjusted EBITDA guidance quiet achievable as the industrial economy recovers and elevated e-commerce/retail activity builds ahead of peak holiday season; ALK said its revenue fell less than expected in the last month of the third quarter on improving demand for air travel; the Eurocontrol Director General said that they forecast European travel decreasing even further off of 2019’s levels through next month and that RYAAY is reportedly planning to cut November flying to about 33% of 2019’s levels compared to previous plans of 40%; ZNH reported September passenger capacity fell 23.67% YoY, driven by a 92% decrease in regional routes

·     Metals & Materials; in chemicals, Goldman Sachs adds Buy-rated AXTA to the conviction buy list as consensus estimates for 2020/21 have remained unchanged since 2Q20 earnings, even as the outlook for the autos end-market (to which AXTA has high exposure) has improved meaningfully while removed SHW from the conviction buy list following recent outperformance; ALB was downgraded to Underperform at RBC Capital noting it currently trades at ~17x our FY21 EBITDA estimate and well above its 7-15x historical range and lowers ests given view 2021 lithium pricing could be similar to 2020 and our expectation of moderate production growth at 3-4%; in ag chemicals, RBC raised its tgt on MOS to $25 from $20 and cut CF to $32 from $38 ahead of EPS

Technology, Media & Telecom

·     Internet; GRUB rises early after Just Eat Takeaway had update, in which the Dutch food delivery firm said it still sees its deal with GrubHub completing in 1H 2021; NFLX tgt raised to $670 from $600 at Goldman Sachs and raised from $550 to $625 at Cowen ahead of earnings as expect paid net adds to come in above guide underpinned by elevated engagement due to COVID; BILI shares tumbled, along with other Chinese ADRs a day after Chinese platforms canceled apple livestream event yesterday with no reason given

·     Semiconductors; QCOM tgt raised to $165 at Bank America saying the AAPL event read positively for Qualcomm, who is the only RF vendor with a millimeter wave solution shipping at volume, and we highlight that mmWave RF content potentially increases the BOM by roughly $45; KeyBank also sees the new iPhones with 5G capabilities as positive for AVGO, QCOM, QRVO, SWKS, while being Neutral on the phones’ impact for CRUS and SYNA

·     Software movers; UBS assumes coverage of six software names and initiates four – in report, assume coverage with WDAY at neutral (up from sell and tgt to $235 from $175) and downgraded SPLK to sell from buy and cut tgt to $165 from $242 with new buy on DOCU, neutral on CTXS and VMW and a new sell rating on VEEV; BTIG noted GWRE weakness yesterday at its annual Analyst Day (virtually) provided key updates to the long-term product roadmap, especially around Guidewire Cloud Platform (GWCP), and its long-term financial model with a framework for $1bn/$1.5bn ARR levels, which they suspect was the primary catalyst that drove shares down; TTD tgt raised to $750 from $580 at Needham saying eMarketer raised its 2020 programmatic ad spending est. by $3.7B to $60B; ZM shares slipped after updating its long-term targets, all non-GAAP and as a percentage of revenue saying it sees gross margin is expected at about 80% versus the prior 80-82% view and the 72% in Q2 and operating margin is set at about 25% compared to the prior 20%+ and 42% in Q2.

·     Media & Telecom movers; AMC is considering a range of options that include a potential bankruptcy to ease its debt load as the pandemic keeps moviegoers from attending and studios from supplying films, Bloomberg reported overnight; NYT initiated overweight and $55 tgt at Morgan Stanley saying it has a unique opportunity to scale its paid subscriber base in a growing global premium news market; TMUS shares underperformed after AAPL announcement followed by the carrier promotions that followed it, creates more competition for TMUS