Closing Recap

Wednesday, October 28, 2020

Equity Market Recap

·     Global stock markets tumbled (closing at lows) as rising coronavirus infections and tougher lockdowns in Europe added to worries about the economic hit from pandemic. U.S markets fell as much as 3% before paring losses, with the S&P 500 and Dow Jones Industrials dropping below their 100-day moving average support levels (3,306 and 27,266 respectively). The move comes after breaching the 50-day earlier in the week for each while the Nasdaq fell below its 50-day of 11,317 today. European stocks fell to a five-month low as the Stoxx Europe 600 index closes down 3% (late May lows), the FTSE 100 fell 2.8% to 6-month lows and the German Dax dropped over 4% to five-month lows. Treasury yields fell alongside the price of oil and gold was under pressure from the rising dollar. On top of the rising infection rates, markets are still dealing with no word out of Washington on a stimulus deal and of course the Presidential election Tuesday.

·     Selling pressure was again broad based but focused more on the reopen related sectors as airlines, cruise lines, casinos, restaurants, theme parks (etc.) dropped. The macro picture has overshadowed generally better earnings results this quarter as we approach over 250 of the S&P 500 reporting by weeks end. Outside of reopen trades, consumer finance names fell on MasterCard earnings miss, transports sunk behind CHRW margins declines and UPS slipped despite its beat, and social media names FB, TWTR fell as their CEO’s testified before the Senate Commerce Committee on Section 230 of the Communications Decency Act. Overall, it was a very ugly day with no comments out of Washington or from the Fed which has warned repeatedly about the need for added fiscal stimulus.

COVID case upgrades:

·     Covid-19 cases, deaths rising leading to mass market uncertainty: France plans one-month lockdown beginning midnight Thursday, says new lockdown will be more flexible than previous one while reports indicate Germany to start lockdown on Monday Nov 2nd; Sweden 1,980 new Covid cases, highest since start of pandemic; U.K. new virus cases rise by 24,701, vs 22,885 the day before and new virus deaths rise by 310, vs 367 the day before; Italy reports record new daily coronavirus cases of 24,991; Spain 9,303 new Covid cases vs 8,304 yesterday; France reports record 36,437 new confirmed covid-19 cases in past 24 hours, from 33,417 on Tuesday; even Middle East seeing uptick in cases as Iran reports record daily coronavirus deaths of 415.

Commodities

·     Oil prices another market casualty, as WTI crude dropped -$2.18 or 5.5% to settle at $37.39 per barrel, well off last Tuesday’s 7-week highs around $41.50 as surging U.S. crude stocks spark oversupply fears as well as growing coronavirus infections in the U.S. and Europe raise worries of an oil glut and weaker fuel demand. Oil prices gave up yesterday gains (and more) as the API said crude inventories climbing by 4.6M barrels compared with expectations for a 1.2M-barrel build, while the EIA this morning said U.S. crude production rose last week by 1.2Mn barrels per day, the largest weekly gain on record, as crude output rose to 11.1 million bpd, the highest since July. Additionally, Libya’s production could rebound to 1M barrels per day in the coming weeks, complicating efforts by OPEC and allies to restrict supply.

·     Gold fell as much as 2% and silver 6% as investors flocked to the safety of the dollar with fears of fresh coronavirus lockdowns hammering Wall Street and no immediate sign of U.S. stimulus to ease the economic blow. December gold dropped -$32.70 or 1.7% to settle at $1,879.20 an ounce, its lowest level in about a month as a lack of stimulus measures and risk off mentality heading into this election also weighing along with the buck.

Currencies & Treasuries

·     Safe-haven assets were one of the few pockets of strength as the dollar gained against all major currencies outside of the Japanese yen (which rallied vs. all) in a flight to safety, while Treasury prices gainers, sending yields lower. The 10-year yield dropped from 4-month highs above 0.85% just last week to lows below 0.75%. The U.S. Treasury sold $55B in 5-year notes at a yield of 0.33% vs. 0.335% when issued prior with the bid-to-cover at 2.38 and indirect bidders awarded 61.94%, directs 13.97% and primary dealers 24.09%.

Sector News Breakdown

Consumer

·     Retailers; BBBY shares fell after guiding FY21 comp sales to be stable, a disappointment as estimates look for growth of over 13% – also announces share buyback of up to $675M over the next three years ahead of its investor day later in the day; TUP surges as beats quarterly sales and earnings estimates saying consumers cooking more at home and needing more food storage pushed Q3 sales up 14% to $477.2M (vs. est. $362M); LULU upgraded from Hold to Buy with $396 tgt at Deutsche Bank citing several factors; BGFV reported mixed 3Q with revenue slightly below estimate ($305M vs. est. $313M) while EPS of $1.31 was well above our $1.10 estimate; the WSJ reported that TIF is nearing agreement to lower the price of its purchase by LVMH to $131.50 per share from $135 https://on.wsj.com/3e3S6Bn

·     Auto sector; J.D. power in U.S. October automotive forecast, says retail sales for new vehicles projected to reach 1,187,800 units in Oct., up 3%; DAN and MNRO among auto retail, supplier names active after earnings results; UBER adds grocery delivery to its expanding list of businesses; VNE downgraded to Underperform from Neutral at CSFB after the stock triples from its COVID-19 depths, and believe the current valuation does not adequately reflect key risks

·     Housing & Building Products; MAS an earnings winner after Q3 EPS and sales handily topped consensus estimates; SUM falls as Q3 revenue fell 3% to $709.6M citing lower cement sales volumes (revs -14% to $84.9M) while general and administrative expenses surged 31% to $81.5M; AWI downgraded to neutral at Bank America as now believe the recovery in demand for ceiling and wall systems for commercial new construction and repair and remodel activity could be longer-tailed; overall homebuilders outperformed broader markets

·     Consumer Staples; food related stocks along with cleaning and consumer products catching interest again as Covid cases rise (SFM, TSN, SAFM, CLX, CL); BG rises after the company raises its 2020 profit outlook following a Q3 beat; KR announces the launch of rapid antibody testing across its family of pharmacies in a move that will expand the company’s existing portfolio of in-clinic and at-home COVID-19 diagnostic tests

·     Restaurants; sector reels (RRGB, CBRL, CAKE, SHAK) as concerns over COVID-19 cases and rising hospitalization rates in many U.S. states sweep over the sector; EAT reported Q1 eps 28c, surprising analysts who expected a (15c) loss on revs $740.1M, and Q1 same-restaurant sales fell 10.9% YoY, and the company sees the metric down mid-single digits for Q2 and forecasts Q2 adj EPS 40-60c, in-line with 50c est.; DIN Q3 EPS 80c and rev $176.6M beat estimated 36c and $165.9M as Applebee’s same-restaurant sales decreased (13.3%) YoY and IHOP’s decreased over 30%, though both restaurants saw improvements in 10/13 weeks of the quarter; CHEF Q3 net sales $254M (-36% y/y) misses even the lowest analyst estimate ($258M, avg est $266.7M), as (38c) EPS loss also misses expected (32c) loss; DENN posted a surprise Q3 adj EPS profit of 1c (est 3c loss), though revs $71.6M miss $71.9M est as same-store sales decreased by 33.6%. The company also issued FY20 guidance, expecting same-store sales of 70-75% of 2019’s levels and adj EBITDA of at least $28M

·     Leisure and Gaming; theme parks fall (DIS, SEAS, FUN) two-fold, hit by the raising COVID-19 cases globally, threatening the hopes of a recovery, while SIX reports Q3 EPS loss ($1.37) on revs $126M misses the ($1.00) and $142.73M estimate; attendance was 2.6 million guests, a decline of 11.4 million guests YoY; HOG downgraded at Morgan Stanley after shares surge yesterday as Harley delivered a strong, consensus-beating Q3 driven by cost performance; ELY and Topgolf have entered into a definitive merger agreement to combine in an all-stock transaction. The number of shares to be issued is based on an implied equity value of $2B; RRR reported Q3 Adj. EBITDA of $161M which was well ahead of Street estimates of $92M driven by better than expected Gaming revenue and continued margin expansion; cruise lines (CCL, NCLH, RCL), and lodging names (HLT, H, MAR) pressured on the European country lockdowns; casinos also tumble further on rising cases with WYNN, LVS, MGM pressured

Energy

·     Energy stock movers; sector tumbles along with another sharp drop in oil prices on slowing demand fears, increased production (Libya this week) and rotation out of riskier assets; HES with Q3 EPS loss (71c) vs. est. (67c) loss while lowers FY production outlook due to hurricane-related downtime in the Gulf of Mexico to total around 325,000 barrels of oil equivalent per day (Boepd), compared with its earlier estimate of 330,000 Boepd and also cut its cap-ex budget to ~$1.8B from prior view $1.9B; EQT files to sell 20M shares of common stock at $15.50 after saying it plans to buy U.S. oil major CVX assets in the Appalachian basin for $735 million; MTDR 3Q EBITDA beat (15%); 2020 production raised 1% above the Street estimates

·     Inventory data: U.S. crude production rose last week by 1.2 million barrels per day, the largest weekly gain on record, U.S. Energy Information Administration data showed. Crude output rose to 11.1 million bpd, the highest since July, EIA said. The API showed a build of 4.58M barrels of oil for the week ending Oct. 23, gasoline inventories showed a build of 2.25M barrels, distillate inventories show a draw of 5.33M barrels and Cushing inventories show a build of 136K barrels

·     MLPs, Pipelines; OKE 3Q EPS $0.70 vs. est. $0.61 on revs $2.2B vs. est. $2.5B; guides FY20 net inc. and adj EBITDA to approach midpoint of prior ranges of $500-900Mm and $2.6-3B, respectively; EPD Q3 GAAP EPS of $0.48 in-line, revenue of $6.99B (-12.2% Y/Y) misses by $140M and EBITDA of $2.06B vs. $1.95B consensus; TRP said it awarded more than $1.6B worth of contracts to six major U.S. union contractors for construction of the Keystone XL pipeline next year.

·     Utilities & Solar; Solar stocks get solid results/guidance from FSLR which posted a Q3 earnings beat and crushing revenue expectations with a 70% YoY gain to $928M with implied FY 2020 guidance of $3.65-$4.15 EPS and revenues of $2.6B-$2.9B, vs. consensus of $2.88 EPS and $2.69B revenues while ENPH also strong earnings results boosting solar space (SPWR, JKS, SEDG, CSIQ active on results); in utilities EIX reports 3Q20 beat and an updated 2020 guidance, primarily due to higher CPUC earnings and lower expenses; DTE was downgraded at BMO Capital after shares rallied on earnings and spin-off of midstream business

Financials

·     Bank movers; DB reported a Q3 profit of EUR 182M ($214.3M), up from Q3 2019’s (EUR 942M) loss driven by +43% in investment banking revenue and +47% growth in fixed-income rev, and the bank also reports setting aside EUR 273M for loss provisions, the lowest since the pandemic started (506M in Q1, 761M in Q2); SF reported Q3 EPS $1.59 (+6% YoY) on sales $883.3M (+7.5% YoY); NYCB reported Q3 EPS 23c on revs $281.9M, both in-line with expectations; RNST posted Q3 EPS 53c on revs $106.29 (missing est $168.7M) and announced it will buy back up to $50M of its stock; PB Q3 EPS $1.40 on $293M top estimates, and they increase their quarterly dividend to 49c from 46c per share; JPMorgan downgraded FBK to Underweight from Neutral, saying looming mortgage headwinds, such as longer-term rates potentially creeping higher, will exert downward pressure on pre-tax pre-provision income

·     Insurance; AFL posted Q3 EPS and sales above views and said it sees potential for modest sales improvement for the rest of the year, depending on the pace of economic recovery; CB Q3 core EPS $2.00 vs. est. $2.12, 3Q net premiums written $9.08 billion, +5.3% YoY, 3Q book value per share $124.98 vs. $120.33 YoY, 3Q property & casualty combined ratio 95.2% vs. 90.2% YoY and 3Q net premiums earned $8.77 billion, +5.3% YoY; MAX 9.25M share IPO priced at $19.00; UNM Q3 adjusted EPS $1.21 vs. est. $1.32 on in-line revs of $3B; RNR reported Q3 operating loss per share of ($2.64), wider than estimated ($2.36) loss, though revs $1.33B topped $1.27B estimate, and Net Income available per share 94c ($47.8M total); THG posted Q3 EPS $2.46 on rev $1.25B, and Net Income per shares of $3.13, and has entered into an accelerated $100M share buyback program; MKL reported Q3 EPS $31.03 on total operating rev $2.91B, both besting consensus expectations as the company reported a combined ration of 97%, posting an underwriting profit despite catastrophe loss and increases to reserved related to Covid

·     Consumer Finance; MA falls as Q3 adjusted eps $1.60 vs. $2.15 y/y, missing estimated $1.65 on net revenue $3.8B (-15% y/y), also missing estimate $3.96B, though Q3 purchase volume +2% to $1.24T, beating est. $1.11T; Dow component Visa (V) to report earnings tonight, and announces it has acquired YellowPepper, a Latin American FinTech company, while the WSJ reports yesterday afternoon that its proposed $5.3B acquisition of Plaid is facing increased scrutiny by the DOJ who could decide to block the deal on antitrust concerns soon; FISV delivered strong 3Q results, and the company also increased its ’20 guidance, driven by revenue outperformance in Merchant Acceptance ($1.46B); SC Q3 EPS $1.58 and rev $2.03B beat ests $0.52 and $1.96B

·     Services; ADP outperforms as Q1 revenue fell slightly while its profit increased from the comparable quarter a year prior and expects adjusted year earnings to be down 3% to 7% an improvement from July when it expected adjusted earnings to fall between 13% and 18%; CME reported Q3 adj eps $1.38 on revs $1.08B, both slightly missing ests ($1.41 on $1.1B rev); CSGP and a private equity consortium led by Warburg Pincus and GTCR are among the bidders seeking to acquire U.S. property data and analytics company CLGX https://bit.ly/3e6k6Eu

·     REITs; EGP raises FY20 FFO view to $5.33-$5.37 from $5.23-$5.33 and ups same PNOI growth on a cash basis to up 2.5%-3.5% from 2.0%-3.0%; EQR normalized FFO/shr $0.77 vs. est. $0.82, NOI -8.4% on same-store basis; GLPI reported Q3 FFO 89c on revs $307.6M, both increasing from Q3 2019 (87c, $287.6M) and will purchase the property assets of the Tropicana Evansville from Caesar’s for $340M; BXP reported Q3 results that slipped from 2019 as FFO was $1.57 vs $1.64 YoY, Net Income was 58c per share vs 70c in 2019, and rev fell to $693.3M from $743.6M, and the company reported a 6c per share charge to rev related to write-offs of tenants in retail, fitness, and entertainment amid the pandemic, and the company collected 99% of rent from office tenants and 97% from retail tenants in the quarter; FCPT Q3 FFO 38c per share and EPS 27c on revs $43M and reported receiving 99% of bas rent; Berenberg initiates Buy ratings on REXR ($56 pt), PLYM ($15 pt), MNR ($17 pt), TRNO ($70 pt)

Healthcare

·     Biotech/Pharma movers; group weak yesterday after LLY earnings miss and disappointing vaccine trial news; AZN and collaboration partner Daiichi Sankyo announced FDA acceptance of a supplemental marketing application seeking approval to use Enhertu to treat HER2-positive metastatic gastric or gastroesophageal junction adenocarcinoma; MRTX 4.33M share Secondary priced at $202.00; ALLK files to sell $250M in common stock and sees Q3 net loss of ($50M) to ($40M) vs. ($21.7M) last year; RGEN announced that it has entered into a definitive agreement to acquire privately-held ARTeSYN BioSolutions for approximately $200M

·     Healthcare services and providers; in managed care, ANTM Q3 beat $4.20 on $30.65B vs. consensus $4.12 on $29.86B as benefit expense ratio in line at 86.8% and still sees FY adj EPS above $22.30 vs. consensus $22.48 possibly due to conservatism around the election; in hospitals, CYH shares rose as reported 3Q20 results that topped expectations with revenues of $3.126B (Street: $2.91B) and adj. EBITDA of $431M (Street: $432M) as margins expanded 180 bp y/y to 13.8%; OMCL reported Q3 ahead of expectations as benefited from its customers resuming implementations that were previously delayed, as well as new customer wins and bookings

·     MedTech and Equipment; BSX Q3 EPS beat 37c vs 25c (includes -4c impact from WATCHMAN offset by 6c tax benefit) on slightly better revs $2.66B vs $2.52B as organic growth -5.7% vs. estimates -6.6%, margins better 69.2% vs street 67.9% but issues no guidance; MASI 3Q result ended up at the high end of its pre, growing 21% with sensor growth recovering to +6% (-8% last q). Looking forward, it expects 80k boards in 4Q and noted board placements in ’21 could go back to 60k/qtr or better; DXCM Revenue was above Street estimates and total volume growth was about ~40% y/y while FY’20 guidance ticked up on all fronts

Industrials & Materials

·     Industrial & Machinery; GE rises as unexpectedly reported a quarterly profit and a positive cash flow on the back of cost cuts and improvements in its power and renewable energy businesses – said expects industrial free cash flow to be at least $2.5B in Q4 and positive in 2021; MSM upgrade to Market Perform at Raymond James following a 4Q beat and given a now more balanced risk/reward profile

·     Transports; sector slammed on travel restriction concerns as some European countries institute lockdowns to slow the spread of the virus, with airlines among the hardest hit (AAL, DAL, UAL, JBLU); UPS posts Q3 profit above Street expectations, helped by a surge in home deliveries due to the COVID-19 pandemic as Q3 revs rise about 16% to $21.24B topping views; HA with a miss driven by weaker topline; CHRW posted an EPS beat but primarily on a lower than expected tax rate while net revenue of $589M (-7% y/y) was below consensus of $611M and Q3 net revenue margin of 13.9% (-250bps y/y) contracted for a fourth consecutive quarter

·     Aerospace & Defense; BA Q3 revenue $14.14B topped the $13.84B estimate (but was down -29% YoY) with a smaller Q3 core EPS loss of ($1.39) vs. est. loss ($2.08); RTX falls after disclosure of criminal subpoena from DOJ; GD Q3 revenue of $9.43B fell short of the $9.6B estimate and was down more than 3% YoY while Q3 operating margin 11.5% vs. 12.5% YoY

Technology, Media & Telecom

·     Internet; AKAM reported a robust third quarter, revenue grew 11% and EPS 19%, the second strong quarter in a row, but shares fell on mixed guidance; internet space in focus as on Wednesday GOOGL CEO Sundar Pichai, FB CEO Mark Zuckerberg, and TWTR CEO Jack Dorsey testified before the Senate Commerce Committee on Section 230 of the Communications Decency Act, which gives websites that host user-generated content broad protection from legal liability for content posted on their sites.

·     Semiconductors; LSCC posted a beat and raise quarter as revenue and EPS was driven by a recovery in Industrial & Automotive and Licensing revenue offset by weaker Communications & Compute and Consumer; MXIM reported 1Q sales/EPS of $619M/$0.72 handily exceeding consensus $546M/$0.59. F1Q sales increased 14% Q/Q (+16% Y/Y) with notable Q/Q strength in automotive (+34% Q/Q); AMD upgraded to Overweight from Equal Weight at Barclay’s and tgt raised to $100 from $85 after strong quarterly earnings this morning, comparing AMD’s earnings with INTC’s last week, calling AMD’s results materially better and Intel’s weak; Reuters reported a U.S. appeals court handed a victory to QCOM, declining to reconsider an August decision that dismissed the U.S. Federal Trade Commission’s antitrust case against the chipmaker.

·     Software movers; MSFT Q1 results topped ests on the top and bottom lines with $31.7B in revenue (+12% Y/Y) and $1.82 EPS as Productivity and Business Processes rose 11% YoY to $12.32B. Intelligent Cloud, up 20% to $12.99B and More Personal Computing, up 6% to $11.85B; FEYE posted Q3 results with all-time records for revenue and EPS, which came in at $238M (+5% Y/Y) and $0.11, respectively, while ARR was up 6% Y/Y to $612M and guided Q4 revs of $237-241M vs. est. $236.59M; SWI delivered a good quarter with headline revenue/EPS of $261.3M/$0.28 vs. consensus at $256.6M/$0.24 and additionally, adjusted EBITDA and FCF both exceeded consensus at $132.7M vs. $120.4M and $108.2M vs. $90.3M, respectively; PPD revs ahead of already revised expectations $1.23B vs cons $1.14B while EPS of $0.30 came below $0.35 vs $0.32 due to higher tax rate and share counts

·     Hardware & Component news; JNPR 3Q20 results were slightly above expectations as SP growth, enterprise resiliency, and routing demand offset weaker cloud and switching/security declines;