Mid-Morning Look

Thursday, April 23, 2020

The resiliency of U.S. stock markets has been incredible thus far, as equities are adding to yesterday’s strong gains, still looking to trade above earlier week highs as better than expected earnings results (still generally weak with limited guidance as expected due to COVID-19 impact) are helping lift sentiment. It was a month ago to the day that we hit bottom in markets – as the S&P 500 index is now up 25% from that low (2,191.86 on 3/23) and Vix in low 40’s level (off highs 85.47 3/18). Since then, stocks have been buoyed by Fed and government actions to stimulate the economy, taking rates back to zero essentially while buying all types of assets, flooding markets with liquidity and providing relief checks to individuals out of work and small business with loans to get by during this worldwide economic shutdown due to the COVID-19 pandemic. The U.S. House begins voting on two bills at 1:30 PM EST today, and the second vote will be on passage of the $484 billion interim relief package, according to guidance from leadership.

The first vote will be on establishing a House committee to oversee the coronavirus relief funds. President Trump was critical of Georgia Governor who planned on opening up businesses that were not approved in phase I of Federal guidelines, saying it may be too early. Markets are largely looking past record low economic data on a daily basis, on the assumption that the jobs data and manufacturing declines being witnessed will be “bottoms”.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar reverses overnight gains to trade near session lows vs. most currencies; the U.S. dollar had risen to a near 1-week high vs Japanese yen on Nikkei report that Bank of Japan considering increasing amount of commercial paper and corporate bond purchases. Commodity prices another risk on type of day, similar to Wednesday with gold prices jumping over 1.3% back near decade highs and oil prices recovering for a second day in a week of unprecedented volatility. WTI crude for June contract rises over $3.50, or 27% to $17.50 per barrel. Treasury market’s rally despite the bounce in stocks, as the 10-yr yield falls to 0.6%.

Economic Data

·     Weekly jobless claims mostly in-line at 4.427MM first time claims vs. est. 4.5M and continuing claims 15.976MM vs. est. 16.73MM; the 4-week average rose to 5,786,500 for week from 5,506,500 prior week (previous 5,508,500)

·     The IHS Markit composite index of purchasing managers plummeted 13.5 points to 27.4, the lowest in data back to 2009, the group reported Thursday. IHS Markit measures of U.S. orders, employment and exports all tanked in April. The group’s measure of future activity, a gauge of sentiment, contracted for the first time in data back to July 2012.

·     The IHS Markit gauge of services slid 12.8 points to 27 in April, the lowest in records back to October 2009. The index of manufacturing dropped to an 11-year low of 36.9.

·     March new home sales fell (-15.4%) to 627,000 annual rate, slightly below the 644K estimate; while prior month was revised down to 741K from 765K; the median new home price rose 3.5% y/y to $321,400; average selling price at $375,300

Sector Movers Today

·     Retailers; TGT shares fell despite saying comp-store sales rose more than 7% so far in Q1 and digital comparable sales has surged over 275% so far in April, but warns margins to drop by 5-percentage points in Q1 due to temporary wage increases of $2 an hour for store and distribution center workers as well as higher sales of low-margin products; GPS slides after company provides further impact from coronavirus, says existing cash may not be enough to fund operations/drew down their entire $500M revolver; WWW cut to neutral at Susquehanna saying post crisis, WWW’s wholesale business recovery will lag peers, in their view; mattress retailers rise with SNBR which posted Q1 EPS, revenue and comp store beats; CROX slides as expects a larger decline in Q2 revenue as majority of the stores may stay closed

·     Consumer Staples; SAM shares fall as reported 1Q EPS of $1.49 (-26% YoY), below consensus of $1.77 as delivered better-than-expected top-line growth, which was more than offset by weaker-than-expected profit margins; HSY posted a top/bottom line miss for Q1 and withdraws full-year outlook, says retail foot traffic has been volatile and consumer shopping, consumption behaviors are evolving/sales fall a whopping 46.7% in the reported quarter in China and gross margins fell 180 bps; GO 15M share secondary priced at $34.00; in research, food service distributors SYY, USFD, PFGC, CHEF were all downgraded at BMO Capital as have little conviction in the duration for the need for continued social distancing measures and we see risk that a return to “normal” takes much longer, which could pressure a return to restaurant spend/eating out

·     Transports; KNX reported a 1Q20 beat on earnings driven by solid Truckload performance (including solid expense control) while expects double digit decline to loaded miles for 2Q, but are constructive on the medium-to-long-term; LSTR EPS of $1.04 (-34% year/year) was below the consensus estimate/guidance of $1.10/$1.10-1.20, respectively with Q1 revenue of $928M (-10%) was shy of consensus’ $931M and toward the low end of $915M-$965M guidance; in rails, CSX beat on 1Q20 earnings driven by strong cost control measures but expect carload volume weakness in 2Q and 3Q; UNP withdraws views for shipping volume, headcount and operating ratio and is racing to cut costs as it foresees a 25% shipping volume decline in 2Q, but it won’t be enough to improve its operating ratio; RUSHA, XPO other movers on results/guidance

·     Semiconductors; XLNX forecasts Q1 revenue below estimates (sees Q1 revenue $660M-$720M vs. est. $738.84M), refrains from providing an annual outlook; STX reported better Q1 results in the hard-disk drive space but sees Q4 EPS $1.28, +/- 10% vs. est. $1.29 and guides Q4 revenue $2.6B, +/- 7%, vs. consensus $2.57B; in equipment space, LRCX reported Q1 revenue in-line with estimates but did not issue guidance, citing COVID-19 uncertainties but Q2 revs expected to rise

·     Software movers; CTXS warned a surge in Q1 demand driven by the pandemic could be offset in the 2H after reporting better earnings’ in research, JPMorgan reduces exposure to high multiple software stocks following an historically epic 25% oversold rally in the S&P 500 since March 23rd , which has lifted our basket of SMID-Cap growth software stocks to flat YTD – firm downgraded COUP, PAYC, CDAY to underweight and cut SMAR, TWLO to neutral; Credit Suisse upgraded PANW in the security sector while downgraded ZS on balanced risk/reward, while in general software, downgraded PAYC, SWI and CDAY

Stock GAINERS

·     EXPE +6%; said it is raising approximately $3.2B of new capital, consisting of a $1.2B private placement of perpetual preferred stock and approximately $2B in new debt financing as investment funds managed by affiliates of Apollo Global Management and Silver Lake are providing the equity investment

·     IMMU +22%; after the company’s Trodelvy breast-cancer drug received an early approval from the FDA/Piper raised tgt to $40 to reflect our lowered discount rate and new pricing assumptions

·     INO +11%; says the Coalition for Epidemic Preparedness Innovations had awarded co and the International Vaccine Institute $6.9M in funding for an early-stage trial of its potential coronavirus vaccine in South Korea

·     LLY +2%; hits record highs as reports 15.1% rise in Q1 sales, boosted by its top-selling diabetes drug, Trulicity, and as customers stockpiled medicines following stay-at-home orders

·     LVS +11%; reported better-than-expected 1Q Macau adj. EBITDA and also beat on margins on the back of solid cost controls while mgmt expects Macau to re-open to China citizens as early as May

·     SNBR +24%; posted Q1 EPS, revenue and comp store beats/ reduces 2020 planned capex to about $35M from $60M and suspends share repurchases for the year

Stock LAGGARDS

·     CROX -10%; slides as expects a larger decline in Q2 revenue as majority of the stores may stay closed

·     GPS ; after company provides further impact from coronavirus, says existing cash may not be enough to fund operations/drew down their entire $500M revolver (reverses higher)

·     IVZ -8%; after earnings and dividend cut to 15.5c from 31c with EPS of 34c missing the 51c estimate and AUM falling 14% QoQ

·     NTGR -17%; posted top and bottom line beat but shares fall on operating margins and with draws guidance for the year

·     TGT -3%; says digital comparable sales has surged over 275% so far in April, but warns margins to drop by 5-percentage points in Q1 due to temporary wage increases of $2 an hour for store and distribution center workers as well as higher sales of low-margin products

·     XLNX -4%; forecasts Q1 revenue below estimates (sees Q1 revenue $660M-$720M vs. est. $738.84M), refrains from providing an annual outlook