Mid-Morning Look

Friday, February 07, 2020

U.S. equities pulling back as major averages pause following stellar gains all week long, amid a bit of profit taking despite generally stronger jobs data (headline beat while unemployment ticked higher due to a rising labor participation rate and wages rose less than expected) and as the number of cases, and deaths continue to rise globally for the coronavirus. In addition to the general concern of the virus that has continued to spread, several companies over the last week have noted store closures in China that could impact further earnings/revs (MCD, SBUX, LK, VFC, among them as well as casinos impacted WYNN, MGM, MLCO, cruise lines RCL, CCL and airline impact (UAL, AAL, DAL). Overnight, China’s National Health Commission reported 31,161 confirmed cases in China, with 636 deaths. Singapore, which has the second-largest number of cases outside China, reported two new infections, including one with no apparent link to China. Another 41 people on a cruise liner off Japan tested positive for coronavirus, bringing the total confirmed from the ship to 61. China delayed trade figures for January due to the virus and said it would combine the data with next month’s release while the S&P revising its estimation of China’s GDP growth for 2020 from 5.7% before the outbreak to 5%. More than 300 S&P 500 companies have reported fourth-quarter results so far, of which about 70% have topped earnings estimates, according to IBES data from Refinitiv.

Economic Data

·     Jobs data very strong as the US economy added more jobs than forecast in January, as nonfarm payrolls rise 225K topping the 165K estimate and private payrolls 206K vs. est. 155K, while manufacturing jobs fell slightly more than anticipated (strong data confirms the big ADP private payroll report earlier this week). Unemployment ticks higher to 3.6% from 3.5% and wages rise 0.2% vs. est. up 0.3%. The U.S. labor force participation rate 63.4% vs. prior 63.2%

·     U.S. wholesale sales dropped -0.7% in December (vs. est. +0.1%), while inventories fell -0.2% (vs. est. and prelim figure down -0.1%), missing estimates on both fronts. Follow a downwardly revised 0.9% increase in November sales (was 1.5%), and a 0.1% gain in November inventories.

Treasuries, Currencies and Commodities

·     In currency markets, the U.S. dollar is overall little changed, as the euro tries to bounce back off 52-week lows and as safe-haven currencies rebound vs. the buck given the rising virus fears/impact. Commodity prices are mixed as precious metals inch higher while oil prices dip, on track for a fifth weekly loss as demand concerns grow in Asia and Europe. Treasury market’s rally as yields decline given the day’s rotation into safety trades (10-year yield to 1.58%)

Sector Movers Today

·     Retailers; footwear retailer SKX rises after posting better-than-expected quarterly sales, helped by increase in international sales while U.S. comp sales rose 9.9% (though guided Q1 EPS 70c-75c, below the 78c estimate); GOOS shares slide after lowering guidance, warning that the coronavirus outbreak is having a material negative impact on results (sees full-year revenue growth of +13.8% to +15.0% after originally guiding for +20% growth); HBI Q4 profit of $263M missed est. of $268M, while sales fell 1% to $1.75B, and constant-currency organic sales increased slightly (guidance for Q1 below views)/announces stocks buyback of up to 40M shares; VFC warned that it shuts 60% of China stores due to coronavirus impact; COLM downgraded at Pivotal after earnings as reported a 4Q19 sales and EPS beat, albeit the EPS beat was on tax, as EBIT came in below expectations, primarily due to a GM shortfall

·     Media & Telecom movers; VRTU rises after mixed results (EPS beat/revs miss) while mid-point of Q4 revenue guidance above views; VZ announced to buy back up to 100M shares; in media earnings, NWSA shares sump after Q2 revenue fell short of consensus while LGF jumps after its mixed results (revs top views while profit fell as expenses in the quarter rose around 23%); TMUS rises in Telco after quarter tops estimates with 1.9M total net additions in Q4 2019 and 7M in in 2019; Intelsat (I) downgraded to underweight at JPMorgan as see little to no fundamental equity value in shares given the details of FCC Chairman Pai’s C-Band proposal.

·     Casino & Leisure movers; WYNN shares fall following earnings and more selling pressure to stocks most affected from the coronavirus as more cases and deaths reported; cruise lines (RCL, CCL, NCLH) pressured after NJ Governor said CDC officials boarded a cruise ship docked in Bayonne this morning and screened 27 passengers who recently traveled from mainland China. After being assessed by the CDC, 23 of those passengers were cleared and four individuals are being evaluated at an area hospital.

·     Medical equipment and devices; BDX downgraded by three analysts (KeyBanc, Cowen, Raymond James) following results and as coronavirus impact, new tenders in China, and other headwinds (DCB) increase uncertainty; MYGN shares plunge over 30% overnight as reported Q2 loss vs. profit a year ago as cash collection issues hit its prenatal business, while its CEO and President Mark Capone resigned (posted Q2 revs $195.1M vs. est. $209.6M and below last year $216.8M); MTD was upgraded to neutral from sell at UBS and raise tgt to $786 after Q4 results. In services, Baird upgraded shares of distributors ABC, CAH and MCK to outperform from neutral acknowledging something of a contrarian call on an inflection in U.S. Distribution macro, company-specific self-help initiatives, and low valuation

·     Software movers; video gamer names active as ATVI rises following its better outlook while TTWO shares tumble after missing misses holiday qtr adjusted revenue est. amid competition from other big-budget titles from rivals (Q3 revs $888.2M below est. $922.1M) while also narrowed its full-year forecast range but still remains the consensus estimate; FTNT 4Q19 top line beat/raise, as revenue, product and billings all beat and were guided above consensus for 2020 though 2020 EBIT margin guide was 70 bps below the Street, impacted by recent acquisitions; ZEN posted a good 4Q, with reacceleration in bookings and RPO – beat 4Q billings w/ growth of 34% above Street of 31%/FY20 rev guidance of 30% was in-line w/ Street while operating income guide was below

Stock GAINERS

·     ABBV +3%; Q2 EPS beat narrowly with in-line revs of $8.7B and forecasts 2020 adj. profit above analysts’ estimates ($9.61-$9.71 vs. est. $9.48), as it sees sales of its new treatments for psoriasis and rheumatoid arthritis reaching $1.70B

·     FG +1%; to be acquired by Fidelity National (FNF) for $12.50 per share, representing an equity value of approximately $2.7B https://on.mktw.net/39ehMaF

·     NLOK +10%; as billings growth beat consensus and operating margins were stronger than expected; lowered its stranded costs estimate in conjunction with significantly raising its asset realization estimate as per Mizuho

·     NOV +9%; Q4 adjusted EBITDA totaled $288M, or 12.6% of sales, increasing from $262M in Q3 and $279M in the year-ago quarter, with sequential gains in all three of the company’s operating segments.

·     PINS +15%; after beating Q4 rev estimates, as it added more monthly active users and earned higher revenue per user/said monthly active users jumped 26% to 335M globally vs. est. 331M

·     SRCL +5%; as agreed to sell its Domestic Environmental Solutions business, ex: the healthcare customer and unused consumer pharmaceutical take-back services, to HSC for $462.5M

·     SYNA +19%; after a beat and raise quarter as for March quarter, guided to sales and GM of over $60MM and 200bps above street estimates (upgraded at JPMorgan – Needham ups tgt to $100)

·     UBER +8%; posted a smaller than expected loss but shares rallied further after saying it now expects to be profitable on adj. EBITDA basis by Q4 2020, ahead of its earlier target of FY 2021 (several analysts raise tgt prices post earnings)

Stock LAGGARDS

·     ACB -17%; announced its founder and CEO steps down while also saying it has cut about 500 jobs, including ~25% corporate positions and will bring down its year cap-ex spending

·     GOOS -5%; after lowering guidance, warning that the coronavirus outbreak is having a material negative impact on results (sees full-year revenue growth of +13.8% to +15.0% after originally guiding for +20% growth)

·     MRVL -5%; downgraded to underperform and cut tgt to $18 from $27 at Cowen as sees downside risks to investor expectations through CY2022 driven by “elongated 5G infrastructure spending and unbalanced 5G provider exposure”

·     MTW -15%; after posted Q4 sales $463.4M, below the $493M estimate while guiding its year sales $1.6B-$1.7B, missing the $1.73B estimate

·     MYGN -29%; as reported Q2 loss vs. profit a year ago as cash collection issues hit its prenatal business, while its CEO and President Mark Capone resigned (posted Q2 revs $195.1M vs. est. $209.6M and below last year $216.8M)

·     SGH -10%; after earlier announced $200M notes offering

·     TTWO -10%; missing misses holiday qtr revenue est. amid competition from other big-budget titles from rivals (Q3 revs $888.2M below est. $922.1M) while also narrowed its full-year forecast

·     ZGNX -31%; as reports its Phase 3 clinical trial of Fintepla, a treatment for childhood-onset epilepsy, met its primary objective, but missed its secondary endpoint