Mid-Morning Look

Friday, January 31, 2020

U.S. equities fading since the higher market open amid a broad based pullback that saw the Nasdaq Composite drop over 100-points from its intraday highs and the Dow Jones Industrial Average tumble over 350 points led by declines in XOM and CVX after the energy giants report disappointing earnings results. Of course, concerns over the coronavirus that originated in Wuhan China accelerating has also pressured market sentiment, especially into the weekend as numbers of those infected continues to climb (nearing 10,000). According to a report in the Lancet says a new modelling study estimates 75,800 individuals in the Chinese city of Wuhan may have been infected with 2019 novel coronavirus (2019-nCoV) as of January 25, 2020 – but authors caution that the true size of the epidemic remains unclear. The World Health Organization declared yesterday the coronavirus a public-health emergency of international concern, but stopped short of recommending restrictions on travel or trade. Also not helping sentiment was weaker manufacturing data as the Chicago PMI index dropped to its lowest level in over 4-years with a reading sub 43 (vs. est. about 49), though sentiment reading (UoM) came in just above preliminary reading and estimates. In other earnings, corporate news, AMZN shares jump after its better results, while Visa slips on rising expenses and CAT drops on a lower outlook.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar was broadly lower, adding to yesterday’s dip as weak manufacturing data pressured the buck vs. other currencies. Commodity prices are mixed with gold prices holding around 7-year highs, little changed just under the $1,590 an ounce level, while oil prices erase earlier gains, moving to 6-month lows on slowing demand fears given potential China virus outbreak impact. Treasury market’s rally as the yield on the benchmark 10-year falls another 4 bps to 1.53%, its lowest levels since mid-October on mixed economic data, a dovish Fed and a flight to safety given the pullback in stocks on coronavirus fears.

Economic Data

·     Chicago PMI for January a very weak reading at 42.9, below the economist est. 48.9, its worst reading since late 2015 pressuring sentiment

·     Personal Spending for December rose 0.3% MoM, in-line with estimates while personal income in December rose 0.2%, just below the 0.3% estimate; the savings rate at 7.6% in December vs 7.8% last month and down from 8.8% a year ago

·     Inflation data modestly higher as PCE prices rose 0.3% MoM for December, topping the est. 0.2% while rising 1.6% YoY and core prices rose 0.2% MoM, above the 0.1% est)

·     University of Michigan sentiment rose to 99.8, topping the est. of 99.1 (which was prelim reading as well) as the expectations index rose to 90.5 vs. 88.9 last month and the current economic conditions index fell to 114.4 vs. 115.5 last month

Sector Movers Today

·     Major oils and Dow components XOM and CVX both reported earnings: 1) CVX posted its biggest loss in a decade after it wrote down the value of North American natural gas fields and returns plunged from overseas refining and oil production/most of the Q4 loss from $10.4B in previously announced impairments (also saw profit fall from int’l downstream and upstream divisions); 2) XOM said its profit and revenue fell for Q4 though the results beat analysts’ expectations though results included $3.7B gain from the sale of upstream assets in Norway to Var Energi.

·     Consumer Staples; CL shares jumped amid a bounce in organic sales growth, rising over 5% YoY and strength in Latin American pricing up 3.5% offset a decline in pricing in the U.S. (better sales on in-line EPS); COTT to sell S&D Coffee and Tea to Westrock Coffee Company, LLC for $405M on a debt free and cash free basis; in tobacco, MO upgraded to overweight at Piper with $57 tgt as believe Altria can deliver 6% average EPS growth in 2020-21, driven by pricing, cost savings, buybacks and equity income; PM was added to the negative watch list at Citigroup as believe the 4Q results/guidance may be quite difficult and more importantly we expect PM to guide to slower growth in 2020, in terms of organic sales, margins and EPS; LK breaking below its 50-day MA support earlier of $35.73 as China virus fears take its toll (off record highs of $51.38 on 1/17)

·     Hardware & Component news; IBM shares very strong after CEO Ginni Rometty, who has held the position for 8 years said would step down while IBM’s current cloud business head Arvind Krishna will take over, effective April 6 (Krishna lead IBM’s $34B acquisition of Red Hat last year); in the EMS sector, FLEX shares rise after Q3 EPS and revs well above views as a result of continued growth in industrial segments, energy, automotive businesses and as well as continued progress on executing mix strategy; INVE negatively preannounced Q4 and lowered `20 guidance due to a variety of factors including pushouts, customer weakness, and headwinds from customers (expects net loss of $2.1M-$2.2M in quarter compared to a profit a year earlier)

·     Pharma movers; VRTX posted better-than-expected Q4 profit of $1.70 EPS, well above the $1.21 estimate helped by revenue from its cystic fibrosis drug Trikafta while saying it expects 2020 total products revenue of $5.1B-$5.3B ahead of the $4.9B estimate; GBT was downgraded to hold and lower tgt of $75 from $110 at SunTrust as see near and mid-term headwinds as the company enters the launch phase in earnest; SNDX entered into an agreement with five leading life sciences investors, for the purchase of common stock at $8.00 per share, for expected gross proceeds of ~$35M

·     Chemicals; SSL shares drop after saying that it expects to report a fall in its key earnings metrics for the 1H’20, blaming a weak economic environment – said EPS are expected to drop 68%-78% and Ebitda to fall between 22%-32%; CE shares slide as earnings and revenue fell, missing estimates while company also recorded over $100M in net other charges; LYB drops with weak Q4 amid broadly lower chemical margins as Q4 Ebitda fell -3.3% YoY to $1.17B below the $1.33B estimate while overall sales fell roughly 8% also missing estimates

Stock GAINERS

·     ADNT +30%; as agrees to sell its 30% stake in Yanfeng Global Automotive Interior Systems to Yanfeng Automotive Trim Systems for $379M, while posts solid Q1 EPS/revs beat

·     AMZN +9%; after Q4 results were well above consensus – revenue upside driven by strong holiday sales, AWS growth, and advertising strength, as well as operating income upside as Q4 net sales in North America jumped 21.6% to $53.67B topping the $52.2B

·     CHTR +4%; shares touch 52-week highs after Q4 profit and revenue topped estimates while saying it lost -101K pay TV subscribers

·     CL +7%; shares up amid a bounce in organic sales growth, rising over 5% YoY and strength in Latin American pricing up 3.5% offset a decline in pricing in the U.S. (better sales on in-line EPS)

·     DECK +10%; standout Q3 that saw Hoka grow an impressive 64% and drove upside to sales while UGG grew +2.6% globally and grew +8% domestically – beat for quarter and raised guidance

·     IBM +4%; after CEO Ginni Rometty, who has held the position for 8 years said would step down while IBM’s current cloud business head Arvind Krishna will take over, effective April 6 (Krishna lead IBM’s $34B acquisition of Red Hat last year)

·     NAV +54%; after Volkswagen’s Traton offered to acquire the rest of the company it doesn’t already own at a price of about $2.9B or $35 per share, in cash https://on.mktw.net/37FWAKo

Stock LAGGARDS

·     AMGN -4%; after issuing 2020 EPS guidance of $14.85-$15.60, below consensus estimate of $16.14 as Q4 product sales fell 2% to $5.88B

·     BZH -20%; falls after earnings and as Wedbush downgraded as believe BZH has some company specific issues that could be detrimental to our outlook over the next 3 to 4 quarters

·     CAT -2%; posted better Q4 EPS but guided 2020 EPS $8.50-$10.00 vs. est. $10.55 as sees global economic uncertainty pressuring sales/expects dealers to further cut inventories

·     EA -4%; reported Dec. quarter results slightly ahead of consensus driven by strong sales of Star Wars Jedi: Fallen Order, while FY20 EPS guidance was raised by more than the Dec. quarter beat, but remains below consensus

·     HON -2%; mixed Q4 results (EPS beat, sales miss) while guides year sales to $36.7B-$37.8B, below the $38.1B estimate and organic sales flat to up 3% for the year

·     INVE -20%; negatively preannounced Q4 and lowered `20 guidance due to a variety of factors including pushouts, customer weakness, and headwinds from customers

·     SSL -8%; after saying that it expects to report a fall in its key earnings metrics for the 1H’20, blaming a weak economic environment – said EPS are expected to drop 68%-78% and Ebitda to fall between 22%-32%

·     V -2%; reported F1Q20 adjusted EPS in-line with the Street but pretax income of $4.0B was ~$70M below the Street, mostly due to higher expenses while also reflecting greater than expected F/X headwinds

·     WWE -25%; after saying its co-presidents, George Barrios and Michelle Wilson, would depart after 10 years of service, prompting at least two analyst downgrades saying the abrupt nature of release suggests a tumultuous situation at the company