Mid-Morning Look

Wednesday, March 04, 2020

U.S. equities with a strong start to the day, attempting to erase most of yesterday’s declines, led by a rebound in healthcare related stocks (UNH, ANTM, CI) after results from Super Tuesday Democratic elections pointed to strength for Joe Biden, beating out Bernie Sanders who is seen as disruptive to the healthcare industry (Sanders not seen as positive for the market overall – so Biden leading also helping broader stocks). While U.S. stocks start the day higher, Treasury prices extend gains after the 10-year yield touched record lows again on Tuesday of 0.9%, as the yield holds below 1%. Stocks failed to rally Tuesday after the Fed’s 50bps cut wasn’t followed by other Group of Seven nations with rate cuts or fiscal stimulus in the face of the virus’s growing threat to the global economy.

Former Vice President Joe Biden picked up wins across the South and dealt a blow to Senator Elizabeth Warren after winning her home state of Mass. while Senator Bernie Sanders picked up California, the state with the most delegates. Overall, Biden scored a commanding nine-state victory in the Super Tuesday Democratic primary, a solid showing vs. Senator Bernie Sanders, as he now leads in the delegate count (Biden 453 to 382 for Sanders, with Warren at 50 and Bloomberg 44). This morning, Michael Bloomberg suspended his campaign following weak results overnight and said he is backing Joe Biden going forward.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar looks to rebound after falling sharply yesterday on the Fed rate cut, paring some losses; the yield on the 10-year Treasury falls 2 bps to 0.978% while gold prices are little changed after surging over 3% yesterday for its biggest one day gain in over a year. Oil prices gained as Saudi Arabia, other OPEC members in talks with Russia to join in cutting crude production by ~1 million barrels per day to offset a hit to prices from coronavirus outbreak

Economic Data

·     Private payroll firm ADP said that U.S. firms added 183K jobs in February, topping the est. 170K while January was revised by -82K to 209K from 291K as reported last month.

·     Markit US Services PMI Feb-Final 49.4, in-line with est. and prior flash reading and Markit Composite PMI reported at 49.6 (same as flash reading as well)

·     ISM non-manufacturing data (services) reported at 57.3, topping the 54.8 estimate and up from 55.8 in the prior month; New orders rose to 63.1 vs 56.2 in prior month (best index since June 2018), while employment rose to 55.6 vs 53.1 prior; prices paid fell to 50.8 vs 55.5 MoM

Sector Movers Today

·     Retailers; JWN shares slumped after Q4 earnings missed ests ($1.23 vs. est. $1.47) and forecasts FY adj EPS $3.25-3.50 below est. $3.49 on net sales +1.5-2.5%, prompting a downgrade at Barclay’s to underweight citing a rising shift to online shopping; ROST shares slip on weaker Q1 guidance as sees Q1 EPS $1.16-1.21 below est. $1.24 after a Q4 EPS and comp sales beat; URBN another weak component in retail as Q4 EPS of 50c missed by 13c on weaker gross margins (28.5% vs. 33% YoY and estimate 30.4%); In firearm monthly data (AOBC, RGR, SPWH), NICS background checks rose to 2,802,467 in Feb ’20 from 2,702,702 in January and up from 2,053,886 YoY; toy retailer MAT upgraded at KeyBanc to overweight, more confident in the LT trajectory of the business, underpinned by a transition back onto offense as the turnaround matures; in discount stores, DLTR mixed Q4 as EPS beat/sales miss with lower Q1 guidance but year outlook was above estimates; ANF a bright spot after Q4 top/bottom line beat

·     Housing & Building Products; HD was upgraded to buy at Nomura/Instinet with $251 tgt as the recent market volatility, along with movements in rates, makes for a more rewarding entry point and firm sees several fundamental factors moving in the right direction for Home Depot; BLD and IBP upgraded to buy at SunTrust as virus fears have pushed Treasuries to all-time lows and should enhance the homebuilding cycle; TOL was added to best ideas list at Wedbush after pullback in shares; positive news for homebuilders as MBA mortgage applications index rose 15.1% in week ended Feb. 28 after rising 1.5% in prior week while refi’s increased 26% to highest level since May 2013, after falling 0.8% in prior week as mortgage rates tumbled)

·     Pharma movers; managed care names surging (UNH, CI, CNC, HUM, CVS, ANTM) following the Super Tuesday Democratic election results as Biden’s victory over Sanders seen as big win for industry (Sanders has pledge to provide universal healthcare for all Americans which could potentially lead to an extensive overhaul to the existing health insurance system); Takeda said overnight it is working on a coronavirus drug, joining GILD and ABBV as the latest drugmaker to work on developing a coronavirus vaccine; ZGNX 8.52M share secondary priced at $23.50 per share; in cannabis sector, CRON upgraded to buy at MKM Partners, taking advantage of broad market concerns and weakness related to 10K filing uncertainty

·     Industrial & Machinery; heavy duty trucks active (CMI, PCAR, NAV) after ACT estimates February Class 8 orders were 14,100 units which was below the Wells Fargo 17,500 midpoint of channel check based 16,000-19,000 estimate range/also NAV posted a wider than expected Q4 EPS loss on better revs and its board said it is also carefully reviewing an unsolicited proposal from its alliance partner TRATON regarding a potential transaction to acquire the company

·     Waste services; UBS upgraded shares of ECOL, RSG and WM to buy from neutral as see the Municipal Solid Waste (MSW) space as attractive to ride out the near-term market volatility/says WCN is their top idea and expect FCF/sh growth of 13.7% 2020-24 driven by balance sheet funded M&A with opportunity to participate in WM/ADSW merger disposals a potential catalyst

Stock GAINERS

·     AMBA ; reported in-line F4 results and provided F1Q21 revenue guidance above estimates driven by strong demand in Home Security Cameras while continues to see solid traction with its CV SoCs and expects CV revenue will contribute ~10% of total FY21 revenue

·     CPB +7%; on improved 2020 EPS outlook after reports organic net sales growth of 1% in Q2, driven by gains in Snacks boosted its adjusted EPS: $2.55 to $2.60 from previous guidance of $2.50 to $2.55

·     INO +10%; as Stifel said the company’s development of a MERS-targeting vaccine, a COVID-19-related virus, provides leverageable experience for its COVID-19 drug candidate

·     UNH +9%; as all managed care names surging following the Super Tuesday Democratic election results as Biden’s victor over Sanders seen as big win for industry (Sanders has pledge to provide universal healthcare for all Americans which could potentially lead to an extensive overhaul)

·     VIR +11%; and ALNY to expand collaboration for the development and commercialization of RNAi therapeutics to treat coronavirus/companies to develop up to six novel RNAi to treat infectious diseases

Stock LAGGARDS

·     BF -3%; cut its underlying net sales forecast for the full year as now sees sales +3%, down from prior view of up 5%-7% and lowers year EPS $1.75 to $1.80, saw $1.75 to $1.85

·     CDLX -35%; downgraded at Craig Hallum to hold and cut tgt to $70 from $100 after softer Q1 revenue guidance ($43.5M-$46.5M misses the $52.7M estimate)

·     HIIQ -10%; reported 4Qresults, which were essentially in line with its pre-release in mid-January while 2020 guidance was below consensus

·     HPE -8%; after Q4 revenue missed estimates $6.95B vs. est. $7.21B and cut its FY free cash flow $1.6 billion to $1.8 billion, down from prior view $1.9 billion to $2.1 billion

·     OMI -19%; shares decline after Q4 revs miss ($2.19B vs. est. $2.48B) and guides FY20 EPS 50c-60c below est. 76c

·     SAIA -5%; released QTD LTL operating data that implies a steeper than expected deceleration in LTL tonnage trends (in February LTL tonnage per workday was +0.4% yoy while January trends were +7.7% yoy, averaging below Deutsche Bank 1Q20 estimate of +5.0%)