US Market Debrief for August 13th 2019

US Market Debrief for August 13th 2019

Market spots relief in tariff-reprieve headline

U.S. stocks rallied on Tuesday after the White House announced that it will delay the 10% tariff rate for some items imported from China, including cell phones and laptops, until Dec. 15. Apple (AAPL 208.97, +8.49, +4.2%) led the broad-based advance and contributed to the solid gains in the S&P 500 (+1.5%), Dow Jones Industrial Average (+1.5%), and Nasdaq Composite (+2.0%). The Russell 2000 increased 1.1%. 

Originally, the 10% tariff rate on $300 billion of mostly consumer goods was set to go into effect Sept. 1. Most products will still be taxed on that date, but the decision to delay some big-ticket items followed a “public comment and hearing process,” according to the USTR. Other items will also be removed from the tariff list based on “health, safety, and national security” factors.

President Trump told reporters he wanted to delay the tariffs so consumers would not be hurt during the Christmas shopping season and said he had a very productive call with China. On a related note, China’s Ministry of Commerce indicated that trade talks will resume over the phone within the next two weeks. 

In turn, the upbeat news contributed to gains in all 11 S&P 500 sectors and a 4% rally in oil prices ($57.04/bbl, +$2.23, +4.1%). Nine sectors advanced at least 1.0%, led by the information technology (+2.5%), consumer discretionary (+1.7%), and communication services (+1.5%) sectors. The Philadelphia Semiconductor Index climbed 3.0%.

Although structural trade issues remain, the news did serve as a temporary relief to the market that had been grappling with geopolitical uncertainty, growth concerns, weakness in global equities, and declining U.S. Treasury yields. 

For instance, prior to the tariff news, attention remained heavily centered on the Hong Kong protests that continued to escalate. Riot police confronted protesters at the city’s airport after flights were canceled for the second consecutive day on Tuesday.

Shorter-dated U.S. Treasuries sold off, driving yields higher in another curve-flattening trade. The 2-yr yield increased nine basis points to 1.67%, and the 10-yr yield increased four basis points to 1.68%. The general risk-on mood helped the market overlook the continued compression in yields. The U.S. Dollar Index advanced 0.5% to 97.82. 

Reviewing Tuesday’s economic data, which included the Consumer Price Index for July and the NFIB Small Business Optimism Index for July:

  • Total CPI increased 0.3% m/m in July, as expected, while core CPI, which excludes food and energy, also increased 0.3% (Briefing.com consensus 0.2%) for the second straight month. Those readings left total CPI up 1.8% yr/yr, versus 1.6% in June, and core CPI up 2.2% yr/yr, versus 2.1% in June.
    • The key takeaway from the report is that it muddles the monetary policy outlook. The year-over-year readings are not exactly “rate-cutting” material, but with everything else going on, the market will be left to conclude that another rate cut is likely since the Fed will want to ensure that everything else going on doesn’t lead to a caustic slide in inflation expectations.
  • The NFIB Small Business Optimism Index for July increased to 104.7 from 103.3 in June.

Looking ahead, investors will receive the weekly MBA Mortgage Applications Index, and Export and Import Prices for July on Wednesday.

  • Nasdaq Composite +20.8% YTD
  • S&P 500 +16.7% YTD
  • Dow Jones Industrial Average +12.6% YTD
  • Russell 2000 +12.0% YTD


  • Europe: DAX +0.6%, FTSE +0.3%, CAC +1.0%
  • Asia: Nikkei -1.1%, Hang Seng -2.1%, Shanghai -0.6%


  • Crude Oil +2.23 @ 57.04
  • Nat Gas +0.04 @ 2.15
  • Gold -2.00 @ 1503.00
  • Silver +0.27 @ 17.27
  • Copper +0.05 @ 2.62

Spotlight Issue: Covetrus has had a ‘ruff’ go of it

Covetrus (CVET 13.89, -9.30, -40.1%) came under heavy pressure today after reporting weak Q2 results this morning. The stock began trending lower almost immediately after it was spun off and has not let up. It seems today’s drop on Q2 earnings is the culmination of concerns built up among investors over the past several months.

Covetrus is an animal health company created in February 2019 by the spin-off of Henry Schein’s (HSIC) Animal Health business and CVET’s merger with Vets First Choice. It has a practice management software platform for veterinarian offices. It also offers prescription and appointment management capabilities along with inventory management and supply chain services for the vet market.

The company reported a Q2 loss of $0.09 per share, which may not be comparable to the S&P Capital IQ Consensus of $0.17; revenues fell 4.5% yr/yr to $1.01 bln versus the $1.06 bln S&P Capital IQ Consensus. Covetrus also updated certain elements of its fiscal year guidance, now seeing pro forma organic net sales growth in the low single-digits versus previous expectations for 3-5% growth and now expecting pro forma adjusted EBITDA of at least $200 mln versus its previously indicated range of $235-250 mln.

With the merger being so recent and with there being a number of moving parts, the financials are a bit difficult to interpret. However, it looks to be an EPS miss, and sales came up light as well.

Q2 was impacted by challenges in North America and the UK. On the call, CEO Benjamin Shaw explained, “In the U.S. we saw moderating traffic in veterinary practices and declining sales of veterinary products purchased and resold to their clients. We also saw unusual inventory activity in the UK related to Brexit.” At the same time, CVET has significantly accelerated some investments tied to the separation from Henry Schein and the build-out of infrastructure.

While CVET says it has made progress on a number of items since the February separation, Shaw says, “It is clear that a slowdown in the North American Animal Health market is undermining… transformation efforts. Slowing patient visits to the veterinary practice and increased competition has put incremental pressure on our in-office supply chain business in North America…. Our manufacturing partners are also reporting decelerating growth in the US in Q2, and market data of nearly 5,000 practices confirms [a decline].”

Bottom line, Covetrus has a lot on its plate. Not only is it dealing with its recent separation from Henry Schein, it’s also integrating the Vets First Choice business. This is a bad time for the North American market to weaken. But unfortunately, that’s what’s happening, and Covetrus is suffering from it.

Looking ahead, management seems pretty cautious on its 2H19 outlook. As such, we would be careful about buying on this dip. While we could look back at this in a few months as having been an attractive entry point, it probably makes more sense to wait until the company can show some progress in terms of the integration, and we’d like to see some vet market improvement.

News Summary:

  • Earnings/Guidance:
    • Advance Auto (AAP) misses by $0.21, misses on revs; lowers FY19 revs and comp guidance; Q2 comps flat; announced new $400 mln share repurchase authorization
    • Avaya Holdings (AVYA) reports Q3 (Jun) results, revs in-line; guides Q4 revs in-line; guides FY19 revs in-line; says long term forecast should no longer be relied upon
    • Bloom Energy (BE) beats by $0.06, beats on revs
    • Brinker (EAT) beats by $0.02, reports revs in-line; guides FY20 EPS above consensus, revs above consensus; Q4 comps +1.2%
    • Covetrus (CVET) reports Q2 (Jun) results, misses on revs; lowers sales guidance
    • Elanco Animal Health (ELAN) beats by $0.02, reports revs in-line; guides FY19 EPS in-line, revs in-line
    • GDS Holdings (GDS) beats by CNY0.78, beats on revs; raises FY19 revs guidance
    • IAA (IAA) beats by $0.05, beats on revs; reaffirms outlook
    • II-VI (IIVI) beats by $0.01, beats on revs; guides Q1 EPS below consensus, revs below consensus
    • JD.com (JD) beats by RMB 1.76, beats on revs; guides Q3 revs in-line (midpoint above consensus)
    • JetBlue Airways (JBLU) reports preliminary traffic results for July 2019; reiterates Q3 RASM outlook
  • General News:
    • USTR releases revised list of products subject to $300 bln in tariffs that begin September 1st; will delay tariffs on certain products including cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing until December 15th
    • Hong Kong Airport has suspended flights for a second consecutive day amid protests, according to Guardian; riot police confront protesters
    • President Trump tweets “Our Intelligence has informed us that the Chinese Government is moving troops to the Border with Hong Kong. Everyone should be calm and safe!”
    • PBOC spokesperson believes yuan is at an appropriate level and that disorderly capital flows are not likely, according to Reuters
    • Argentine President Mauricio Macri still believes he can get re-elected despite primary setback, according to Bloomberg
    • ADTRAN (ADTN) files to delay its 10-Q; working diligently on restating financial statements
    • Avaya Holdings (AV) says expects to conclude strategic alternatives process within the next 30 days
    • US Federal Court has ruled against American Airlines (AAL) mechanics union, according to Reuters
    • Barrick Gold (GOLD) is in talks with international investors to expand exploration and production, according to The Wall Street Journal
    • Boeing (BA) reports no new orders for the grounded 737 MAX for the fifth straight month
    • CBS (CBS) and Viacom (VIAB) confirm deal to merge — Each Viacom Class A voting/Class B non-voting share will convert into 0.59625 of a Class A voting/Class B non-voting share of CBS, respectively
    • Exxon (XOM) considering sale of British North Sea assets, according to Reuters
    • General Electric (GE) CEO H. Lawrence Culp, Jr. disclosed this morning the indirect purchase of about 331K shares worth about $3.0 mln (transaction date 8/12)
    • Shutterfly (SFLY) Chief Technology Officer Satish Menon to resign effective Sept 6
    • UPS (UPS) announces CFO succession plan – Richard Peretz to retire and Brian Newman appointed CFO
    • Yum! Brands (YUM) CEO Greg Creed to retire at the end of 2019; co names COO David Gibbs as replacement

Notable Ratings Changes:

  • Upgrades:
    • Barrick (GOLD) upgraded to Buy from Hold at Argus
    • CenterPoint (CNP) upgraded to Overweight from Equal Weight at Barclays; tgt lowered to $31
    • Chart Industries (GTLS) upgraded to Outperform from Mkt Perform at Raymond James; tgt $72
    • Exelon (EXC) upgraded to Overweight from Equal Weight at Barclays; tgt lowered to $52
    • PayPal (PYPL) upgraded to Neutral from Sell at Guggenheim
  • Downgrades:
    • Aptinyx (APTX) downgraded to Underweight from Neutral at JP Morgan
    • Emerson (EMR) downgraded to Hold from Buy at Argus
    • NextEra Energy (NEE) downgraded to Equal Weight from Overweight at Barclays; tgt $218
    • Royal Caribbean (RCL) downgraded to Hold from Buy at Argus
    • Southwest Air (LUV) downgraded to Hold from Buy at Argus
    • Xcel Energy (XEL) downgraded to Equal Weight from Overweight at Barclays; tgt $64
  • Others:
    • Advanced Micro (AMD) initiated with Hold at Loop Capital
    • Intel (INTC) initiated with Hold at Loop Capital
    • Medallia (MDLA):
      • initiated with an Outperform at William Blair
      • initiated with a Buy at BofA/Merrill Lynch; tgt $50
      • initiated with a Buy at SunTrust; tgt $47
      • initiated with a Neutral at Credit Suisse; tgt $40
      • initiated with an Outperform at Wells Fargo; tgt $45
      • initiated with an Outperform at Oppenheimer; tgt $55
      • initiated with a Buy at ROTH Capital; tgt $52
      • initiated with a Neutral at Citigroup; tgt $40
    • Occidental Petro (OXY) resumed with an Underweight at JP Morgan; tgt $50
    • Public Service (PEG) initiated with an Overweight at Barclays; tgt $63
    • Salesforce (CRM) initiated with a Buy at Compass Point; tgt $190
    • Sempra Energy (SRE) initiated with an Equal Weight at Barclays; tgt $142
    • Workday (WDAY) initiated with a Buy at Compass Point; tgt $238

Upcoming Events:

  • Econ Data (Wednesday):
    • 07:00 ET: MBA Mortgage Applications for week ending Aug. 10 (Prior 5.3%)
    • 08:30 ET: Export Price Index for July (Prior -0.7%)
    • 08:30 ET: Import Price Index for July (Prior -0.9%)
    • 10:30 ET: EIA Crude Oil Inventories for the week ending Aug. 10 (Prior +2.4M)
  • Earnings:
    • Monday (Aug 12)
      • Pre-Market: GOLD MDP SYY TSG
      • After-Hours: BE TME VFF
    • Tuesday (Aug 13)
    • Wednesday (Aug 14)
    • Thursday (Aug 15)
    • Friday (Aug 16)
      • Pre-Market: DE QD
      • After-Hours: None
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