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US Markets Debrief for the 8th of August 2019

Stocks reclaim opening losses

The stock market staged a big reversal on Wednesday in which the S&P 500 increased 0.1% after being down as much as 2.0% shortly after the open. A steep drop in U.S. Treasury yields contributed to the early sell-off, but selling pressure was abated soon after yields stabilized. 

The Nasdaq Composite (+0.4%) also finished higher after beginning sharply lower, while the Dow Jones Industrial Average (-0.1%) and Russell 2000 (-0.1%) finished just below their flat lines.

Treasury yields have been on a steady decline since November, but a sharp acceleration that further flattened the yield curve today was startling to see. Investors piled into the safe-haven asset amid familiar growth concerns and expectations that global central banks will continue to lower rates. 

Central banks from New Zealand, India, and Thailand cut interest rates sharper than expected on Wednesday with New Zealand’s RBZN Governor indicating that rates may go negative. Negative rates around the world has been a phenomenon that has presumably increased interest in U.S. Treasuries. 

Nevertheless, much like Tuesday’s session, initial gloom and doom quickly turned into an opportunistic mindset throughout the day. Six of the 11 S&P 500 sectors finished in the green, led by solid gains in the materials (+1.3%), consumer staples (+1.2%), and real estate (+0.9%) sectors. 

On the downside, the financials sector (-1.2%) underperformed amid some yield-curve flattening, which isn’t too conducive for lending activity should it continue. The energy sector (-0.8%) fell alongside oil prices ($51.14/bbl, -$2.70, -5.0%) that were pressured by bearish inventory data and growth concerns.

The 2-yr yield finished three basis points lower at 1.58% after touching 1.53% at its low, and the 10-yr yield finished six basis points lower at 1.68% after touching 1.61% at its low. The U.S. Dollar Index finished flat at 97.62. Low rates and growth concerns continued to boost gold ($1505.9/oz, +$33.30, +2.3%), which at one point today provided investors a higher return than the S&P 500 this year. 

In earnings news, Dow component Walt Disney (DIS 134.86, -7.01, -4.9%) fell nearly 5% after it missed top and bottom-line estimates. CVS Health (CVS 58.12, +4.03, +7.5%) and Match Group (MTCH 91.77, +17.86, +24.2%) climbed on positive results and guidance. 

Reviewing Wednesday’s economic data, which included the Consumer Credit report for June and the weekly MBA Mortgage Applications Index:

  • Consumer credit increased by $14.6 bln in June (Briefing.com consensus $16.5 bln) after increasing a revised $17.8 bln (from $17.1 bln) in May.
    • The key takeaway from the report is that the June increase in consumer credit was driven entirely by growth in nonrevolving credit, like auto and student loans. This marks a return to a dynamic that was seen earlier this year.
  • The weekly MBA Mortgage Applications Index increased 5.3% following a 1.4% decline in the prior week.

Looking ahead, investors will receive the weekly Initial and Continuing Claims report and Wholesale Inventories for June on Thursday.

  • Nasdaq Composite +18.5% YTD
  • S&P 500 +15.0% YTD
  • Dow Jones Industrial Average +11.5% YTD
  • Russell 2000 +11.3% YTD

Overseas: 

  • Europe: DAX +0.7%, FTSE +0.4%, CAC +0.6%
  • Asia: Nikkei -0.3%, Hang Seng +0.1%, Shanghai -0.3%

Commodities: 

  • Crude Oil -2.55 @ 51.22
  • Nat Gas -0.04 @ 2.08
  • Gold +32.10 @ 1516.10
  • Silver +0.74 @ 17.19
  • Copper +0.01 @ 2.57

Spotlight Issue: JELD-WEN’s shaky earnings report provides a window into health of housing market

As a manufacturer of doors and windows primarily for residential construction and repair and remodeling projects (90% of total revenue), JELD-WEN (JELD) is a good gauge for the health of the housing market and consumer confidence.

Therefore, JELD’s weak Q2 results and reduced FY19 guidance offer a key data point indicating that all is not well in the housing market. This is despite efforts by the Federal Reserve to keep interest rates low.

The company’s disappointing results are also in sync with peer Masonite Intl. (DOOR) which posted downside Q2 results and lowered its FY19 forecast on August 5.

For the quarter, JELD generated EPS of $0.45 vs. the $0.51 consensus. Revenue fell by 4.6% yr/yr to $1.12 bln, also coming up short of the $1.16 bln expectation.

Due to a pronounced deterioration in its “Australasia” market (13% of revenue) and softer-than-expected demand in North America (62% of revenue), the company cut its FY19 revenue growth guidance to flat from +1-5%. Adjusted EBITDA is now expected to be $450-480 mln compared to its prior outlook of $475-505 mln..On the positive side, the company’s productivity and footprint rationalization initiatives did help offset some of the weakness caused by lower sales volume. These actions included closing several facilities while improving efficiency by leveraging acquired assets such as American Building Supply, which was added in April of 2018.

Along with pricing benefits, JELD’s footprint rationalization plan pushed Adjusted EBITDA higher by 130 bps to 13.1%.

Unfortunately, that’s where the good news ends.

During the earnings call this morning, CEO Gary Michel was quite cautious regarding business expectations for the remainder of the year.

Specifically, he stated that the housing market in Australia is pulling back faster than anticipated. This is evidenced by the fact that the Australia Housing Industry Association is forecasting a 17% decline in home construction for 2019 compared to the prior expectation for an 11% drop.

Mr. Michel’s outlook for the North American market isn’t much rosier. June housing permits fell by 6.6% yr/yr in June, and he commented that there are no clear signs yet for a meaningful acceleration in 2H19.

Key Takeaways: Following DOOR’s weak quarterly report last week, JELD’s disappointing results provide further evidence that not only is the domestic housing market soft, but so too is the global market. This is despite efforts from central bankers to keep currencies and interest rates low.

It would be an overstatement to say that business conditions are disastrous, but the fact that the environment isn’t improving in the face of low rates and a strong labor market is a bit concerning.

News Summary:

  • Earnings/Guidance:
    • ADT (ADT) misses by $0.18, beats on revs; raises FY19 revs guidance, still in-line with consensus
    • Beacon Roofing Supply (BECN) misses by $0.33, misses on revs; cuts outlook
    • Capri Holdings (CPRI) beats by $0.05, misses on revs; guides Q2 EPS in-line, revs below consensus; reaffirms FY20 EPS guidance, guides FY20 revs below consensus
    • CVS Health (CVS) beats by $0.20, beats on revs; guides Q3 EPS in-line; raises FY19 EPS above consensus
    • CyberArk (CYBR) beats by $0.12, beats on revs; guides Q3 EPS, revs above consensus; raises FY19 guidance
    • Frontier Communications (FTR) reports Q2 (Jun) results, revs in-line; reduces FY19 adj EBITDA guidance
    • Guardant Health (GH) beats by $0.22, beats on revs; raises FY19 revs guidance
    • Hertz Global (HTZ) beats by $0.24, beats on revs
    • HubSpot (HUBS) beats by $0.12, beats on revs; guides Q3 EPS in-line, revs in-line; guides FY19 EPS above consensus, revs above consensus
    • Lending Club (LC) beats by $0.09, reports revs in-line; guides Q3 EPS above consensus, revs in-line; reaffirms FY19 revs guidance; improves profit outlook
    • Lumber Liquidators (LL) misses by $0.03, misses on revs; cuts FY19 outlook
    • Match Group (MTCH) reports EPS in-line, beats on revs and Tinder subs; guides Q3 revs above consensus; raises FY19 EBITDA, revenue, Tinder sub forecast
    • New Relic (NEWR) beats by $0.11, reports revs in-line; issues mixed Q2 guidance; guides FY20 EPS in-line, reaffirms FY20 revs guidance
    • Nu Skin (NUS) reports EPS in-line, revs in-line; guides Q3 EPS in-line, revs below consensus; guides FY19 EPS in-line, revs in-line
    • Papa John’s (PZZA) misses by $0.02, beats on revs; reaffirms FY19 EPS guidance
    • Planet Fitness (PLNT) beats by $0.04, beats on revs; guides FY19 EPS in-line, revs above consensus
    • Potbelly (PBPB) misses by $0.08, reports revs in-line, guides for flat to low-single digit decrease in company-operated comparable store sales for FY19
    • SailPoint (SAIL) beats by $0.04, beats on revs; guides Q3 EPS below consensus, revs in-line; guides FY19 EPS below consensus, revs in-line
    • SolarEdge Technologies (SEDG) beats by $0.11, beats on revs; guides Q3 revs above consensus
    • ShotSpotter (SSTI) beats by $0.03, misses on revs; guides FY19 revs below consensus
    • Teva Pharma (TEVA) beats by $0.02, beats on revs; reaffirms FY19 guidance
    • Walt Disney (DIS) misses by $0.39, misses on revs
    • WW (WW) beats by $0.13, misses on revs; guides FY19 EPS above consensus, revs in-line
    • Wynn Resorts (WYNN) beats by $0.05, beats on revs
    • ZAGG (ZAGG) reports EPS in-line, beats on revs; lowers FY19 guidance; to consider strategic alternatives to maximize shareholder value; announces restructuring
  • General News:
    • QEP Resources (QEP) enters into cooperation agreement with 4.9% shareholder Elliott Management
      Subway unveils new culinary innovation partnership with Beyond Meat (BYND) to test exclusive plant-based protein options
    • Tesla (TSLA) said mulling a China price increase in September, according to Reuters
    • Teva Pharma (TEVA) CFO Michael McClellan steps down

Notable Ratings Changes:

  • Upgrades:
    • Electronic Arts (EA) upgraded to Buy from Neutral at Ladenburg Thalmann
    • WW (WW) upgraded to Buy from Neutral at B.Riley FBR and upgraded to Buy from Underperform at BofA/Merrill
    • Dunkin (DNKN) upgraded to Buy from Hold at Argus; tgt $92
    • Arconic (ARNC) upgraded to Overweight from Equal Weight at Barclays; tgt to $31 from $20
  • Downgrades:
    • Teva Pharma (TEVA) downgraded to In-Line from Outperform at Evercore ISI
    • Aramark (ARMK) downgraded to Hold from Buy at Stifel and downgraded to Neutral from Outperform at Baird; tgt $36
    • Quotient (QUOT) downgraded to Neutral from Buy at Doughtery & Co, downgraded to Outperform from Strong Buy at First Analysis, and downgraded to Underperform from Buy at BofA/Merrill
    • ShotSpotter (SSTI) downgraded to Market Perform from Outperform at William Blair
    • Mosaic (MOS) downgraded to Neutral from Sector Outperform at CIBC
  • Others:
    • Dropbox (DBX) initiated with an Underperform at Bernstein; tgt $19
    • Red Robin Gourmet (RRGB) reiterated with a Buy at Maxim Group; tgt to $44 from $49
    • Vodafone (VOD) resumed with an Overweight at Morgan Stanley

Upcoming Events:

  • Econ Data (Thursday):
    • 8:30 ET: Initial Claims for week ended August 3 (Briefing.com consensus 213,000; Prior 215,000) and Continuing Claims for week ended July 27 (Prior 1.699 mln)
    • 10:00 ET: Wholesale Inventories for June (Briefing.com consensus 0.2%; Prior 0.4%)
    • 10:30 ET: EIA Natural Gas Inventories for week ended August 3 (Prior +65 bcf)
  • Earnings:
    • Monday (Aug 5)
      • Pre-Market: ATRO CARS CYOU KMPR L TA TSN
      • After-Hours: APLE CAR BKD CBT CZR CBPO COHU CXW PLOW DCO FRPT HIIQ PODD ITRI KLAC RAMP MAR O SHAK SWAV SNCR TTWO THC WWD
    • Tuesday (Aug 6)
      • Pre-Market: AFI BHC BDX APRN CRCM CHK CHH DF DISCA DUK ERI ENR HSIC JLL LGIH MNK MGP EYE PAYS PLUG SEAS SSTK FLOW VRTV VG WBT WLK ZTS
      • After-Hours:  ADT BNFT SCOR DVN FANG DXPE EVH STAY FTR LOPE HTZ HUBS JAZZ LRN KAR KRNT LC MTCH MAXR MODN PZZA PLNT PLYA PBPB QUOT SEDG TROX DIS WYNN ZAGG
    • Wednesday (Aug 7)
      • Pre-Market:  ATHM GOLF CPRI FUN CORE CVS CYBR LL MIDD NYT SBGI SPB SGRY TEVA VER WEN WWW
      • After-Hours: ANGI AAOI AZPN BKNG CABO CWH CVNA CTL DAR ENV FRGI FLO FOSL IAC JACK KRO LYFT MELI NTRA NUAN PTLA QTWO RCII ROKU SFLY SWKS STMP UPLD ZG
    • Thursday (Aug 8)
      • Pre-Market: AZUL CAH ECOM COMM CRON CRON HIMX IBP LITE MGA MMS MUR NCLH PRTY PRGO RLGY REZI SUP THR USPH VIAB VSTO
      • After the close: ATVI ALRM APPN CHUY CBS ELY EPAY FTCH FNKO MTW NVRO NWSA OSTK PCTY PRAA PUMP PBYI QDEL SIEN SYNA TTD TRUE UBER VSAT WPRT YELP
    • Friday (Aug 9)
      • Pre-Market:  CLNY DPLO HPT SSP TRCO USCR YRCW
      • After-Hours:  None
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