Daily Markets: Coronavirus Beginning to Have Material Impact On Economy, Stocks

Today’s Big Picture

In yesterday's Daily Markets note, your authors shared that as equity markets looked to shrug off the mounting coronavirus news, our suspicion that we had yet to see the real fallout on economic growth and earnings expectations. It would seem we were correct in that thinking. Overnight economists updated their forecasts in an attempt to size up that potential economic impact, and it is weighing on global equities. With more than 7,700 people being infected by the virus and the World Health Organization saying the spread of the virus outside of China is a “grave concern,” one Chinese economist estimated the virus could hit China’s GDP by 1-5% while economists from Nomura shared the “outbreak could cause China's real GDP growth to shrink to below 4% from the 6% pace.”  We suspect these are only the first few revisions to be had in the coming days.

Below in today’s note, we call out various companies who have announced changes to their operations as a result of the virus below, but we'd like to point out that the sheer magnitude of work that is being put on hold cannot help but have an impact on global supply lines as well. Add this to the impact of the ongoing trade war and you have some material headwinds to global growth.

As investors digest all of this and what it could mean for global GDP forecasts as well as assess the impact to 2020 EPS expectations as the current earnings season rolls on, Asian equities remained under pressure today, closing in the red. European equities are also down across the board in trading today, and US equity futures point to more of the same.

Data Download

Yesterday’s Federal Reserve’s Open Market Committee meeting public debrief was basically an “as expected” on with rates unchanged, more assurances that the Fed’s activity in the repo market is nothing like QE and that activity is expected to continue through tax season. There was no update to the official future rate plans (aka the dot plot), but the market is highly confident that there will be another cut this year. Chairman Powell mentioned that they are keeping a close watch on the coronavirus outbreak as, aside from the human suffering, could also negatively impact the global economy. 

January Eurozone Business Confidence rebounded to -0.23 from December's -0.32 but even so marked the fifth consecutive month in negative territory. Eurozone Consumer Confidence also remained in red for January, clocking in at -8.1, unchanged compared to its December reading. On a positive note, Economic Sentiment for the Eurozone in January rose to 102.8, the highest reading in the trailing five-month period and better than the expected 101.8, due primarily to rising sentiment in Germany. 

Against a backdrop of reduced business uncertainty and stabilized global growth, the Bank of England kept its benchmark interest rate at 0.75% 

In the US, we have the usual weekly Thursday economic reports — Initial Jobless Claims and EIA Natural Gas Inventories - but the focus will be on the initial GDP reading for the December 2019 quarter that will be published at 8:30 AM ET. The consensus view calls for the speed of the US economy to remained relatively stable at 2.1% in the final quarter of 2019 according to The Wall Street Journal’s Economic Forecasting Survey compared to 2.0%-2.1% in the prior two quarters.  

Stocks to Watch

Smokeable products company Altria (MO) delivered December quarter EPS that matched expectations despite revenue for the quarter that fell modestly short of consensus forecasts. The company issued 2020 EPS guidance of $4.39-4.51 vs. the $4.43 consensus. We’d note that included in its December quarter results, Altria recorded a non-cash pre-tax impairment charge of $4.1 billion related to its investment in JUUL, which reflects “the increased number of legal cases pending against JUUL and the expectation that the number of legal cases against JUUL will continue to increase.”

Despite delivering December quarter revenue that matched consensus expectations, Verizon (VZ) reported quarterly EPS of $1.13, $0.02 below consensus forecasts. As part of its 2020 outlook, which calls for EPS in the range of $4.90-$5.00 vs. the $4.89 consensus, Verizon shared its capital spending will be in the range of $17-$18 billion and includes the buildout of its 5G network, densification of its 4G one, and the continuation of the fiber build-out. 

Hershey Foods (HSY) beat December quarter EPS expectations by $0.04 on in-line revenue and guided its 2020 EPS in the range of $6.13-46.24 vs. the $6.15 consensus. Global beverage company Coca-Cola (KO) reported in-line December quarter results and issued 2020 guidance that also matched expectations. For 2020, the company “expects to deliver approximately 5% growth in organic revenues (non-GAAP) and approximately 8% growth in comparable currency neutral operating income (non-GAAP).” On both earnings-related conference calls, investors will want to see how Hershey plans to deal with shifting consumer preferences for healthier snacks, and Coca-Cola with the shifting consumer preference away from plastic and sugary beverages that is part of Tematica’s Cleaner Living investing theme. 

Deutsche Bank (DB) reported the full year 2019 loss of $5.8 billion, a greater loss than expected, as the company's December quarter results came in below consensus forecasts. The company is in the midst of restructuring its business, looking to refocus in corporate banking, asset and wealth management, and retail banking. During the quarter, the bank's common tier one equity ratio — a key indicator of balance sheet strength — was 13.6% of risk-weighted assets, up from 13.4% in the September quarter and the expected fall to 13.2% for the December one. 

Aerospace defense company Raytheon (RTN) reported EPS of $3.16 per share for the December quarter, $0.05 better than expected, and its backlog climbed to $48.75 billion from $42.42 billion. Raytheon confirmed its pending merger with United Technologies (UTX) is on target to close early in the June quarter. 

Commercial vehicle component and systems company Meritor (MTOR) issued December quarter EPS of $0.64, beating the consensus by $0.07, on softer than expected quarterly revenue. The company issued downside guidance of $4.75-$5.05 for 2020 vs. the $5.48 consensus forecast. 

Conglomerate Danaher (DHR) reported better than expected December quarter results but served up 2020 EPS guidance of $4.80-$4.90, well below the $5.38 consensus. 

Technology materials and ingredients company DuPont (DD) also issued downside guidance this morning seeing its 2020 EPS in the range of $3.70-$3.90 compared to the $4.14 consensus. 

Samsung (SSNLF) reported December quarter results matching expectations but shared it expects seasonally weaker memory demand that it expects will improve throughout 2020 due to data center and 5G smartphone demand. 

Consumer goods company Unilever (UN) reported 2019 EPS of EUR 2.55 vs the EUR 2.52 consensus as revenue rose 2% YoY to  EUR 52.0 billion, falling short of the EUR 52.3 billion consensus. In discussing its 2020 outlook, the company shared it sees its top line “in the lower half of the multi-year 3-5% range” but cautioned the “impact of the coronavirus outbreak is unknown at this time.” We’ll file this as something critical to watch for the company given Unilever’s Asia business generated 46% of its 2019 sales. 

Facebook (FB) reported earnings and revenue that were both slightly better than expected yesterday after the close, but the less than 30% revenue growth for four consecutive quarters frustrated investors and saw the shares fall over 4% in extended trading after it had been recently bumping up against its 2018 all-time highs.

Lam Research (LRCX) reported better-than-expected results and raised guidance yesterday after the close, which pushed shares up more than 4% in extended trading. Adjusted gross margin was also better-than-expected but deferred revenue was lower.

Microsoft (MSFT) gained more than 4% in extended trading yesterday after the company reported better-than-expected results for its fiscal second-quarter and improved guidance for the current quarter. Revenue rose 14% year-over-year in the reported quarter.

PayPal (PYPL) reported beats on both top and bottom line yesterday but lowered guidance which pushed shares down around 3% in extended trading from Tuesday's close.

Tesla (TSLA) yesterday reported a beat on fourth-quarter revenue and earnings with weaker automotive gross margins. Shares jumped over 9% from the prior day’s close in after-hours trading.

UPS (UPS) and Henry Schein (HSIC) announced they would jointly explore and test a variety of drone delivery use cases that will include drone deliveries of essential healthcare products by UPS to customers of Henry Schein. UPS also placed an order for 10,000 electric vans (with an option for 10,000 more) from the U.K.-based Arrival.

The coronavirus continues to take its toll as the following airlines (at last count) have all canceled flights to China: Air India (Shanghai), Air Macau,  Asiana Airlines, British Airways (BABWF), Finnair, Jeju Air, Jetstar Airways Singapore Ops, Jin Air Co, Lion Air, Lufthansa (DLAKF).  Delta (DAL) has temporarily reduced the number of weekly flights between the US and China due to a significant drop in demand.

Microsoft (MSFT) has told its employees in China to work from home and cancel all non-essential business travel until February 9.

Alphabet (GOOGL) is temporarily closing its offices in China and restricting travel. 

Amazon (AMZN) is now restricting all non-essential employee travel to China and will be reporting its earnings today after the bell.

Starbuck (SBUX) has now closed more than half of its locations in China and may soon close more as CEO Kevin Johnson states that the situation is very dynamic and when there is a concern, the company will close stores.

General Motors (GM) and Honda have extended their manufacturing shutdown in China through February 9. 

The CEO of Novartis (NVS) commented yesterday that he believes it will take at least 12 months to find a new vaccine to treat the coronavirus - get out your antibacterial wipes!

After today’s US equity markets close, a few dozen companies will be reporting their latest quarterly results. The ones investors are most likely to concentrate on include Amazon (AMZN), Amgen (AMGN), Deckers Outdoor (DECK), Electronic Arts (EA), Levi Strauss (LEVI), Proofpoint (PFPT), Visa (V), and Western Digital (WDC).  

For a more detailed look at upcoming earnings reports, we recommend checking in with Nasdaq’s earnings calendar page. 

On the Horizon

• • Upcoming IPOs:
    • • Health and wellness company Avadim Health (AHI) is looking to price 5 million shares within a price range of $14-$16;
      • Arcutis Biotherapeutics (ARQT) aims to price $7.8 million shares between $15-$17;
      • Black Diamond Therapeutics (BDTX) targets its IPO with 8.9 million shares with a target price range of $16-$18;
      • Casper Sleep (CSPR), the company that popularized the bed-in-a-box trend, plans to offer 8.4 million shares in a price range of $17-$19.
      • Membership-based primary care platform 1Life Healthcare (ONEM) is looking to price 17.5 million shares in the range of $14-$16;
      • Consumer products company Reynolds Consumer (REYN) targets offering 47.2 million shares between $25-$28;
      • Drug discovery software company Schrödinger (SDGR) will offer 10 million shares priced between $14 to $16;
      • For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
  • Dates to mark:
    • • Jan 31: Brexit deadline
      • Feb. 24-27: Mobile World Congress
      • May 12-14: Google I/O Developer Conference

Thoughts for the Day

“It is our imagination that is responsible for love, not the other person.” ~Marcel Proust

Disclosures

• Hershey Foods (HSY), Microsoft (MSFT), Northrop Grumman (NOC), Raytheon (RTN), UPS (UPS), and Verizon (VZ) are constituents in Tematica Research's Thematic Dividend All-Stars Index. 
• Tesla (TSLA) is a constituent in Tematica Research’s Cleaner Living Index. 
• Proofpoint (PFPT) is a constituent in the Foxberry Tematica Research Cybersecurity & Data Privacy Index. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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