Markets

Daily Markets: Despite Earnings, Investors Remain Focused on Spread of Coronavirus

Airport officials monitoring for Coronavirus outbreak
Credit: Dinuka Liyanawatte /Reuters - stock.adobe.com

Today’s Big Picture

Despite the accelerating velocity for the current earnings season, markets remain focused on the rapidly spreading coronavirus which has surpassed 4,500 cases in China and led China to restrict travel to Hong Kong as the death toll tops 100. Some 60 million are under travel restrictions in China, and select countries, including Indonesia and the Philippines, have restricted Chinese tourists. Outside of China, there are more than 60 confirmed cases, including ones in the US, Australia, France, and Germany. The US Centers for Disease Control and Prevention raised its travel precautions for China to its highest level, and at last count it is monitoring 110 possible coronavirus cases across 26 states.

The escalation weighed on equity markets yesterday, leading the Dow Jones Industrial Average to fall 1.6%, its biggest one-day drop since October. The S&P 500 fell 1.6% as well extending its 2-day decline to 2.5% and the Nasdaq Composite dropped 1.9%, its worst day since August. As of yesterday's close the Dow, NYSE Composite and the Russell 2000 were all in negative territory for the year. Year to date, at up 2.5% as of last night's close, the Nasdaq 100 is the strongest performer of the major domestic equity indices, the Nasdaq Composite was up 1.9% and the S&P 500 up 0.4%. The CBOE S&P 500 Volatility Index rose over 25% yesterday and is now up 32.3% year-to-date.

As reports indicate the coronavirus continues to spread, equity indices in Asia ended trading today lower, and we'd note markets in China and Hong Kong remained closed for Lunar New Year.  European equities are trading in positive territory as we write this, however, we'd note they are off their highs for the day. US futures point to a positive open, but here as well those futures have pared would-be gains vs. being up nearly 1% overnight.

We will continue to monitor coronavirus developments and its impact on the markets in the coming days, but when today's US equity markets close and we get ready for the back half of the week, we'd remind investors there are several other items to watch over the next few days - the Fed's January FOMC meeting; Brexit officially "done" this coming Friday and the focus will soon turn to the EU-UK trade deal; Canada has begun ratifying the USMCA trade deal, and more corporate earnings reports.

Data Download

Today we have a largely US-centric plate of economic data to be digested that includes the November S&P Case-Shiller Home Price Index,  December Durable Goods Orders, January Consumer Confidence and later today the Richmond Fed Manufacturing Index for January. With the initial 4Q 2019 GDP report looming and investors looking to gauge the speed of the economy as we inch deeper into 2020, we expect the core capital goods data contained in today’s Durable Goods Order report will be of keen focus for investors. 

Stocks to Watch

Powersports vehicle company Polaris Industries (PII) beat consensus expectations by $0.04 with EPS of $1.83, despite a modest revenue shortfall relative to expectations. Polaris guided 2020 EPS in the range of $6.80-$7.05, ahead of the $6.73 consensus forecast. 

Harley-Davidson (HOG) missed expectations on both its top and bottom line for its December quarter results. EPS for the quarter came in at $0.20 per share, excluding non-recurring items, $0.02 below the consensus forecast; revenue for the quarter fell nearly 8.5% YoY to $874.1 million, missing the expected $928.79 million. Investors will want to tune into the company’s conference call to understand how and why the company sees its March quarter Motorcycle revenue rebounding to $1.09-$1.17 billion. 

3M (MMM) reported December quarter Non-GAAP EPS of $2.15, beating the consensus by $0.05; revenue for the quarter was essentially in line with expectations. The company announced a restructuring that will reduce approximately 1,500 positions, spanning all business groups, functions and geographies. For 2020, 3M forecasts EPS $9.30-$9.75 vs. the $9.61 consensus forecast. 

Spice and flavoring company McCormick & Co.’s (MKC) December quarter EPS came in at $1.61, matching expectations; revenue for the quarter rose 0.7% YoY, just missing the consensus forecast. In 2020, the company expects sales to rise 2%-4% YoY on an organic basis with EPS in the range of $5.15-$5.25 vs. 2019’s $5.24.

United Technologies (UTX) reported December quarter EPS $1.94, beating the consensus forecast by $0.10; better than expected revenue for the quarter rose 8.4% YoY. Touching on its pending spinouts, the company shared, "Operational separation activities for Otis and Carrier are substantially complete, and we are executing the final steps required to spin both businesses as independent companies early in the second quarter.” United Technologies continues to target closing its pending acquisition of Raytheon (RTN) “concurrent with the portfolio separation."

Vehicle solutions company BorgWarner (BWA) announced it will acquire UK based vehicle propulsion systems company Delphi Technologies (DLPHin an all-stock transaction that values Delphi at approximately $3.3 billion. Delphi Technologies shareholders will receive  0.4534 shares of BorgWarner stock per Delphi Technologies share owned.

Software and services company SAP SE (SE) issued December quarter results with EPS €1.82 per share, €0.11 ahead of consensus expectations; revenue for the quarter rose 8.3% YoY to €8.05 billion vs. the €8.09 billion consensus forecast. SAP guided 2020 revenue to €29.2-29.7 billion vs. the €29.68 billion consensus forecast. 

Alongside its December quarter results, Netherlands based health technology company Philips (PHG) announced it will review options for future ownership of its Domestic Appliances business that includes kitchen appliances, coffee, garment care, and home care appliances. For the December quarter, Philips reported EPS of €0.83 per share on revenue of €6 billion, in-line with expectations.

Yesterday Alice Europe NV (ALLVF), which is triple C-rate, sold €500 million in 8-year senior with a 4% coupon - the lowest ever for a euro-denominated bond in this rating category. Just to be clear, the company has lost money on a net income basis in each year going back to at least 2012.

Travel related stocks have been taking a beating as the coronavirus concerns weigh on investors. United Airlines Holdings (UAL) fell 5% yesterday, Delta Air Lines (DAL) lost 3.7% and American Airlines Group (AAL) fell 5.4%. Since January 17, these shares are down 13.3%, 8.7%, and 7.9% respectively. Shares of Carnival Corp (CCL), Expedia Group (EXPE), Marriott International Inc (MAR), Hilton Worldwide Holdings (HLT) and Booking Holdings Inc (BKNG) also took a hit yesterday, falling 4.9%, 3.3%, 2.2%, 3.2%, and 2.8% respectively. Citibank estimates that both Marriott and Hilton have significant exposure to China.

Both Estee Lauder (EL) and Nike (NKE) are estimated to generate around 17%of their revenue from mainland China. The two saw their shares drop 4.2% and 1.9% yesterday and 10.5% and 4.2% since January 17th respectively. Nike has also pulled all Kobe Bryant-related items from its online store following the tragic death of the basketball legend. 

Resort shares with material exposure to China also have been getting hit hard. Shares of Wynn Resorts (WYNN), Las Vegas Sands (LVS) and MGM Resorts International (MGM) dropped 7.8%, 6.8% and 3.4% yesterday and 18%, 14.6% and 11.7% respectively since January 17. With travel to Hong Kong being restricted, these stocks will continue to be in focus today.

Boeing (BA) reportedly secured commitments for over $12 billion in financing from a variety of banks as it looks to work through the pain of the 737 Max grounding. The company is scheduled to report on its earnings Wednesday (Jan29) before the open and is expected to discuss its financing strategy at that time.

Software firm F5 Networks (FFIV) dropped 4.6% yesterday in extended trading after providing weak guidance for its next quarter even though it beat on both top and bottom line for the December quarter.

On a similar note, Juniper Networks (JNPR) lost 1.8% yesterday in after-hours despite beating on the top and bottom line for the December quarter because of weaker EPS guidance for the next quarter on in-line revenue guidance.

After today's US equity markets close, we have many companies reporting their quarterly results including:

  • Apple (AAPL), which is expected to report EPS of $4.38 on revenue of $86.2 billion;
  • Investors will look for eBay (EBAY) to deliver EPS of $0.76 on $2.8 billion;
  • NVR (NVR) is slated to report EPS of $59 on revenue of $2.0 billion;
  • Consensus expectations have Starbucks (SBUX) serving up EPS of $0.76 on revenue of $7.1 billion;
  • Xilinx (XLNX) is expected to report EPS of $0.62 on revenue of $725.7 million;
  • 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 28: Before the opening of trading Paycom (PAYC) will replace WellCare (WCG) in the S&P 500
        • Jan 28-29: Federal Reserve FOMC Meeting
        • Jan 31: Brexit deadline
        • Feb. 24-27: Mobile World Congress
        • May 12-14: Google I/O Developer Conference

Thoughts for the Day

“We must accept finite disappointment but never lose infinite hope.” ~ Martin Luther King Jr. 

Disclosures

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

Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

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Lenore Elle Hawkins

Lenore Elle Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, her focus is on macroeconomic influences that create investing headwinds or tailwinds. Lenore co-authored the book Cocktail Investing and in addition to her Tematica work, provides M&A consulting services for companies in Europe looking to expand globally. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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