Daily Markets: The 737 Max Crisis Hits Boeing's Earnings

Boeing - Shutterstock photo
Credit: Shutterstock

Today’s Big Picture

As your authors commented to each other when discussing yesterday’s market rebound following the coronavirus inspired sell-off on Monday - "that didn't last long!"  The Nasdaq 100 lead the rebound, gaining 1.6% on the day with the Nasdaq Composite a close second, up 1.4%. The S&P 500 and Dow Jones Industrial Average rose 1.0% and 0.7% respectively and the CBOE S&P 500 Volatility Index (VIX) fell 10.7%. Helping fuel the rebound were a number of high-profile December quarter earnings reports that delivered better than expected results, but in some cases offered a cautiously optimistic outlook as managements continue to assess the impact to be had from the virus – see Stocks to Watch below.  

The number of confirmed coronavirus cases in China approached 6,000 with total deaths reaching more than 130, prompting the Hong Kong Hang Seng fell 2.8% to a seven-week low on the first day of trading after the Lunar New Year holiday. China's financial markets will remain closed until next Monday after authorities extended the Lunar New Year break by three days as they grapple with the worsening virus that has now recorded more cases than SARS. The People's Bank of China reiterated plans to use its tools to ensure liquidity once the interbank market reopens on Feb. 3. And as the number of reported coronavirus cases continue to grow, we can add the United Arab Emirates to that list as the first cases of the virus were reported earlier today. 

The Trump administration is reportedly considering a temporary ban on all flights from China to the U.S., and the Centers for Disease Control and Prevention has expanded screening for the virus to 20 US airports, up from five. UK Health Secretary Matt Hancock announced today that “anyone who returns from Wuhan will be safely isolated for 14 days, with all necessary medical attention.” International Consolidated Airways Group’s (IAG) British Airways has canceled all flights to and from mainland China making it the first global airline to do so.  While the market enjoyed a reprieve yesterday, your authors suspect we have yet to see the real economic and earnings fallout to be had from the still spreading coronavirus.

We’d note the risk-off mood was decidedly not in the sovereign debt market yesterday as Greece issued €2.5 billion in 15-year bonds at the astoundingly low yield of 1.88%, below the government’s targeted 2%. This is the first issuance of 15-year paper since 2009 and the issue attracted an order book of nearly €19 billion.

As we digest the latest coronavirus headlines as well as the barrage of corporate earnings reports to be had this morning, European equities are modestly higher as we pen today’ note, and US futures point to a positive open. 

Data Download

Japan Consumer Confidence was unchanged in January, matching December’s 39.1 reading and coming in below the expected 40.8 for the month. 

January Consumer Confidence in France and Italy came in better than expected at 104 and 111.8, with indicators higher MoM. January Business Confidence in Italy was better than expected at 99.9 versus the expected reading of 99.3. 

The February GfK Consumer Confidence reading for Germany inched up to 9.9 from the prior 9.7 and the expected 9.6 for the month. This was the highest reading since June 2019 and continues the recent upward trajectory in the data-led by improvements in economic and income expectations as well as the propensity to buy.

Later today in the US we'll get Pending Home Sales for December, the usual weekly EIA gasoline, crude, distillate, and heating oil inventories reports. More importantly, we'll get the Federal Reserve’s Interest Rate decision for January and following press conference. The market isn't expecting a change in the Fed's key rate range of 1.5% to 1.75% following today’s monetary policy meeting, but they will be listening for comments from Chairman Jerome Powell about the Fed’s repo program.

Stocks to Watch

Feeling the continued pain associated with the current 737 Max crisis, Boeing (BA) reported its first annual loss in more than two decades. For the December quarter, Boeing reported a $2.33 per share loss with revenue falling 37% to $17.9 billion. Inside the company's earnings press release, it commented "The estimated costs to produce 737 aircraft included in the accounting quantity increased by $2.6 billion during the quarter, primarily to reflect updated production and delivery assumptions. In addition, the suspension of 737 MAX production and a gradual resumption of production at low production rates will result in approximately $4 billion of abnormal production costs that will be expensed as incurred, primarily in 2020." In what can only be called a big understatement, Boeing President and Chief Executive Officer David Calhoun said the company has "a lot of work to do."

McDonald's (MCD) reported December quarter EPS of $1.97, matching the consensus view, on revenue of $5.35 billion vs. the expected $5.30 billion. Global comparable sales grew 5.9%, (International Operated +6.1%, US +5.0%, and International Developmental Licensed segment of +7.2%) and systemwide sales rose 6% (7% in constant currencies). 

General Dynamics (GD) reported December quarter EPS that beat consensus expectations by $0.07 as revenue for the quarter came in ahead of the consensus forecast.  The company’s total backlog grew 28.1% YoY during the December quarter to $86.9 billion led by its Aerospace, Information Systems, and Marine Systems segments. 

AT&T (T) reported Non-GAAP EPS of $0.89, $0.01 better than expected on revenue of $46.8 billion that slipped 2.4% year over year, modestly missing the consensus forecast for the quarter. The company confirmed HBO Max will launch in May and guided 2020 revenue to be up 1%-2% with EPS in the range of $3.60-$3.70, including its HBO Max investments, compared to the $3.61 consensus. In its earnings release, AT&T also shared its 3-year guidance, which calls for EPS of $4.50-$4.80 by 2022. 

December quarter results from Stanley Black & Decker (SWKmodestly missed both top and bottom-line expectations, and the company guided 2020 below consensus expectations. The company also announced it has entered into a definitive agreement to acquire Consolidated Aerospace Manufacturing for up to $1.5 billion in cash, with “$200 million of the purchase price held back and contingent on the Boeing (BA) 737 MAX receiving FAA authorization to return to service and Boeing achieving certain production levels.“ 

Chemical company Dow Inc. (DOW) reported better than expected December quarter EPS, shrugging off the 15% YoY drop in revenue for the quarter. 

General Electric (GEreported better than expected December quarter revenue and EPS, but guided its 2020 EPS in the range of $0.50-$0.60 vs. $0.67 consensus revenue at GE Industrial grow “organically in the low-single-digit range.”  Total orders for the December quarter fell 5% YoY to $24.9 billion.

US investment bank Goldman Sachs (GS) will hold its first-ever investor day today at which it is expected to share“ambitious firm-wide performance targets." Among other things, investors will also be looking for insight on the company's credit card tie-up with Apple; Marcus, Goldman's consumer banking business; and how it plans to leverage technology to grow its securities business.  

Yesterday Apple (AAPLreported December quarter results that knocked off investors’ socks (technical term). The company’s “Wearable, home and accessories” segment generated 41% more revenue than the Mac segment for the first time ever. This category included Airpods, Beats headphones, the Homepod and Apple Watch which enjoyed record sales during the quarter with 75% of Apple Watch purchasers buying their first one. Shares gained as much as 6% during after-hours trading as the company's iPhone business rose 7.7% year over year to $56 billion, which led the company to exit 2019 with 1.5 billion active devices. The company also shared its Services business had 480 million paid subscribers at the end of 2019, putting it close to its 2020 goal of 500 million. Apple guided its revenue for the current quarter to rise 9%-15% but noted the wider than usual range was due to uncertainty associated with the coronavirus. in response, shares of RF semiconductor companies, including Skyworks (SWKS)Qorvo (QRVOand Qualcomm (QCOM), moved higher in aftermarket trading last night.

eBay (EBAY) shares dropped 2.4% in extended trading after reporting a beat on both top and bottom line, but weak guidance for the first quarter of 2020. 

Starbucks (SBUX) met expectations for revenue and beat EPS expectations but warned that the coronavirus outbreak could harm the company's 2020 fiscal outlook which pushed shares down 1.3% during extending trading. The company reported that over half of its locations in China have been temporarily closed. The magnitude of the impact of the coronavirus will depend on just how long it forces store closures - something we expect to be hearing more.

Xilinx (XLNXshares lost 7% after missing on revenue estimates, beating on earnings and providing weaker-than-expected guidance for the current quarter. The company also announced that it expected to cut its global workforce by 7% as part of cost-cutting efforts.

Beyond Meat (BYND) shares fell in aftermarket trading yesterday following a report that Restaurant Brands International’s (QSR) Tim Hortons is pulling the plant-based food option from its menu in select Canadian provinces. 

After today’s US equity markets close Archer-Daniels (ADM)Brandywine Realty (BDN)Cirrus Logic (CRUS)Facebook (FB)Las Vegas Sands (LVS)Microsoft (MSFT)Paypal (PYPL)ServiceNow (NOW)Tesla (TSLA)United Rentals (URI), and Wynn Resorts (WYNN) will be reporting, among others. Inside these reports, investors look to further get their arms around the potential impact of the coronavirus as well as the speed of the US economy, the continued pace of cloud adoption, and social media monetization. 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 28-29: 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

“Resentment is like drinking poison and then hoping it will kill your enemies.” ~Nelson Mandela


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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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 has, for over a decade, served as a founding partner of Calit Advisors, a boutique advisory firm specializing in mergers and acquisitions, private capital raise, and corporate finance with offices in Italy, Ireland, and California. She has previously served as the Chief Macro Strategist for Tematica Research, which primarily develops indices for Exchange Traded Products, co-authored the book Cocktail Investing, and is a regular guest on a variety of national and international investing-oriented television programs. 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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