(Bloomberg) -- Cherish a brief reprieve in equity catalysts Monday, as it won’t last long.
The trade story is a seeming constant, with what feels like near paralysis for a market that wants to move on with its life. Each week brings a "maybe" that you need to be prepared to handle. This time it’s high-level trade talks between Chinese Vice Premier Liu He, Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Beijing (didn’t that just happen in the U.S.? Yes, two weeks ago). And with the tendency for the developments in the talks to be the next tapebomb, bulls and bears are hamstrung throughout the process, which is undoubtedly complex.
But if you seek to look beyond the macro for idiosyncratic insight, a series of conferences on energy, healthcare and tech provide your fill. Of specific interest should be the Goldman Sachs Tech and Internet conference that begins later this week , especially coming off the latest reports exploring the depths of Apple and smartphone woes in China. IDC, in its latest report put a number on the decline for smartphone shipments in China, with Apple shrinking nearly 20% in the last quarter of 2018, citing the high price and longer replacement cycles (though Xiaomi had a worse quarter). S&P futures are holding up well despite this overhang, after running up into the close Friday and benefiting from strong showings in Europe and China after the Lunar Week holidays.
Payments and IT are on offer at the conference, and Goldman itself notes that macro and competitive trends in payments, money transfer, Cryptocurrencies, blockchain technology and B2B payments opportunities will be of particular focus. Key names to present include PayPal, Global Payments (which also reports results later this week; Goldman expects shares to "grind higher" on solid results), Paychex, Fleetcor , Western Union, Euronet, EVO Payments and GreenSky.
The week will bring a red bow to a few themes, from semiconductors and enterprise tech (NVDA and CSCO report) to the consumer. We’ve seen a variety of results in the latter this season, starting way back with the mini "retailpocalpse" in mid-January. But since, we’ve seen a not so clear theme, from the high end to aspirational consumer in retail and beauty showcasing diverging outcomes. In fact, among sectors thus far in earnings season, consumer discretionary and staples feature the narrowest margin of sales beats from across the industry.
With earnings this week including beauty-name Avon Products (Thursday), cult-names Under Armour (Tuesday) and Canada Goose Holdings, which Susquehanna wrote performed "exceptionally well" during the holiday season in a note last week (unfortunately for them, one that didn’t include the latest Polar Vortex to sweep across North America), we can more accurately gauge the pulse within the segment. Will they perform like Ralph Lauren (+8.4% post results), or Tapestry (-14% post earnings, prompting a throaty defense from the Street: Needham said buy the pull back on international strength, UBS called it inexpensive with its 12x P/E near 10- year trough levels).
The international theme will be strong, as key European luxury brands Hermes International and cosmetics giant L’Oreal SA boasted double digit growth rates last week, mostly on the back of the high end Chinese customer. That may come as little consolation to Under Armour, though more upmarket than the competitive giant Swoosh (which blew out in its latest report that did not include the holiday season), its sales are more heavily geared toward North America (76% of sales, according to data compiled by Bloomberg versus Nike’s 41%). The Street is more sour on Under Armour too, with the average analyst target assuming shares are currently fully valued. Options are pricing in some fireworks come Tuesday, with a higher than average implied move of 13% around earnings (historical average is closer to 9%).
Your 63-Hour ICYMI
Congressional talks to avoid a new Government shutdown by this coming weekend stall; CAH, CVS, MDT, DGX, PTC, BBY, CSCO and Agilent were mentioned positively in Barron’s (the last three due to their sustainability ratings, the first four due to their solid financials); Thieves have begun to target catalytic converters in cars as the metal found in them, palladium, has surpassed the price of gold, the WSJ discusses; Russia was raised to investment grade at Moody’s; Minnesota democratic Senator Amy Klobuchar has entered the 2020 presidential race; Saudi Arabian foreign affairs minister denied they have any involvement in the Bezos-National Enquirer entanglement, according to the NY Post; Tiger Woods is now the favorite to win the Masters tournament in April, while Phil Mickelson seeks to wrap up a win at the Pebble Beach pro-am today after a hail storm delayed play Sunday; Kacey Musgraves won album of the year at the Grammys while Childish Gambino wins record and song of the year
Sectors in Focus Today
- Restaurants after QSR beats expectations for EPS; this comes after Chipotle’s blow out earnings last week
- NY-focused REITs (like EQR, SLG) after reports that Amazon’s plans for HQ2 in NYC are under reconsideration
- Flow control companies (XYL, IEX, ITT etc) after Ingersoll-Rand’s deal to acquire Precision Flow Systems (2018 rev: $400m) for $1.45b
- Medical tech companies after a FT report that Nuvasive was in talks with Smith & Nephew; Piper wrote earlier that investors should take profits in NUVA
- Beauty companies as Coty comes off its 32% gain Friday; AVP reports this week
- Managed care names (CNC, HUM, UNH) as Molina Healthcare reports results
- Toy makers after the stellar Friday results from Mattel, which had its biggest intraday gain in history
Notes From the Sell Side
The electric vehicle penetration story "underappreciated" by the Street, Canaccord Genuity analyst Jonathan Dorsheimer writes in an upgrade of Tesla to buy from hold. He sees January as the "low point" in EPS for 2019 due to strong shipments in the EU and China, with the expectation that the short thesis will be unfounded as the company ramps toward year end. Its "coveted" autopilot tech has a nearly "insurmountable" lead, which Dorsheimer sees as paramount in the future of transportation. Shares are poised to open near their 200-DMA at $315, up nearly 3%.
Avis Budget’s valuation looks "attractive" for mean reversion, Goldman Sachs analysts write in a double upgrade to buy from sell. Shares were trading near a historically low multiple with most difficulties in the industry now priced in. Analyst David Tamberrino finds that Avis Budget is the better operator between the two publicly traded rental car firms (maintains HTZ rating at sell). Risks to residual values now may be skewed to the upside following incentive restraint by the OEMs, they write. Shares are indicated to open higher by nearly 6%.
Nvidia was downgraded at Bernstein ahead of its results Thursday, coming after the preannouncement in late January that cascaded through the sector. The target goes to $175 (near the Bloomberg average of more than 40 analysts) from $250. Analysts led by Stacy Rasgon "struggled" about what to do with the stock after the surprise guidance cut and feel as though the company now has to demonstrate "ever-increasing" growth. Near term downside is likely for shares, they write, given the unfavorable cloud spending environment.
Tick-by-Tick Guide to Today’s Actionable Events
- AVCO, ARDS IPO lockup expiry
- Credit Suisse Energy Summit
- 8:30am -- QSR earnings call
- 9:15am -- CRZO at Credit Suisse Energy Summit
- 11:50am -- RRC at Credit Suisse Energy Summit
- 4:15pm -- MOH earnings
- 6:00pm -- RICK investor meeting
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