Closing Stock Market SummaryEach of the major indices fell more than 3.5% on Wednesday in an orderly retreat fueled by profit-margin concerns. The Nasdaq Composite (-4.7%) and S&P 500 (-4.0%) were hit the hardest, followed by the Dow Jones Industrial Average (-3.6%) and Russell 2000 (-3.6%).
Target (TGT 161.61, -53.68, -24.9%) was the main culprit today, as shares dropped 25% after the company missed EPS estimates amid elevated cost pressures that it expects to persist in future quarters.
That was reminiscent of Walmart (WMT 122.43, -8.92, -6.8%) yesterday, eliciting a belief that if these high-profile consumer companies are struggling in the inflationary environment, then the pain could be more widespread and possibly lead to decreased consumer demand down the road.
As such, the S&P 500 consumer discretionary (-6.6%) and consumer staples (-6.4%) sectors were by fear the weakest performers, bearing losses of over 6.0%. The information technology sector (-4.7%) was another important laggard since it is the most heavily-weighted sector in the market.
The defensive-oriented utilities sector (-1.0%), which traded higher intraday, eventually turned lower as there remained a dearth of buying interest into the close. Buyers were largely on strike amid the inflation-induced growth concerns while investors braced for further downside as shown by the 18.6% pop in the CBOE Volatility Index (30.96, +4.86).
Higher costs, and affordability issues, also presumably contributed to a 3.2% m/m decline in building permits for April and an 11.0% drop in the weekly MBA Mortgage Applications Index. On a related note, the EIA reported an unexpected draw in weekly crude inventories, but oil prices still fell 2.6%, or $2.86, to $109.35/bbl amid de-risking and profit-taking efforts.
In other earnings news, Lowe's (LOW 183.82, -9.99, -5.2%) fell in sympathy with Target and the broader retail space despite beating EPS estimates. TJX Cos. (TJX 60.19, +4.01, +7.1%) was an individual bright spot, reassuring investors that its profit margins are healthy with an improved pre-tax margin outlook for FY23.
The inflation narrative, of course, maintained rate-hike expectations, which nudged the fed-funds-sensitive 2-yr yield higher by one basis point to 2.68%. The 10-yr yield fell eight basis points to 2.89% amid growth concerns (which were put on hold yesterday) and safe-haven interest. The U.S. Dollar Index rose 0.5% to 103.90.
Reviewing Wednesday's economic data:
- Total housing starts declined 0.2% month-over-month in April to a seasonally adjusted annual rate of 1.724 million units (consensus 1.775 million). Building permits decreased 3.2% month-over-month to 1.819 million (consensus 1.820 million).
- The key takeaway from the report is that building permits -- a leading indicator -- were down month-over-month for single-family units in every region, underscoring the hesitancy on the part of builders to construct new units in the face of high costs for labor and materials and rising mortgage rates that have created affordability and demand pressures for buyers.
- The weekly MBA Mortgage Applications Index dropped 11.0% following a 2.0% increase in the prior week.
Looking ahead, investors will receive weekly Initial Claims and Continuing Claims, Existing Home Sales for April, the Philadelphia Fed Index for May, and the Conference Board's Leading Economic Index for April on Thursday.
- Dow Jones Industrial Average -13.3% YTD
- S&P 500 -17.7% YTD
- Russell 2000 -21.0% YTD
- Nasdaq Composite -27.0% YTD
After Hours Summary: CSCO -12.1% drops on earnings/guidance, taking down JNPR -6.2%, CIEN -6.2%, ANET -5.4%, AVGO -3.5%; SNPS +3.5% higher on earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: SNPS +3.5%
Companies trading higher in after hours in reaction to news: AUR +5.6% (AUR expands autonomous commercial linehaul trucking pilot with FDX), IRT +3.5% (authorizes $250 mln share repurchase program; increases dividend), DMTK +2.3% (presents new research differentiating atopic dermatitis and psoriasis), SMR +1.9% (signs MOU with Associated Electric to explore SMR deployment), GD +0.1% (awarded $310 mln Navy contract)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: CSCO -12.1%, BBWI -5.8%
Companies trading lower in after hours in reaction to news: ENTA -17.3% (reports top-line data from RSVP study of EDP-938; study did not meet primary endpoint), JNPR -6.2% (in sympathy with CSCO earnings/guidance), CIEN -6.2% (in sympathy with CSCO earnings/guidance), ANET -5.4% (in sympathy with CSCO earnings/guidance), GMED -5% (first surgeries performed with the Excelsius3D imaging platform performed), AVGO -3.5% (in sympathy with CSCO earnings/guidance), EXTR -3.2% (in sympathy with CSCO earnings/guidance), UAA -2.3% (CEO to step down), BB -2.2% (provides its long-term financial goals), HCI -2.2% (announces $150 mln convertible offering). VUZI -2.2% (signs agreements with Atomistic SAS to deliver microLED microdisplay for AR glasses), AEM -2.1% (announces additional investment in Cartier Resources), DISH -1.3% (T and DISH announce Internet Distribution Agreement), LITE -1.2% (in sympathy with CSCO earnings/guidance), NOK -0.7% (in sympathy with CSCO earnings/guidance), FDX -0.4% (AUR expands autonomous commercial linehaul trucking pilot with FDX), NTR -0.4% (evaluating Louisiana site as location to build $2 bln clean ammonia facility), T -0.4% (T and DISH announce Internet Distribution Agreement), TSLA -0.3% (NHTSA has opened a special investigation on a crash in CA, according to Reuters), PKG -0.2% (increases dividend), OCN -0.1% (names new CFO)
Twitter deal leaves Elon Musk with no easy way out
Strength of $44bn agreement comes into focus as Tesla chief executive appears to have second thoughts
Since the financial crisis, corporate lawyers have aspired to build the ultimate ironclad merger contract that keeps buyers with cold feet from backing out.
The “bulletproof” modern deal agreement now faces one of its biggest tests, as Elon Musk, the Tesla boss and richest person in the world, openly entertains the possibility of ditching his $44bn deal for Twitter.
Musk tweeted earlier this week that the “deal cannot move forward” until the social media platform provides detailed data about fake accounts, a request that Twitter seems unlikely to meet. Twitter’s board, meanwhile, has stated its commitment “to completing the transaction on the agreed price and terms as promptly as practicable”.
Simply abandoning the deal is not an option. Musk and Twitter have both signed the merger agreement, which states “the parties . . . will use their respective reasonable best efforts to consummate and make effective the transactions contemplated by this agreement”.
With tech stocks falling — dragging down the price of the Tesla shares that form the basis of Musk’s fortune and collateral for a margin loan to buy Twitter — all eyes are on the mercurial billionaire’s next move.
Can Musk walk away for $1bn?
The agreement includes a $1bn “reverse termination fee” that Musk would owe if he withdraws from the merger agreement. However, if all other closing conditions are met, and the only thing left is for Musk to show up at the closing with his $27.25bn in equity, Twitter can seek to make Musk close the deal. This legal concept, known as “specific performance”, has become a common feature in leveraged buyouts since the financial crisis.
In 2007 and 2008, leveraged buyouts typically included a reverse termination fee that often allowed a firm backing the acquisition to pay a modest 2 to 3 per cent of a deal’s value to get out. Sellers believed at the time that private equity groups would follow through and close their transactions in order to maintain their reputations. But some did pull the plug on those agreements, leading to several court fights involving prominent firms such as Cerberus, Blackstone and Apollo.
Since that era, sellers have implemented much higher termination fees as well as specific performance clauses that effectively require buyers to close. Most recently, a Delaware court in 2021 ordered private equity firm Kohlberg & Co to close the buyout of a cake decorations business called DecoPac.
Kohlberg had argued that it was allowed out of the deal because DecoPac business had suffered a “material adverse effect” when the pandemic struck between signing and closing. The court rejected that argument and ruled DecoPac could force Kohlberg to close — which it did.
Can Musk sue his way out of the deal?
Should Musk choose to go to court, he might claim that Twitter misrepresented the state of its business by estimating in regulatory filings that bots comprise 5 per cent or less of its users base.
Filing such a lawsuit would be easy enough, but proving that the bot issue justifies ending the deal would be much harder. Under the merger agreement, Musk would have to show that any misrepresentation had a “material adverse effect”, an onerous standard that courts have rarely found to be met. He also explicitly waived doing due diligence on Twitter in his offer to the board.
“It is tough to argue in court that a material adverse event has occurred if you cannot show how it has impacted earnings — and the impact has to be large,” said Gustavo Schwed, a New York University professor and former executive at Providence Equity.
Could Twitter make Musk take the deal if he tries to end it?
Twitter could sue Musk to enforce the agreement, and a person close to the company described the contract as “bulletproof”. Alternatively, it could choose to sue him for damages related to the failed deal. However, under the merger agreement, the amount of damages Musk could pay would be capped at $1bn.
Another option, experts say, is for Twitter to first threaten to force Musk to close and then settle for damages greater than $1bn in order to avoid a messy litigation.
“Twitter could say, ‘Well, we want to get the deal done, and we’re suing to enforce the contract. And you know, in your heart of hearts, Mr Musk, that the court is leaning in our direction, so let’s forget the billion-dollar cap and settle for $2bn,” explained Charles Whitehead, a Cornell law professor and former corporate attorney.
Can the two sides reach a compromise?
Twitter’s board could decide to accept a lower price from Musk to avoid the risk of trying to enforce the existing agreement — and the risk of remaining a standalone public company at a challenging time for tech companies.
In 2021, Tiffany & Co sued LVMH seeking to force the French luxury conglomerate to close a deal that had been struck just before the pandemic. The sides ultimately reached a deal to cut the price slightly, which Tiffany shareholders later approved.
The worry is that Musk’s public sniping on Twitter damages both the company, as well his professional reputation, which he needs to operate Tesla and the rest of his empire.
“Mr Musk might be a little more concerned about the people with whom he might do deals in the future,” added Whitehead, the Cornell Law professor. “If he walks from this deal, it may be harder for him in the future to strike deals for Tesla or on his own behalf. There’s a lot on the line here too.”
Shipping group CMA CGM to take Air France-KLM stake under cargo tie-up
Container company seeks to expand its reach after business soared during pandemic
CMA CGM, the French shipping group, is set to become a leading shareholder in Air France-KLM and will forge a partnership in air cargo with the carrier, part of a drive to expand its reach after a boom in its business during the pandemic.
The Marseille-based container company, which in recent months has made investments in logistics ventures, port terminals and a parcel delivery group at a time when international shipping prices have been soaring, will take up to 9 per cent of the airline group, the companies said.
The deal will make CMA CGM a top investor in Air France-KLM, which is partly backed by the French and Dutch governments, as the airline emerges from a rocky patch following coronavirus lockdowns that brought most travel to a halt and pushed the company to request bailouts.
The shipping group’s position as a shareholder will depend on the outcome of a looming €4bn capital raising at Air France-KLM, and on whether state investors or shareholders such Delta Air Lines of the US and China Eastern Airlines take part.
A partnership would also set a precedent in the cargo world in which players, including some of CMA CGM’s shipping rivals, have begun to encroach on the airfreight market.
“We think we can be innovators. The existing air-cargo market has not been very innovative for the last 30 to 40 years. The model has been quite stagnant,” Ben Smith, Air France-KLM chief, said in an interview.
The 10-year agreement, which will allow the companies to pool their networks and cross-sell their freight capacity, will help bump up revenues and offer broader services to existing clients, many of which are shared with CMA CGM, Smith added.
Unlisted CMA CGM, the world’s third-biggest container group after MSC of Italy and Denmark’s Maersk, broke into air cargo last year by purchasing four aeroplanes.
It was encouraged by demand from customers asking for “a more express service”, CMA CGM chief Rodolphe Saadé told the Financial Times. Those cargo planes will add to Air France-KLM’s six freight carriers, and the two companies have another combined 12 on order.
The companies expect to capitalise on a strong recovery in airfreight traffic since the height of pandemic lockdowns in 2020, despite Covid-19 variants persisting.
Although CMA CGM initially also requested a French state-backed loan in 2020, which it has since repaid, the company has emerged as one of the big winners globally. It had previously struggled with losses and a large debt load.
Demand for shipping transportation has soared and supply-chain logjams have driven up prices. CMA CGM’s improving finances had pushed it to speed up a plan to transform itself into a broader logistics company, Saadé said.
He added that as an Air France KLM shareholder — the group should receive one board seat — CMA CGM wanted to see the carrier do more deals and pounce on acquisitions.
“In our industry, we are a consolidator and we would very much like, when the timing allows for it, for Air France-KLM to also seize opportunities in the market to grow,” Saadé said.
Smith declined to comment on when the capital raising would take place. Air France-KLM has been looking to do it as soon as possible, partly to repay state aid which is preventing it from acquiring more than 10 per cent of another company under EU rules.
In another example of airline and shipping companies teaming up, CMA CGM’s German rival Lufthansa is working with MSC to bid for Italy’s ITA Airways, the state-owned successor to Alitalia, which Air France-KLM is also interested in, Smith confirmed.
Gapping down
In reaction to earnings/guidance:
- TGT -22.8%, NXGN -14.3%, DOCS -12.9% (also authorizes up to $70 mln for share buybacks), TGI -11.4%, LOW -2.6%, DOYU -2%
Other news:
- EWCZ -7.1% (stock offering)
- RES -6.1% (CEO to transition to Exec Chairman role)
- ACRE -5.6% (prices offering of 7 mln shares of common stock for gross proceeds of $104.7 mln)
- LFLY -5% (launches online cannabis delivery orders)
- AMWL -3.2% (to shorten earnout period with acquisition of SilverCloud Health)
- LAB -2.4% (stock offering)
- ROOT -2.3% (launches Root Insurance in Alabama and Florida)
- HVT -1.6% (increases dividend)
- APPS -1.5% (to restate results for JunQ, SepQ and DecQ)
Analyst comments:
- CENX -4.3% (downgraded to Peer Perform from Outperform at Wolfe Research)
- DNA -3.6% (downgraded to Underperform from Neutral at BofA Securities)
- CARR -3.1% (downgraded to Neutral from Buy at BofA Securities)
- ILPT -1.8% (downgraded to Mkt Perform from Mkt Outperform at JMP Securities)
- HAFC -1.5% (downgraded to Neutral from Buy at DA Davidson)
- HOPE -1.1% (downgraded to Neutral from Buy at DA Davidson)
Inditex has a chance to exact revenge on its online rivals. Despite a painful pandemic, the 64 billion euro fast-fashion retailer has amassed a war chest of more than 9 billion euros. Typically such spoils will trickle back to shareholders. For 38-year-old Chair Marta Ortega, buying an ailing online foe like 9 billion euro Zalando might make more sense.
Inflation is taking a heavy toll on Ortega’s Spanish outfit. Since January, the Zara owner’s share price has shed over 25% as investors fret about consumers cutting back on handbags and shoes. Next boss Simon Wolfson voiced similar concerns about discretionary spending on fashion and home decor. Germany’s Zalando went a step further and said its more cost-conscious customers were simply not interested in buying flashy togs.
Hoarding cash is part of Inditex’s crisis-management playbook. The company relies on its surprisingly plump balance sheet to spruce up supply chains, revamp tired stores and open new ones. Excess funds are doled out sparingly to investors via special dividends.
Ortega has reason to be more daring. Thanks to its hyper-efficient operations, the owner of brands like Massimo Dutti and Pull&Bear operates with a 25% EBITDA margin, compared to 19% for rival H&M. Even with the spectre of inflation, sales are forecast to grow 5% a year for the next five years.
Removing a competitor and incorporating its digital savvy could turbocharge that growth once inflation subsides. Zalando’s online retail platform, which specialises in selling cheap clothes and shoes, has grown its top line by an average of 23% annually over the past five years. But now it looks cheap. Since January, Zalando shares have halved. After taking away net cash, Inditex trades at around 9 times its forecast EBITDA for the next 12 months. Zalando, which was trading as high as 30 times forward EBITDA in 2019, is now around the same level, comfortably its lowest valuation since listing eight years ago.
A swoop would still be an about-turn. To date, Inditex’s strategy for growth has been organic, steadily opening new stores in established markets like the United States. A sudden burst of inflation has given its young boss a reason to take a calculated risk.
Gapping up
In reaction to earnings/guidance:
- DLO +13.7%, AGYS +9.4%, TCS +8.9%, DT +6.7%, ADI +2.4%, TJX +1.5%
Other news:
- NCMI +17.9% (AMC discloses 6.8% stake in NCMI)
- MX +14.8% (report that private equity firms including Carlyle Group (CG) will bid for the company)
- SPNT +8.2% (Chairman and CEO resigns to pursue other opportunities)
- XAIR +6.4% (presents positive study update from the at-home LungFit GO Pilot Study)
- CWK +5% (acquires Cresa Partners of Los Angeles)
- NVST +4.6% (to acquire Osteogenics Biomedical)
- INSM +2.3% (Presents New Data Across Three Pillars at American Thoracic Society 2022 International Conference)
- TILE +1.8% (authorizes new $100 mln share repurchase program)
- EGY +1.5% (receives new five year $50 mln reserve based lending facility providing additional financial flexibility)
- SONY +1.3% (provides updates at Corporate Strategy Meeting)
- CASA +1.2% (stock offering)
- EXTR +1.1% (announces $200 mln share repurchase authorization over three-year period)
Analyst comments:
- EDR +3.3% (upgraded to Buy from Neutral at Goldman)
- PENN +2.8% (upgraded to Buy from Hold at Jefferies)
- AJX +1.8% (upgraded to Buy from Neutral at Compass Point)
- INT +1.6% (upgraded to Buy from Hold at Stifel)
- MNST +1.2% (upgraded to Outperform from Mkt Perform at Bernstein)
- CAH +0.9% (upgraded to Outperform from In-line at Evercore ISI)
Research Calls
- Upgrades:
- AeroVironment (AVAV) upgraded to Outperform from Sector Perform at RBC Capital Mkts; tgt raised to $100
- Canadian Nat'l Rail (CNI) upgraded to Outperform from Market Perform at BMO Capital Markets
- Cardinal Health (CAH) upgraded to Outperform from In-line at Evercore ISI; tgt raised to $68
- Cellectis (CLLS) upgraded to Outperform from Neutral at Robert W. Baird; tgt $10
- Endeavor Group (EDR) upgraded to Buy from Neutral at Goldman; tgt lowered to $29
- Expedia Group (EXPE) upgraded to Buy from Neutral at Redburn
- Great Ajax (AJX) upgraded to Buy from Neutral at Compass Point; tgt $16
- InterCure (INCR) upgraded to Buy from Speculative Buy at Canaccord Genuity; tgt $13
- Mercury (MRCY) upgraded to Outperform from Sector Perform at RBC Capital Mkts; tgt raised to $72
- Monster Beverage (MNST) upgraded to Outperform from Mkt Perform at Bernstein; tgt raised to $110
- On (ONON) upgraded to Hold from Sell at Williams Trading; tgt $19
- Penn Natl Gaming (PENN) upgraded to Buy from Hold at Jefferies; tgt $49
- Ventas (VTR) upgraded to Outperform from Neutral at Credit Suisse; tgt raised to $63
- Welltower (WELL) upgraded to Outperform from Neutral at Credit Suisse; tgt raised to $100
- World Fuel Services (INT) upgraded to Buy from Hold at Stifel; tgt $35
- Downgrades:
- Carrier Global (CARR) downgraded to Neutral from Buy at BofA Securities
- Century Aluminum (CENX) downgraded to Peer Perform from Outperform at Wolfe Research; tgt lowered to $14
- Comstock (CRK) downgraded to Underweight from Neutral at Piper Sandler; tgt lowered to $16
- Ginkgo Bioworks (DNA) downgraded to Underperform from Neutral at BofA Securities; tgt $3
- Hanmi Financial (HAFC) downgraded to Neutral from Buy at DA Davidson; tgt $25
- Hope Bancorp (HOPE) downgraded to Neutral from Buy at DA Davidson; tgt lowered to $16
- Industrial Logistics Properties Trust (ILPT) downgraded to Mkt Perform from Mkt Outperform at JMP Securities
- Plymouth Industrial REIT (PLYM) downgraded to Mkt Perform from Mkt Outperform at JMP Securities
- Warby Parker (WRBY) downgraded to Neutral from Buy at Goldman; tgt lowered to $18
- Others:
- Amplitude (AMPL) initiated with an Overweight at Piper Sandler; tgt $25
- Fidelity Nat'l Info (FIS) initiated with a Buy at Goldman; tgt $128
- Fiserv (FISV) initiated with a Neutral at Goldman; tgt $108
- Five9 (FIVN) resumed with a Buy at ROTH Capital; tgt $129
- Global Payments (GPN) initiated with a Neutral at Goldman; tgt $151
- Mastercard (MA) initiated with a Buy at Goldman; tgt $460
- PAR Technology (PAR) initiated with a Neutral at Goldman; tgt $43
- Performance Food Group (PFGC) initiated with a Buy at Berenberg; tgt $71
- PerkinElmer (PKI) initiated with an Underweight at Barclays; tgt $125
- Terreno Realty (TRNO) initiated with a Mkt Outperform at JMP Securities; tgt $75
- Warby Parker (WRBY) downgraded to Neutral from Buy at Goldman; tgt lowered to $18
- US Foods (USFD) initiated with a Buy at Berenberg; tgt $53
- Visa (V) initiated with a Conviction Buy at Goldman; tgt $282
- Vodafone PLC (VOD) resumed with a Buy at Citigroup
- VSE Corp (VSEC) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt lowered to $48
- Waters (WAT) initiated with an Overweight at Barclays; tgt $375
- Western Union (WU) initiated with a Sell at Goldman; tgt $18
- Shift4 Payments (FOUR) initiated with a Neutral at Goldman; tgt $55
Early premarket gappers
- Gapping up:
- NCMI +22.8%, DLO +14%, AGYS +10.8%, SPNT +8.2%, XAIR +6.4%, TCS +5.1%, CWK +5%, NVST +4.6%, ROOT +3%, TGI +2.8%, AMR +2.4%, EGY +2%, AMC +1.9%, LFLY +1.8%, TILE +1.8%, AMWL +1.6%, DXC +1.3%, INSM +1.3%, SONY +0.9%, APPN +0.9%, BAH +0.8%, FFIC +0.8%
- Gapping down:
- DOCS -14.7%, NXGN -14.3%, EWCZ -7.8%, ACRE -6.6%, RES -6.1%, DOYU -4.6%, LAB -2.4%, LOW -1.5%, CASA -0.9%, APPS -0.8%, UNFI -0.7%, DWAC -0.5%