After Hours Summary: FOSL -27%, TPIC -21%, PBYI -18%, DXCM +19%, VNDA +22% following earnings/guidance
After Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: VNDA +21.8%, DXCM +18.5%, IVC +17.2%, CECO +13.5%, LVGO +13.2%, BL +10.5%, GDDY +9.8%, SAIL +9.2%, CNDT +7.4%, ELF +7.4%, TXMD +6.1%, QCOM +5.8% (also appoints Akash Palkhiwala as CFO), NVRO +5.6% (lightly traded; also announced CFO retirement), IIPR +4.8%, EBS +4.7% (light volume), RDFN +4.6%, BIDU +4.4%, ANGI +3.9%, PAAS +3.6%, ECPG +3.4%, TTGT +3.3% (lightly traded), FISV +3%, IQ +2.8%, FOXA +2.7% (also authorized $2 bln stock repurchase program), TLND +2.3%, CXW +2.2% (light volume), WYNN +2% (also filed mixed securities shelf offering), SQ +1.4%
Companies trading higher in after hours in reaction to news: AVP +5.3% (Brazilian anti-trust authority approves co's acquisition by Natura), UNIT +4.6% (declared quarterly dividend of $0.22/share), DRRX +3.7% (to host key opinion leader conference call for DUR-928 Phase 2a alcoholic hepatitis study), AZUL +2.4% (lightly traded; reported October traffic results), CHRS +2.4% (acquired rights to commercialize Bioeq's biosimilar candidate to Lucentis in the US; lightly traded)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: FOSL -26.7%, TPIC -21.2%, PBYI -18%, BAND -15.2%, ROKU -14.9%, GLUU -14.4%, EXPE -12.8%, AAOI -10.5%, INSG -9.6%, RUBI -8.8%, LCI -7.4%, UPWK -5.8%, QUOT -5.8% (also announced retirement of CFO Ronald Fior and acquisition of Ubimo), FSCT -5.7%, RP -5.6% (also announced acquisition of Buildium), TRIP -5.1% (also announced strategic partnership with Trip.com Group [TCOM]), STAY -4.9%, CVNA -4.5%, RCII -4.2%, SEDG -3%, KGC -2.3%, VSLR -1.5%, SUN -1.5%, DVAX -1.4%, IAG -1.4%
Companies trading lower in after hours in reaction to news: EOLS -5.7% (proposed a public offering of common stock), AGIO -5.3% (lightly traded; proposed 7.5 mln common share offering), QTNT -3.8% (proposed intended public offering of ordinary shares), AM -2.9% (announced a secondary public offering of 25.97 mln shares of common stock), YETI -2.1% (prices secondary offering of 10.0 mln shares at $29.00/share), TCOM -1.9% (announced strategic partnership with TripAdvisor [TRIP]), ARVN -1.8% (announced public offering of $90.0 mln of its common shares), NFLX -0.8% (CEO discussed spending on CNBC)
Closing Stock Market SummaryThe stock market closed little changed on Wednesday, marking its second straight pause near record highs as investors digested a possible pushback in the timeline for a trade deal. The S&P 500 (+0.1%), Dow Jones Industrial Average (unch), and Nasdaq Composite (-0.3%) closed within 0.3% of their flat lines, while the Russell 2000 (-0.6%) underperformed.
Reuters reported that a "Phase One" trade agreement may not get signed until December, as both sides continue to discuss terms and a venue. The news took the market to session lows, but it didn't get the pullback some had been expecting. This might have been due to expectations for a partial deal to still get signed and a view that there is some pent-up demand among under-allocated investors.
The S&P 500 energy sector, however, did succumb to a 2.3% pullback following disappointing earnings results and guidance from Diamondback Energy (FANG 77.20, -13.03, -14.4%) and a decline in oil prices ($56.35, -0.89, -1.6%). The Philadelphia Semiconductor Index (-0.8%) also gave back some gains in response to Microchip's (MCHP 95.62, -4.40, -4.4%) results and guidance and perhaps amid a more cautious trade outlook.
On the other hand, the financials sector (+0.4%) provided the broader market some influential support. The health care (+0.6%), consumer staples (+0.5%), and real estate (+0.5%) sectors also outperformed, likely benefiting from their defensive-oriented dispositions.
The health care and consumer staples sectors can also credit their relative strength to the gains in CVS Health (CVS 70.93, +3.61, +5.4%), Humana (HUM 304.94, +10.19, +3.5%), and Coty (COTY 13.02, +1.56, +13.6%) following their positive earnings results and encouraging guidance.
In notable M&A activity, Xerox (XRX 37.66, +1.29, +3.6%) is reportedly considering a cash-and-stock bid for HP, Inc (HPQ 19.57, +1.17, +6.4%). An offer would value HP at a premium at just under $23 per share, according to The Wall Street Journal.
U.S. Treasuries finished the session on a higher note, having received increased demand following the latest trade update. The 2-yr yield declined three basis points to 1.60%, and the 10-yr yield declined five basis points to 1.81%. The U.S. Dollar Index remained little changed at 97.95.
Reviewing Wednesday's economic data, which included preliminary Q3 figures for Productivity and Unit Labor Costs and the weekly MBA Mortgage Applications Index:
- Nonfarm business sector labor productivity declined 0.3% in the third quarter ( consensus +1.0%), according to the BLS, after increasing an upwardly revised 2.5% (from 2.3%) in the second quarter. Unit labor costs jumped 3.6% consensus +2.1%) after increasing a downwardly revised 2.4% (from 2.6%) in the second quarter.
- The key takeaway from the report is that it points to profit margin pressures for businesses with the decline in productivity and the jump in unit labor costs; it is also the first decline in productivity since the fourth quarter of 2015.
- The weekly MBA Mortgage Applications Index ticked down 0.1% following a 0.6% increase in the prior week.
Looking ahead, investors will receive the weekly Initial and Continuing Claims report and the Consumer Credit report for September on Thursday.
- Nasdaq Composite +26.8% YTD
- S&P 500 +22.7% YTD
- Russell 2000 +17.9% YTD
- Dow Jones Industrial Average +17.9% YTD
SoftBank: mystery meat
Doubts over Masayoshi Son’s wheeler dealing have deepened, fostered by opacity of bank’s account
Masayoshi Son extolled the consistency of McDonald’s, even as he apologised for sketchy due diligence on WeWork. It was a risky reference. McDonald’s classic burger contains only beef. SoftBank’s quarterly results are composed of the financial equivalent of mechanically reclaimed meat from multiple sources. That intriguing bit of gristle in the middle was a $4.6bn writedown on a disastrous investment in the US-based serviced offices group.
Pessimists reckoned the hit should have been bigger. At least SoftBank’s founder fessed up to an error sceptics such as Lex thought he might sweep under the carpet. The quarterly net loss of $6.4bn was the first in 14 years, as investment valuations plummeted. Doubts over Mr Son’s wheeler dealing have deepened, fostered by the opacity of SoftBank’s accounts.
This is apparent in the business’s tendency to disown debts of fiefs to keep a lid on its own heavy leverage. By waiving majority voting rights, SoftBank can account for WeWork as an associate and not a subsidiary, keeping $22bn of borrowings off its balance sheet.
It has marked down the fair value of WeWork’s equity from $47bn to $7.8bn. Is this just the beginning? The reduced valuation is highly sensitive to shifts in free cash flow. The impact of the $9.5bn debt and equity bailout has not been accounted for yet.
The Vision Fund, the Saudi-backed vehicle with which SoftBank is incestuously entwined, wrote down the fair value of 22 other investments. A combined fair value of $77.6bn for 88 portfolio companies was just a 10th higher than initial investments.
SoftBank’s P&L is composed of revaluations, non-cash income from affiliates and modest flows of dividends and disposal proceeds. Its enterprise value is the subject of a debate medieval theologians would find abstruse. Lex, using S&P data, estimates the group trades at one-third less than the value of its investments. Bernstein’s Chris Lane calculates a stonking 48 per cent discount.
The shares have fallen 28 per cent since an April peak. This was supposed to be the year Mr Son’s bets came good. A demerger late last December was meant to inject the value of a Japanese mobile phone operation into SoftBank’s share price. US flotations were intended to do the same for forays into US tech. Instead, Mr Son has depended on his longstanding investment in Alibaba to prop up market value. That is the closest SoftBank ever gets to consistency.
KPMG widens review of Wirecard accounting
Special audit will now look at accusations concerning type of lending made to merchants
Wirecard revealed on Wednesday that a special audit by KPMG will be wider-ranging than previously announced, examining accusations from short-sellers about the German payment company’s lending activities in Brazil and Turkey.
Details of the probe came as Wirecard reported another quarter of the rapid growth in sales and profits which made it an investor favourite last year, catapulting the group into the prestigious Dax index of Germany companies.
The company, which also faces an ongoing criminal inquiry in Singapore into its accounting at several subsidiaries in Asia and the Pacific, last month said it had hired KPMG to examine questions over its accounting practices that were raised by whistleblowers and reported by the Financial Times.
The FT has reported suspicions that hundreds of millions of euros in sales and profits at Wirecard businesses in Dubai and Dublin were fraudulent, raising questions about the oversight provided by Wirecard’s longstanding audit firm EY.
On Wednesday the company said KPMG would also look at accusations made by short-sellers about a type of lending known as “Merchant Cash Advance”. Wirecard said last year it had put €400m into making short-term loans to its customers, with many of them being located in Turkey and Brazil.
Merchants using Wirecard to process credit card payments can wait a month to receive the money, so the product is designed to bridge that gap. However, an anonymous group of short-sellers that calls itself MCA Mathematik has raised doubts about whether the activity is taking place as Wirecard has described.
In a letter to Wirecard's supervisory board, MCA Mathematik said “the two countries in which management has claimed MCA lending is most significant — Brazil and Turkey — cannot possibly be offering any meaningful programme of this type”.
Filings made by Wirecard’s Brazil subsidiary at the country’s central bank do not describe significant MCA lending, according to MCA Mathematik. In Turkey, such advance cash loans to merchants were not legal, the short-sellers alleged, asking where money for the loans had gone.
A Wirecard spokeswoman said that MCA Mathematik’s allegations were “based on wrong assumptions which lead to wrong conclusions”.
Its MCA operations in Turkey were “structured in full compliance with all applicable Turkish regulations and was explicitly approved by Turkey’s Banking Regulation and Supervision Authority,” the spokesperson said. With regard to Brazil, the company said that while the central bank filings were correct, the numbers were used and interpreted wrongly by MCA Mathematik, they added.
Wirecard, which has categorically rejected the FT’s reporting, said that lending to merchants had fallen to about €320m by the end of September, down from about €400m six months earlier.
KPMG had already started work on the special audit, which was expected to be concluded by March 2020, with the results to be made public, Wirecard said.
Alexander von Knoop, Wirecard’s chief financial officer, told analysts that “we of course fully trust in our accounting, and the very intensive and detailed auditing by EY”. KPMG’s review “shall give additional confidence to our shareholders”.
Its latest results showed that Wirecard expects to generate €1bn to €1.1bn in earnings before interest, taxes, depreciation and amortisation in 2020, matching analysts’ expectations, according to S&P Global Market Intelligence.
For the third quarter, the Aschheim-based group reported a 37 per cent increase in revenue to €731.5m from a year ago, and a 43 per cent jump in ebitda to €211.1m.
Wirecard said that the Asia-Pacific region contributed half its sales and profits in the first nine months of the year, up from about 40 per cent in the same period in 2018. It has previously said that its own investigation of financial irregularities in the region did not uncover problems with any material impact on its accounts.