Gapping down
In reaction to disappointing earnings/guidance:
- DAKT -25.8%, MNTA -18.4%, HSBC -6.2%, DDS -4.9%, CYOU -4.2%, AMRI -3.5%, SOHU -3.2%, WAB -3%, MGIC -2.6%, UIHC -2.5%
- CBRL -1.6%, AU -1.3%, PWR -1.2%, CRMT -0.6%
M&A news:
- UL -8.5% (Unilever and Kraft Heinz (KHC) jointly confirm that KHC has amicably agreed to withdraw its proposal for a combination of the two companies )
- UN -8.3%, KHC -5%
Other news:
- TRVN -33.4% (announces its Phase 3 APOLLO-1 and APOLLO-2 pivotal efficacy studies of oliceridine)
- CDTX -32.6% (reports that the Phase 2 RADIANT clinical trial in acute vulvovaginal candidiasi did not show sufficient efficacy to justify further development)
- MNTA -18.9% (receives notice of warning letter from FDA to contracted Glatopa; Approval of the Glatopa 40 mg ANDA will be dependent on resolution of Pfizer (PFE) facility compliance issues)
- DRYS -18.8% (enters into $200 mln stock purchase agreement with Kalani Investments)
- IMMU -3.4% (files a federal lawsuit and a motion seeking injunctive relief against venBio Select Advisor and venBio's four director candidates)
- GMS -3.1% (commences 6 mln common stock offering by its existing stockholders, including certain affiliates of AEA Investors LP)
- ING -1.1% (in sympathy with HSBC earnings)
Analyst comments:
- FCX -3.7% (downgraded to Sell from Hold at Deutsche Bank)
- EIGI -3.2% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
- DKS -1.1% (downgraded to Perform from Outperform at Oppenheimer)
- OHI -0.9% (downgraded to Hold from Buy at Jefferies)
- BLMN -0.8% (downgraded to Neutral from Overweight at JP Morgan)
What a difference a year makes… {IBXXC2D1 Index }
European coco bonds are rallying hard, just 12 months after the asset class was thrown into turmoil.
The main Markit index covering the bonds – the riskiest class of bank debt – touched its highest ever level yesterday, the latest data show. It is up nearly 30 per cent since its lows last February.
European coco bonds, which are issued by banks and designed to take losses at times of distress, collapsed in price early last year as fears over the future of the continent’s banking sector mounted.
The debt, which is also known as “additional tier 1 capital (AT1)” because it contributes towards a bank’s capital requirements, typically moves in tandem with bank equities, which have also staged a recovery over the past year. The Euro Stoxx banks index, a gauge of the share prices for major lenders, is up 28 per cent since last February’s lows.
The original coco sell-off centred around the prospect of missed coupons on a Deutsche bank AT1 bond, as well as uncertainty over regulatory rules for triggering coupon cancellation. Losses are imposed when a bank’s capital falls beneath a certain threshold.
In 2016, the bonds came under intense criticism because of their perceived capacity to heighten market distress around European banks. Since then, regulators have moved to clarify their approach, effectively reducing the potential level at which bonds are forced to stop payments.
Unlike bonds sold by non-financial corporates or sovereigns, coco bonds are not being bought as part of the European Central Bank’s quantitative easing program. They typically come with coupons of 6-8 per cent, and are perpetual with an option to be called by the issuer after several years.
Full pdf attached
* Hedge Fund Consensus Buy List
- Bank of America (BAC): This is the second consecutive quarter that hedge funds have accumulated BAC shares. Managers including Tiger Management, Blue Ridge Capital, Coatue Management, Third Point, and Lone Pine Capital all started brand new stakes. This is mainly a play on rising interest rates and the potential for less regulation. A few funds also decided to buy other megabanks like Wells Fargo (WFC) and JPMorgan Chase (JPM), while others added smaller regional banks to the portfolio. That said, BAC was by far the most consensus pick both in terms of quantity of funds and size of position.
- Symantec (SYMC): Hedge funds including Tiger Global, Coatue Management, and Lone Pine Capital all initiated positions in SYMC. During the fourth quarter, Symantec acquired LifeLock (LOCK), an identity theft protection service, for $2.3 billion. This will join SYMC’s existing Norton cybersecurity offering as it looks to diversify its product offering. The company also announced a new CFO during the quarter. Back in August, Symantec also purchased Blue Coat, an internet security firm, for $4.65 billion.
- Monsanto (MON): Merger arbitrage names attracted many managers this quarter. Monsanto shares were bought by the likes of Berkshire Hathaway, Glenview Capital, and Greenlight Capital. The company is being bought by Bayer AG (pending regulatory approval) for $66 billion, or $128 per share in cash. There seems to be some skepticism from other investors around the deal’s potential to close, as there’s currently a wide deal spread. MON shares currently trade around $109.
- Time Warner (TWX): Farallon Capital, Paulson & Co, and Third Point all scooped up shares of TWX during Q4. The company is being acquired by AT&T (T), pending regulatory approval. On the campaign trail, Donald Trump hinted he would try and block the deal. However, now that he’s in office, it’s unclear if he’ll still pursue that action. Various media reports have hinted that Trump’s administration would look for various conditions to be placed on the merger, even going as far to suggest Jeff Zucker should step down or the CNN television network should be spun-off. TWX shareholders will receive $107.50 per share comprised of $53.75 in cash and $53.75 in AT&T stock. Per the deal, “The stock portion will be subject to a collar such that Time Warner shareholders will receive 1.437 AT&T shares if AT&T’s average stock price is below $37.411 at closing and 1.3 AT&T shares if AT&T’s average stock price is above $41.349 at closing.”
* Hedge Fund Consensus Increase List
- Shire (SHPG): Hedge funds such as Bridger Management, Omega Advisors, Tiger Management, Viking Global, Maverick Capital, and Lone Pine Capital all accumulated more shares of SHPG during Q4. This stock has also been listed by a few sellside firms as a ‘best idea for 2017.’ Management has been working on integrating Baxalta and commercializing Xiidra.
- Microsoft (MSFT): Tiger Management, Farallon Capital, Lone Pine Capital, Viking Global, and ValueAct Capital all added to their positions during the fourth quarter. (However, it’s worth highlighting that in the first quarter ValueAct has been reducing its MSFT stake.)
- Liberty Global (LBTYK): This is the fourth consecutive quarter that shares of John Malone’s European cable giant have been accumulated by hedge funds in the newsletter. Managers such as Viking Global, Glenview Capital, Brave Warrior Advisors, and SPO Advisory all bought more. Shares had previously sold off for a couple of reasons: ‘Brexit’ fears hit the company’s UK cable unit, Virgin Media, and it earns revenues in British Pounds (the Pound saw a steep decline post-Brexit vote). The company in general is also facing more competition in some of its markets (like the Netherlands) but has been buying back more stock given the increased volatility in its shares. This has been a longtime favorite among hedge funds
- Facebook (FB): In reality, this is more of a ‘mixed activity’ name. It’s included on this list though because there certainly were a lot of funds adding to their positions. Tiger Management, Appaloosa Management, Blue Ridge Capital, Maverick Capital, and Viking Global all enlarged their FB position sizes. That said, a decent number of other managers were also out trimming their stakes, so just keep that in mind.
* Hedge Fund Consensus Sell List
- Kinder Morgan (KMI): This stock was liquidated by the likes of Berkshire Hathaway, Lone Pine Capital, and Pennant Capital during the fourth quarter.
- Teva Pharmaceutical (TEVA): Managers such as Bridger Capital, Glenview Capital, and Viking Global all sold their positions. Teva closed on its acquisition of Allergan’s (AGN) generic drugs business.
- AIG (AIG) Warrants: Funds such as Blue Ridge Capital, Fairholme Capital, and Hound Partners all liquidated their longstanding AIG Warrant positions. This was an extremely successful investment for many of them as they bought the TARP warrants right after the financial crisis and rode them higher as insurance giant AIG recovered.
* Hedge Fund Consensus Decrease List
- Charter Communications (CHTR): This is the fourth consecutive quarter CHTR positions have been trimmed by various managers. The company closed on its acquisition of Time Warner Cable and Bright House and is now the second largest cable player in the US. The stock is up 80% over the past year and the funds that have been selling are trimming their positions by 10-15% for the most part to lock-in some profits and for risk management purposes most likely, as position sizes have swelled due to the share gains. Funds that trimmed their stakes in Q4 include Third Point, Blue Ridge, Tiger Global, SPO Advisory, and Lone Pine.
- Alphabet (GOOG): Hedge funds that reduced their exposure to Google’s parent company during the fourth quarter included Pennant Capital, Tiger Global, Maverick, Coatue, and Lone Pine. That said, the company continues to be a core holding for many hedge funds as some managers also own the other share class (GOOGL).
- Apple (AAPL): Maverick Capital, Appaloosa, Third Point, and Coatue all sold some AAPL shares during Q4. The stock has performed well, and some funds probably wish they held onto those shares a bit longer, as the stock has done nothing but go up in 2017 thus far. It’s gone from a low of $88 last May to current highs of $136. Sales of the iPhone have met or exceeded expectations after sentiment on the name had soured a bit in 2016. The company is set to release the next iteration of the iPhone (rumored to be either iPhone 8 or iPhone X) later this year. They’re also rumored to be working on projects centered on television and automobiles, while CEO Tim Cook has also mentioned augmented reality as an area of interest for the company.
- Mastercard (MA): This has been a long-term holding for various funds and many have just locked-in some profits as shares continue their march higher. Maverick, Tiger Global, Blue Ridge, and Viking all trimmed their positions during the fourth quarter. Some funds have added Visa (V) shares to the portfolio recently as well, so it might be a case of simply shifting some of that exposure. Many managers choose to own both V and MA, as they’re pure plays on the payment processing oligopoly and don’t bear credit risk.
Medtronic beats by $0.01, reports revs in-line; reaffirms FY17 guidance (78.88)
- Reports Q3 (Jan) earnings of $1.12 per share, excluding non-recurring items, $0.01 better than the Capital IQ Consensus of $1.11; revenues rose 5.0% year/year to $7.28 bln vs the $7.22 bln Capital IQ Consensus. U.S. revenue of $4.106 billion represented 56 percent of company revenue and increased 4 percent. Non-U.S. developed market revenue of $2.193 billion represented 30 percent of company revenue and increased 6 percent, or 7 percent on a constant currency basis. Emerging market revenue of $984 million represented 14 percent of company revenue and increased 9 percent, or 11 percent on a constant currency basis; non-GAAP operating margin was 29.1 percent, representing a 130 basis point improvement.
- Co reaffirms guidance for FY17, sees EPS of $4.55-4.60, excluding non-recurring items, vs. $4.56 Capital IQ Consensus. The co continues to expect fiscal year 2017 revenue growth to be within the mid-single digit range on a constant currency, constant weeks basis, which is consistent with the company's long-term, mid-single digit constant currency revenue growth expectation. The company expects revenue growth for the fourth quarter of fiscal year 2017 to be in the lower half of the mid-single digit range on a constant currency basis. While the impact from foreign currency exchange is fluid, if current exchange rates remain similar for the remainder of the fiscal year, the company's full year revenue and fourth fiscal quarter would both be negatively affected by ~$20 million to $40 million. The company continues to expect fiscal year 2017 diluted non-GAAP EPS growth to be in the double digits on a constant currency, constant week basis, which is consistent with the company's long-term, double digit constant currency EPS growth expectation
- "In Q3, we achieved solid results across all of our business groups and geographies," said Omar Ishrak, Medtronic chairman and chief executive officer. "At the same time, we produced meaningful operating profit growth based largely on our synergy programs from the Covidien integration, as well as our focus on operating excellence initiatives."
The euro is edging lower but holding up fairly well amid the latest market jitters over the continent’s upcoming elections (compared to bonds, at least). But that doesn’t mean traders are ignoring the currency, with demand to hedge against upcoming wobbles picking up.
The single currency is 0.6 per cent weaker against an upbeat dollar on Tuesday at $1.0545, and has weakened 2.3 per cent so far this month. The fall comes despite further signs of healthy growth in the eurozone economy, with figures from IHS Markit showing the currency bloc’s composite purchasing managers’ index has leapt to its highest level in almost six years in February.
That’s not exactly a stellar performance, but still puts the euro slightly ahead for the year to date, in contrast to expectations at the turn of the year that it could quickly hit parity with the dollar.
However, as ING points out:
while not necessarily reflected in the euro spot rate, the eurozone political risk is creeping more pronouncedly into euro/dollar implied volatility – with volatility premia for tenors covering the eurozone elections rising higher day by day.
Implied volatility tracks demand for options to hedge against big currency swings over a set period. Higher implied volatility reflects higher expectations of currency movements over the coming period.
Three-month implied volatility had been fading at the start of the year, but has jumped significantly since the options started to cover the weeks of France’s presidential election. The measure has also spiked noticeably as the travails of early frontrunner Francois Fillon prompted fears that Marine Le Pen’s populist Front National could win an unexpected victory.
--> +2% TO ALL TIME HIGHS
Home Depot beats by $0.10, beats on revs; guides FY18 EPS & revs roughly in line; Q4 comps +5.8%; increases quarterly dividend to $0.89 from $0.69/share; authorizes $15.0 bln share repurchase program
- Reports Q4 (Jan) earnings of $1.44 per share, excluding non-recurring items, $0.10 better than the Capital IQ Consensus of $1.34; revenues rose 5.8% year/year to $22.21 bln vs the $21.81 bln Capital IQ Consensus.
- Co issues in-line guidance for FY18, sees EPS of $7.13 vs. $7.17 Capital IQ Consensus Estimate; sees FY18 revs of growth of ~4.6% to ~$98.95 bln vs. $98.32 bln Capital IQ Consensus Estimate; sees comps growing ~4.6%
- Comparable store sales for the fourth quarter of fiscal 2016 were positive 5.8 percent, and comp sales for U.S. stores were positive 6.3 percent.
- The board of directors declared a 29 percent increase in the quarterly dividend to $0.89 per share. The dividend is payable on March 23, 2017, to shareholders of record on the close of business on March 9, 2017.
- The board of directors has authorized a $15.0 billion share repurchase program, replacing its previous authorization. Since 2002 and through January 29, 2017, the Company has returned more than $67 billion of cash to shareholders through repurchases, repurchasing approximately 1.3 billion shares.
Retailers Set to Pay the Piper, Weak Q4 Seen
Wal-Mart, Macy’s, TJX, Nordstrom and more will reveal their fourth-quarter results this week.
The holiday reckoning is here.
It’s already a given that this winter’s been an extremely tough one on most retailers, but just how bad it really was will start to be made clear as Wal-Mart Stores Inc. and Macy’s Inc. kick off the fourth-quarter earnings season today.
Nine major retailers will unveil their results this week and collectively analysts expect them to post a 12.6 percent drop in adjusted profits on a 1.1 percent gain of sales, according to data from S&P Capital IQ. (The trend is slightly better, but still down excluding the giant Wal-Mart, with the other eight retailers combined showing a 5 percent profit loss on a 0.6 percent increase in fourth-quarter sales).
In short, retailers were forced to cut prices to move goods, eating into already slim earnings.
Part of the problem is centered on the consumer, who is simply not buying apparel the way they have in the past, opting for less expensive fast-fashion looks and spending more on experiences.
But retailers are also having to spend more to reinvent their businesses, meeting the challenges of a quick-turn and much more digital marketplace.
The combination is toxic to the bottom line.
Wal-Mart is also running up against the law of large numbers, with sales slated to top $481 billion last year.
“Though Wal-Mart’s 2016 results have generally been in line to better than management had projected and the Jet.com acquisition should help drive e-commerce growth in the fourth quarter, we suspect that the company was not immune to some of the in-store traffic challenges experienced elsewhere within retail,” said Scot Ciccarelli, analyst at RBC Capital Markets. (Wal-Mart acquired e-tailer Jet for $3.3 billion last year and tapped its founder, Marc Lore, to build its online business.)
“Longer-term, Wal-Mart is making some smart strategic changes to improve its competitive positioning; however, it has become increasingly difficult for it to grow,” Ciccarelli said, adding the company “is being forced to continue to accelerate investments to defend existing market share, and many of its newer growth initiatives are margin-dilutive.”
Macy’s has it’s own, although not unique problems, including store closures and sagging results, and will also face questions from Wall Street about rumors that the company is seen as a takeover target.
On Tuesday, one of the industry’s few truly strong players, off-price giant TJX, will update its investors and although profits are expected to be down slightly, sales are slated to rise strongly, with a 5.3 percent gain.
In a sign of the times, TJX is now bigger than Macy’s on the sales line.
Nordstrom Inc., perhaps the strongest department store player now, is still seen as a solid business despite expected profit declines. Certainly, it’s not immune to the ills of the market.
Christian Buss, an analyst at Credit Suisse, said Nordstrom would “continue to grow sales and outperform peers, but believe some caution is in order near-term given highly challenging market conditions over the holiday period.”
J.C. Penney Co. will end the week on Friday with what is supposed to be the strongest bottom-line showing of the bunch, a 57.2 percent gain to $190.2 million despite a 0.6 percent sales decline.
Penney’s misadventure under former ceo Ron Johnson, which saw a dramatic strategy change lead to dramatic sales declines, has given the company a hole to climb out of — a process that maybe others are just beginning.
Rules threaten $100bn worth of China share sales
Securities regulator concerned private placements used to fund speculation
At least 180 Chinese listed companies will be forced to cancel or scale back planned rights offerings worth $97bn in response to regulations that target excessive fundraising used for dubious acquisitions and financial speculation.
The rules come as Chinese regulators are increasingly concerned about the trend of “exit the real, enter the fake” — a phrase used to denote companies abandoning real economic activity in favour of financial engineering. Listed companies invested a record $110bn into passive financial products in 2016 even as fixed-asset investment grew at its slowest pace since 1999.
China’s securities regulator on Friday issued regulations that restrict the use of secondary share offerings through private placements. In addition to financial products, such share sales have largely been used to fund private-equity acquisitions, with investment targets chosen to match investment “concepts” popular with retail investors, even when the target is outside the acquirer's core business.
Much like company name changes designed to pump up share prices by signalling a strategy shift to trendy businesses such as technology, the acquisitions are intended to attract interest from speculators.
“The secondary private placement has been used by company management as a way to securitise low quality assets so as to cash out. Small investors have been left holding the bag,” said Hong Hao, head of research at Bocom International in Hong Kong.
The strategy of raising shares through listed companies to acquire unlisted ones is especially attractive in China, where the government tightly controls the flow of initial public offerings, and many companies have waited years for approval. Private placements were the preferred method because the rules allow pricing new shares below their current market value.
Last year, 793 Shanghai and Shenzhen-listed companies raised Rmb1.8tn ($261bn) through private placements. Meanwhile, the 227 IPOs in those two exchanges were worth only Rmb150bn, according to data from Wind Information.
The latest rules state that the amount of shares issued through private placements cannot exceed 20 per cent of previously outstanding shares. Companies will not be allowed to conduct private placements if they have already completed a placement within the past 18 months. And non-financial companies that already have “rather large” cash balances or other financial asset holdings will not be allowed to place shares.
Some 178 listed companies have disclosed private placement plans worth an estimated Rmb668bn that appear to run afoul of the first two provisions, according to an FT analysis of Wind data.
The move to curb financial speculation fuelled by secondary share listings is in line with China’s broader focus on curbing financial risks this year. The central bank has guided money-market interest rates higher in recent months in an effort to deflate a bond bubble.
The latest rules are also linked to the government’s medium-term goal of phasing out the approval requirements for IPOs and allowing the market to decide which companies can sell new shares, when they sell and at what price.
The China Securities Regulatory Commission has noticeably increased the pace of IPO approvals in recent months. Analysts say that the agency intends to first reduce the IPO queue, which stands at 619 companies, before deregulating the IPO process. CSRC chairman Liu Shiyu said this month that he anticipated it would take two to three years to go through the latest IPO applicants.
A relatively strong market has eased fears that increased IPO activity will siphon demand from existing shares. But analysts say tightening secondary offerings is in part an effort to rebalance overall equity fundraising towards IPOs while keeping overall volumes in check.
“The scale of private placements over the past two years has been enormous, and growth has been very fast,” said Zhu Bin, tactical analyst at Southwest Securities in Shanghai. “The ‘bloodsucking’ impact on the overall capital markets has been devastating.”