EU SEMICONDUCTORS: Outside of mobile phones and PCs, Autos has emerged as a key growth area for semis, and now accounts for ~10% of global semis market. Also Auto semis has grown at 7% CAGR over 2010–2015 vs. overall semis market growing at 2% CAGR, and we expect it to continue given increasing focus around advanced safety, lower CO2 emissions and improved connectivity. With Infineon and STM having a material auto exposure, we look at monthly trends in the auto sector. So far, we have had car sales data from a number of key markets for the month of May, which shows auto volumes likely to be up 4% yoy for May-16 indicating another robust month.
H1 charges to clear the way for H2 rebound* H1 issues soon to be over: Programme issues on A320neo, A350 and A400M (largely supplier-driven) have troubled Airbus in H1. We expect the situation to improve from June-July onwards, which would make H2 a much better period for the stock. We do not expect these issues to reflect an underlying deterioration of the industrial performance of the group and to materially impact the 2018-2020 FCF story supporting our investment case.* Programme issues largely priced in: We believe that the prospect of oneoff charges on A400M and A350 has been holding back the stock. We have now provided for EUR1.5bn of such exceptionals (of which EUR500m already in our model). These charges may be announced with H1 results, removing an overhang which has impacted H1 stock performance. They are not yet fully in consensus data but we estimate that they are largely priced in, after a 9% underperformance of the stock YTD against the STOXX600.* Cycle worries appear overblown: A moderation of the order intake is normal in our view. This should not derail the expected delivery increase, given the backlog levels and good financial health of the airlines industry. Worries on short term order inflow may even be alleviated by the book-to-bill in April and May of respectively 1.6x and 1.5x* Catalysts: H1 results on 27 July; Farnborough airshow on 11-15 July; restart of PW1000G-powered A320neos deliveries and ramp-up of A350 production in June; start of LEAP-powered A320neo this summer.* Valuation: As a result of the additional one-offs on A350 and A400M, we trim our target price from EUR80 to EUR79 per share (with EUR/USD rates based on a spot of 1.10, unchanged). The stock currently trades on EV/EBIT multiples of 8.6x 2017E and 6.2x 2018E (vs an historical average of 10.0x). The expected 2018-2020 FCF accumulation should generate excess cash of up to EUR15bn, possibly distributed to shareholders via share buybacks
H1 charges to clear the way for H2 rebound
* H1 issues soon to be over: Programme issues on A320neo, A350 and A400M (largely supplier-driven) have troubled Airbus in H1. We expect the situation to improve from June-July onwards, which would make H2 a much better period for the stock. We do not expect these issues to reflect an underlying deterioration of the industrial performance of the group and to materially impact the 2018-2020 FCF story supporting our investment case.
* Programme issues largely priced in: We believe that the prospect of oneoff charges on A400M and A350 has been holding back the stock. We have now provided for EUR1.5bn of such exceptionals (of which EUR500m already in our model). These charges may be announced with H1 results, removing an overhang which has impacted H1 stock performance. They are not yet fully in consensus data but we estimate that they are largely priced in, after a 9% underperformance of the stock YTD against the STOXX600.
* Cycle worries appear overblown: A moderation of the order intake is normal in our view. This should not derail the expected delivery increase, given the backlog levels and good financial health of the airlines industry. Worries on short term order inflow may even be alleviated by the book-to-bill in April and May of respectively 1.6x and 1.5x
* Catalysts: H1 results on 27 July; Farnborough airshow on 11-15 July; restart of PW1000G-powered A320neos deliveries and ramp-up of A350 production in June; start of LEAP-powered A320neo this summer.
* Valuation: As a result of the additional one-offs on A350 and A400M, we trim our target price from EUR80 to EUR79 per share (with EUR/USD rates based on a spot of 1.10, unchanged). The stock currently trades on EV/EBIT multiples of 8.6x 2017E and 6.2x 2018E (vs an historical average of 10.0x). The expected 2018-2020 FCF accumulation should generate excess cash of up to EUR15bn, possibly distributed to shareholders via share buybacks
Dow +0.10% S&P +0.13% Nasdaq -0.14% Russell +0.26%
US Market closed near the flat line as a a rally in crude oil and a positive economic outlook from Fed Chair Yellen could not keep equities near their highs. Six sectors ended in the green with energy (+2.1%) leading telecom services (+1.5%) and industrials (+0.4%). Conversely, health care (-0.7%), financials (-0.3%), and utilities (-0.3%) ended with the largest losses. The energy sector (+2.1%) traded lockstep with crude oil as the energy component extended its 2016 advance. WTI crude ended its day higher by 1.3% ($50.38/bbl; +$0.65). Volume were in line with average @ 844m shares. US After Hours PLAY +5%, HQY +5%, PAY -28% following earnings/guidance. Asian equity markets are mixed, echoing a pause in the rally for US indices, as investors look for fresh catalysts beyond the dovish Fed speak and the rebound in oil prices. Today's assessment from World Bank demonstrates the conundrum - global GDP forecast for 2016 was revised down to 3.5% from 4.1%, US target cut to 1.9% from 2.7%, Japan cut to 0.5% from 1.3%, and China maintained at 6.7%. In its accompanying Global Economic Prospects report, World Bank notes "weakness in the global economy has persisted and risks have become more pronounced (as) divergence in economic conditions between commodity exporters and importers has widened." China trade figures were similarly mixed. While the trade surplus was slightly below expectations, market reaction overall was somewhat positive on more constructive components. In Japan, Q1 final GDP report confirmed the economy has averted a technical recession, though concerns remain that the impact of Kumamoto earthquake will plunge the country back into contraction.
Nikkei +0.61% Hang Seng-0.30% CSI -0.39% Shanghai -0.30%
Eur$1.1365 CNH 6.5749 CNY 6.5707 JPY +0.31% GBP 1.4555 CHF 0.9651 RUB 64.6730
S&P+0.02% EuroStoxx -0.33% Dax +0.22% SMI -0.18%
Macro :
- China May Retail Auto Sales Rise 11.4% on Year: PCA
- U.S. April Consumer Credit Rose $13.4b, Est. Up $18b
- Uber’s Kalanick Says North America Business Profitable: Bild
Keep an eye on :
- AF FP : Air France-KLM May Passengers Rise 3.8%; Load Factors Fall
- CS FP : French Floods Insured Damage Estimate EU900m-EU1.4b: AFA
- BCP PL : Banco Comercial Has No Plans To Raise Capital, Reuters Says
- DB1 GY : Deutsche Boerse to Automate Share Index Composition
- EBS AV : Erste Group Holder Uniqa Foundation to Sell About 17.4m Shares for €22.50/share
- EKT SM : UBS Placing About 4.7% of Euskaltel on Behalf of Franklin Mutual, Stake Sold at EU8.70/Shr
- ENGI FP : Engie Job Cuts Announced So Far Total 950, Unions Say: AFP
- FDPA FP : Eurosic Bid Deadline for Fonciere de Paris Extended: Regulator
- HDD GY : Heidelberger Druck Targets Med-Term Annual Sales Growth Up to 4%
- K US : Kellogg Calls Active; Previously Cited as Takeover Target
- NOVN VX : Novartis: New Cosentyx Data in Ankylosing Spondylitis at EULAR
- ORA FP : Orange Not Excluding Partnerships to Create Pan-European Actor
- ROG VX : Roche Gets EU Approval of Avastin Tarceva Combo for NSCLC
- SAN FP : Sanofi R&D Chief Says Disappointment on Praluent Is ‘Artificial’
- TOM2 NA : TomTom Selected by Volvo Cars as Maps, Navigation Provider
- VOD LN : Sky Network in Talks With Vodafone NZ on Potential Combination
- VOLVB SS : Industrivarden Sells Shares in Volvo, Buys in Handelsbanken
- WDH DC : William Demant Looking for More Retail Acquisitions: Rtrs
>>> Up
*ALFA LAVAL RAISED TO HOLD AT NORDEA
*GENERALI RAISED TO BUY VS NEUTRAL AT UBS
*GREENCORE GROUP RAISED TO BUY AT SOCIETE GENERALE
*WARTSILA RAISED TO NEUTRAL VS SELL AT GOLDMAN
>>> Down
*AIXTRON CUT TO SELL FROM HOLD AT HEALVEA - BAADER
*DNB CUT TO REDUCE VS ADD AT ALPHAVALUE
*HOCHSCHILD MINING CUT TO NEUTRAL VS BUY AT UBS
*K&S CUT TO MARKET PERFORM AT BERNSTEIN
*REXEL CUT TO NEUTRAL VS BUY AT CITI
*SECHE ENVIRONNEMENT CUT TO HOLD AT SOCIETE GENERALE
*VERIFONE SYSTEMS CUT TO EQUALWEIGHT AT BARCLAYS
>>> PT Change
>>> Initiation
*DIALOG SEMI RESUMED EQUALWEIGHT AT MORGAN STANLEY, PT EU31
*ERICSSON RATED NEW BUY AT DNB, PT SEK71
*TECHNOGYM RATED NEW NEUTRAL AT GOLDMAN, PT EU4.24
*TECHNOGYM RATED NEW NEUTRAL AT JPMORGAN
*VEDANTA RESOURCES RESUMED NEUTRAL AT CITI, PT 440P
>>> Call
Asian Mid-session Market Update: China trade surplus shy of surplus despite smaller decline in imports; World Bank cuts global GDP target
***Economic Data***
- (CN) CHINA MAY TRADE BALANCE (USD terms): $50.0B v $55.6Be
- (CN) China Passenger Car Association (PCA): China May vehicle sales +11.4% y/y; YTD +7.7% y/y
- (JP) JAPAN Q1 FINAL GDP Q/Q: 0.5% V 0.5%E; ANNUALIZED GDP: 1.9% V 1.9%E
- (JP) JAPAN APR CURRENT ACCOUNT BALANCE: ¥1.88T V ¥2.30TE; ADJUSTED CURRENT ACCOUNT: ¥1.63T V ¥2.01TE; TRADE BALANCE: ¥697B V ¥919BE
- (JP) JAPAN MAY BANK LENDING (INCL TRUSTS) Y/Y: 2.2% V 2.2% PRIOR; BANK LENDING (EX- TRUSTS) Y/Y: 2.2% V 2.3%E
- (AU) AUSTRALIA APR HOME LOANS M/M: 1.7% V 2.5%E
- (NZ) NEW ZEALAND Q1 MANUFACTURING ACTIVITY Q/Q: -2.6% V -2.3% PRIOR; VOLUME Q/Q: -1.2% V 0.8% PRIOR
- (KR) South Korea May Bank Lending to Households (KRW): 660.9T v 654.2T prior
***Index Snapshot (as of 05:00 GMT)***
- Nikkei225 +0.4%, S&P/ASX -0.1%, Kospi +0.1%, Shanghai Composite -0.4%, Hang Seng -0.3%, Jun S&P500 -0.1% at 2,109
***Commodities/Fixed Income***
- Aug gold +0.3% at $1,250/oz, Jul crude oil +0.4% at $50.54/brl, Jul copper +0.5% at $2.06/lb
- SLV: iShares Silver Trust ETF daily holdings rise to 10,535 tonnes from 10,491 tonnes prior; highest since May 5th
- (US) Weekly API Oil Inventories: Crude: -3.6M v +2.3M prior
- (CN) Platts China Oil Analytics: China Oil Demand in Apr fell 1.3% y/y
- (CN) China MoF sells 2-yr bonds at 2.563%, bid-to-cover 1.95x; 5-yr bonds at 2.774%, bid-to-cover 2.63x
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.5593 V 6.5618 PRIOR
- (CN) PBOC to inject CNY55B in 7-day reverse repos
- (JP) BOJ offers to buy ¥450B in 5-10yr JGBs, ¥220B in 10-25yr JGBs, and ¥140B in JGBs with maturity over 25-yr, and ¥25B in inflation-indexed JGBs
- JGB: (JP) China said to have bought a record amount of Japan short term debt in April - financial press
- (AU) Australia MoF (AOFM) sells A$1.1B in 5.75% 2021 Bonds; avg yield: 1.753%; bid-to-cover: 2.66x
***Market Focal Points/FX***
- Asian equity markets are mixed, echoing a pause in the rally for US indices, as investors look for fresh catalysts beyond the dovish Fed speak and the rebound in oil prices. While key US markets are near all-time highs, the recovery in labor has come under question and growth overseas has slowed. Today's assessment from World Bank demonstrates the conundrum - global GDP forecast for 2016 was revised down to 3.5% from 4.1%, US target cut to 1.9% from 2.7%, Japan cut to 0.5% from 1.3%, and China maintained at 6.7%. In its accompanying Global Economic Prospects report, World Bank notes "weakness in the global economy has persisted and risks have become more pronounced (as) divergence in economic conditions between commodity exporters and importers has widened." Among FX majors, USD was under modest pressure - USD/JPY fell as much as 60pips below 106.80, AUD/USD reversed initial drop to 0.7430, and NZD/USD rose about 50pips from the lows toward $0.70 level.
- China trade figures were similarly mixed. While the trade surplus was slightly below expectations, market reaction overall was somewhat positive on more constructive components. Exports decline of -4.1% was slightly less than expected -4.2% and the closely monitored Imports saw a much smaller decline of -0.4% v -6.8%e, indicative of recovering internal demand for materials. Recall that similar trends have been observed in exports data out of Australia. Also of note in China, a PBoC research paper maintained 2016 GDP target, raised CPI forecast from 1.7% to 2.4%, and warned about Export growth to forecast a decline of -1% vs +3% prior.
- In Japan, Q1 final GDP report confirmed the economy has averted a technical recession, though concerns remain that the impact of Kumamoto earthquake will plunge the country back into contraction. Japan's Q1 GDP components saw Private consumption rise 0.6% - up from 0.5%e and 0.5% prelim - while the CAPEX decline of -0.7% was worse than -0.4%e but up from -1.4% prelim. More skeptical analysts are quick to note that the data includes an extra Leap Year day, and growth would have been slower adjusted for that impact.
***Equities***
US equities / ADRs:
- PLAY: Reports Q1 $0.72 v $0.59e, R$262M v $251Me; Authorizes $100M share repurchase through FY18 (5.7% of market cap); Raises FY16 guidance; +4.8% afterhours
- PAY: Reports Q2 $0.47 v $0.53e, R$532M v $528Me; Cuts FY16 $1.85 v $2.23e, R$2.1B v $2.15Be (prior $2.21-2.24, R$2.15-2.17B); -27.6% afterhours
Notable movers by sector:
- Consumer discretionary: Skyworth Digital 751.HK -1.5% (May result); Xiao Nan Guo Restaurants Holdings 3666.HK -15.0% (acquisition); Chow Tai Fook Jewellery Group 1929.HK -2.4% (annual result)
- Financials: Central China Real Estate 832.HK +0.8% (May result)
- Technology: Beijing Baofeng Technology Co 300431.CN +1.0% (being rejected for asset acquisition plan); Screen Holdings Co 7735.JP +4.5% (Samsung said to consider bendable-screen phones); Fujitsu 6702.JP +1.4% (signs MOU with Box)
- Materials: Hanwha Chemical 009830.KR +6.2% (Q2 result speculation)
- Telecom: Spark New Zealand SPK.NZ -3.0% (in talks with Vodafone NZ for potential combination)
After Hours Summary: PLAY +5%, HQY +5%, PAY -28% following earnings/guidance;After Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: PLAY +5.1%, HQY +5%
Companies trading higher in after hours in reaction to news: GEVO +34.3% (announces that the first two commercial flights using its renewable alcohol to jet fuel flew from Seattle to San Francisco and Washington), CAPN +21.3% (enters into exclusive 3-year distribution agreement with M/s Healthware Private for the sale of its CoSense End-Tidal Carbon Monoxide Monitor & Precision Sampling Sets in India), HHS +13.9% (to explore strategic alternatives for its Trillium Software business), PTX +12.6% (being attributed to Point72 Asset Management's Steven Cohen stake increase)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: PAY -27.6%, DLTH -8.3%, OXM -7%, VRNT -1.5%
Companies trading lower in after hours in reaction to news: FLXN -11.1% (commences $60 mln common stock offering), ASC -8.1% (to offer 7.5 mln common shares in an underwritten public offering; to acquire six modern, Eco-Design MR product/chemical tankers for ~172.5 mln; expected to be accretive), RMP -6.7% (commences underwritten public offering of 8 mln common units representing limited partner interests), SU -2.7% (files for common stock offering; proposed max aggregate offering price of ~$1.758 bln)
Closing Market Summary: Averages Lose Steam in Final HourThe stock market ended the Tuesday affair on a flat note as a rally in crude oil and a positive economic outlook from Fed Chair Yellen could not keep equities near their highs. Additionally, the Dow Jones Transportation Average (+1.1%) and the PHLX Semiconductor Index (+1.0%) each outperformed the S&P 500 (+0.1%). The Dow Jones Industrial Average (+0.1%) finished in-line with the benchmark index (+0.1%) while the Nasdaq Composite (-0.1%) underperformed.
Equity indices opened above their flat lines as yesterday's remarks from Fed Chair Yellen stoked risk appetite. Ms. Yellen struck an optimistic tone yesterday when she reiterated an optimistic outlook despite a disappointing reading of the May jobs report. The Fed Chair maintained that further gradual increases in the federal funds rate are likely to be appropriate and conducive to meeting and maintaining the Fed's dual mandate.
The major averages climbed through the afternoon as the benchmark index notched a new 2016 intraday high (2119.22) and the Dow Jones Industrial Average briefly reclaimed the 18,000 price level. However, the S&P 500 tested and failed to clear resistance near the 2120/2122 price level and surrendered most of its gains through the final hour of trade. Six sectors ended in the green with energy (+2.1%) leading telecom services (+1.5%) and industrials (+0.4%). Conversely, health care (-0.7%), financials (-0.3%), and utilities (-0.3%) ended with the largest losses.
The energy sector (+2.1%) traded lockstep with crude oil as the energy component extended its 2016 advance. WTI crude ended its day higher by 1.3% ($50.38/bbl; +$0.65). The American Petroleum Institute will release its latest stockpile data this evening. Crude oil inventories are expected to decline by 3.50 million barrels. Additionally, the more influential inventory report from the Department of Energy will be released tomorrow morning at 10:30 ET.
The Dow Jones Transportation Average (+1.1%) outperformed as the index benefited from a rally in airline names. The U.S. Global Jets ETF (JETS 23.15, +0.52) ended its day higher by 2.3%. Elsewhere in the index, Avis Budget (CAR 34.26, +1.69) gained 5.2% while CSX (CSX 26.47, -0.03) underperformed in the rail sub-group. The Transportation Index has gained 4.6% in 2016, trailing the broader industrial sector (+0.4%; year-to-date +5.7%).
In the consumer discretionary space (+0.4%), the SPDR S&P Retail ETF (XRT 42.95, +0.30) gained 0.7% as Dow component Home Depot (HD 129.92, +0.73) rebounded 0.6%. The home improvement retailer also benefited from strength in the homebuilder sub-group. On that note, PulteGroup (PHM 19.37, +0.76) jumped 4.1% on news that Elliot Management took a 2.0% stake in the company. The broader iShares Dow Jones US Home Construction ETF (ITB 27.97, +0.45) gained 1.6%.
Biotechnology weighed on the broader health care space (-0.7%) and the tech-heavy Nasdaq (-0.1%). The iShares Nasdaq Biotechnology ETF (IBB 278.76, -7.31) lost 2.6% and is now down 0.4% for the month of June. The sub-group traded lower as Biogen (BIIB 252.86, -36.98) and Valeant Pharmaceuticals (VRX 24.64, -4.21) weighed.
The Treasury complex traded on a higher note throughout the session despite an uptick in equities. The yield on the 10-yr note finished its day lower by two basis points at 1.72%.
Today's participation was above the recent average as more than 844 million shares changed hands on the NYSE floor.
Today's economic data included the revised estimate for first quarter Productivity, Unit Labor Costs, and Consumer Credit for April:
- Nonfarm business sector labor productivity decreased at a 0.6% annual rate in the first quarter, as expected, versus an originally reported decrease of 1.0%.
- The revised productivity number was the result of output increasing 0.9% and hours worked increasing 1.5%. On a year-over-year basis, first quarter productivity increased a lowly 0.7%.
- While the upward revision to first quarter productivity is nice to see, the fact remains that productivity is weak.
- Unit labor costs, in turn, were revised higher, logging an increase of 4.5% (consensus 4.0%) versus an originally reported increase of 4.0%.
- The revised unit labor costs number flowed from the 0.6% decline in productivity and a 3.9% increase in hourly compensation. On a year-over-year basis, unit labor costs are up 3.0%.
- Total outstanding consumer credit increased by $13.4 billion in April after increasing a downwardly revised $28.4 billion (from $29.6 billion) in March. The consensus estimate for April was $18.5 billion.
- In the preceding 12-month period leading up to April, consumer credit had risen by an average of $18.3 billion.
- The growth in April was driven predominately by nonrevolving credit, which increased by $11.7 billion. Revolving credit increased by $1.7 billion.
- In April, consumer credit increased at a seasonally adjusted annual rate of 4.5%.
Tomorrow's economic data will include the weekly MBA Mortgage Index and the April Job Openings and Labor Turnover Survey, which will be released at 7:00 ET and 10:00 ET, respectively.
- Russell 2000 +3.9% YTD
- S&P 500 +3.3% YTD
- Dow Jones +3.0% YTD
- Nasdaq Composite -0.9% YTD