(GS) Still more Food: GIS up to Neutral; CHD/CL down to Neutral/Sell

* Sticking with our 2015 resolution of more Food
We raised our coverage view of Food to Neutral from Cautious in January on the view that industry challenges were understood and risk of value creating corporate actions was rising (e.g., cost cuts, M&A, restructuring). This remains our view today and we continue to expect management teams to take emboldened steps to create value in the wake of the pending Heinz- Kraft merger. Meanwhile we see risk that the macro drivers of a strengthening dollar and rising rates return to the forefront later this year and see HPC as most susceptible in our coverage universe, making us more cautious on HPC.

* Let the General ride again; GIS up to Neutral
We maintain a guarded stance on US-centric packaged food and see risk the industry suffers a multi-year rebasing of gross margins as portfolios are rebalanced to align with shifting demand patterns. In fresh analysis detailed in a separate report today (Millennials Munching) we detail why we see GIS as further along than peers in shifting to meet the demands of the critical Millennial generation. Our analysis leads us to raise our fundamental forecast and valuation targets for GIS. With added event optionality, we find reason to move off our Sell rating and upgrade GIS to Neutral.

* More cautious on HPC; CL down to Sell, CHD down to Neutral
CL sits in the cross-hairs of some of the largest risks in HPC. Its FX exposure is substantial and we believe the margin implications are underestimated. Our EPS estimates are 3-5% below consensus and we see potential for up
to 11% incremental downside if GS Macro Research forecasts prove correct. And like US-based peers, it faces risk of competitive threats from EU competitors (FX funded flexibility vs. US peers) and local/regional competitors, both of which may limit pricing power outside of LatAm. The exposure is not dissimilar to PG and KMB, but CL has outperformed each and we expect relative underperformance going forward. While the macro backdrop still favors US-centric names, in our opinion, the confluence of limited upside to our price target and emergence of new competitive threats in US laundry cause us to downgrade CHD to Neutral from Buy. The new threat in laundry comes from Henkel and appears positioned as a direct threat to PG’s Tide, but we see risk that PG reacts to stop it in its tracks, putting at risk our view that CHD would benefit from a less competitive laundry environment.

(Makor) Technical View S&P 500 Index (2,081 last) - Bullish above 2,040, target 2,180-90



 

                S&P 500 Index

 

·         The Index found support on the 55dma and is set to open higher today

·         The triangle pattern highlighted on the chart suggest that we are in a final wave 'E' within this consolidation

·         As long as 2,040 holds as support a move higher is my preferred scenario

·         Based on the height of this pattern, a break above 2,111-2,119 would argue for a measured move to 2,190

·         In our previous email we noted that we would use a dip to 2,075 to be long. The low on Friday was 2,072.

 

Strategy: Long from 2,075, target 2,180 with a stop on a close below 2,040.

 

Daily chart

 

>>> Fed's Dudley (dove, FOMC voter): Timing of Fed rate hikes is data dependent;

Fed's Dudley (dove, FOMC voter): Timing of Fed rate hikes is data dependent; reiterates pace of tightening will depend on market reaction and the economy 
- Still hope rate hikes will be possible in 2015, cannot say when normalization will happen
- Expect some market turbulence when rate lift off occurs
- Unemployment rate is at levels that will push gains in income, rate to reach 5% by the end of 2015
- Confident that inflation will trend back to 2% over time
- Economy to pick up again, mirroring performance in 2013 and 2014- Stronger USD has slowed US economic growth 
- Even after the first rate hikes, policy will remain pretty easy

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: FARO -14.8%, RCL -6.9%

Other news: ADXS -5% (files for $200 mln offering of common stock), NBG -4.2% (on going speculation on Greece default), CRIS -3.2% (files for ~17.2 mln share common stock offering by selling shareholders), YNDX -2.6% (Barron's profiles cautious view), TRCO -0.9% (announces a secondary offering of 9.24 mln shares of common stock by selling stockholder Oaktree Capital Management)

Analyst comments: BBVA -1.6% (removed from Conviction Buy list at Goldman), CMRE -1.3% (downgraded to Underperform from Neutral at BofA/Merrill), LULU -0.7% (downgraded to Underperform from Outperform at Credit Agricole), KORS -0.7% (downgraded to Neutral from Buy at Mizuho; tgt $70 from $80), CL -0.6% (downgraded to Sell from Neutral at Goldman), SYT -0.6% (downgraded to Hold at Kepler), MDVN -0.5% (downgraded to Neutral from Outperform at Credit Suisse
)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: HAS +8.2%, SVA +6.4%, CHKP +2.4%, MS +2%, LII +1.6%, HAL +0.4%

M&A news: PLD +2.6% (signs definitive agreements to acquire $5.9 bln portfolio from KTR Capital Partners; also rpted earnings)

Select metals/mining stocks trading higher: GFI +3%, FSM +2.9%, HMY +2.6%, RIO +0.8%, BHP +0.5%

Other news: GENE +25.8% (announces additional breast health centres to begin offering BREVAGenplus), PVCT +11.1% (Provectus Pharma and Pfizer (PFE) announce receipt of Patent Allowance for Use of PV-10 for the treatment of cancer), HQCL +8.8% (announces over 1.5 GW solar module supply agreement to power NextEra Energy Resources' (NEE) continued solar investments in the U.S.), CYCC +6.9% (announces pre-clinical data from its Second-Generation CDK2/9 inhibitor), ONCY +6.4% (announces that a series of poster presentations by its research collaborators will be made at the 2015 AACR), VPCO +6.3% (files for ~6.2 mln share common stock offering by selling shareholders), ROVI +6.3% (announces it has renewed its patent license and interactive program guide product agreement with Charter Communications), NBS +4.6% (announces the expansion of manufacturing services under an existing Services Agreement between its subsidiary and Kite Pharma (KITE)), FNRG +4.5% (founder and majority shareholder Richard St-Julien voluntarily resigned as the Company's Executive Chairman of the Board, and from all other positions he held with the company; also issues business update; divested its interest in Trans Pacific Energy and its TCS business), CLDX +3.7% (announces preclinical results that further support varlilumab's expansion into combination studies with PD-1 inhibitors), URI +2.1% (Barron's profiles positive view), TASR +2.1% (announces that the Ontario Provincial Police has purchased 1000 Taser X2 smart weapons), PBR +1.7% (announced the concluded negotiations on various loan contracts), HZNP +1.6% (announces proposed private offering of senior notes and intention to enter into new term loan facility), ABBV +1.5% (extends exchange offer to acquire Pharmacyclics (PCYC) to May 1, 2015), CHRS +1.4% (obtained positive results of a repeat Phase 1 pharmacokinetic bioequivalence study for CHS-0214, its etanercept biosimilar candidate), MAT +1.4% (in sympathy with HAS earnings), ING +1.3% (still checking), COST +1.2% (announces reauthorization of $4 bln stock repurchase program; increases quarterly dividend 12.7% to $0.40 from $0.355 per share), MRK +1% (announces submission of supplemental Biologics License Application to FDA for KEYTRUDA in advanced non-small cell lung cancer), MNTA +0.9% (presents new data from studies conducted as part of the ANDA submission for once daily Glatopa)

Analyst comments: ADRO +9% (initiated with a Buy at ROTH Capital; tgt $74), SEDG +3.4% (initiated with a Buy at Goldman; initiated with a Buy at Deutsche Bank), CLLS +3.1% (initiated with a Overweight at Piper Jaffray), CUBE +2.9% (upgraded to Buy from Hold at Evercore ISI), MTG +2.7% (upgraded to Neutral from Underperform at Credit Suisse), BCRX +2.7% (upgraded to Neutral from Underperform at BofA/Merrill), SPLK +1.7% (initiated with a Buy at Citigroup), JBHT +1.7% (upgraded to Buy from Underperform at BofA/Merrill), CPLP +1.7% (upgraded to Buy from Neutral at BofA/Merrill), GIS +1.6% (upgraded to Neutral from Sell at Goldman), HSBC +1.5% (added to Conviction Buy List at Goldman), FB +1.1% (favorable commentary at Oppenheimer),UN +0.5% (upgraded to Outperform from Sector Perform at RBC Capital Mkts), JNJ +0.5% (added to Short-Term Buy List at Deutsche Bank
)

>>> Lennox Intl misses by $0.09, misses on revs; reaffirms FY15 EPS guidance; co

Lennox Intl misses by $0.09, misses on revs; reaffirms FY15 EPS guidance; co says some Commercial segment equipment sales got pushed from Q1 into Q2-Q4

Reports Q1 (Mar) earnings of $0.37 per share, excluding non-recurring items, $0.09 worse than the Capital IQ Consensus Estimate of $0.46; revenues fell 1.4% year/year to $685.8 mln vs the $714.8 mln consensus. Co reaffirms guidance for FY15, sees EPS of $5.20-5.60, excluding non-recurring items, vs. $5.39 Capital IQ Consensus Estimate.
  • "We continued to see strong momentum in our Residential business in [Q1], and our Refrigeration business was as expected...However, our Commercial business saw the timing of specific national account equipment business shift beyond the first quarter into the second through fourth quarters of this year. While Commercial national account business was down in the first quarter, our backlog is up double digits from a year ago, and we continue to expect solid growth for 2015 overall."