Daily Markets: Apple (AAPL) Reveals Coronavirus Will Affect Revenue Expectations

Today’s Big Picture

Last Friday we noted traders would likely take a cautious stance heading into the long weekend that saw US equity markets closed yesterday in observation of Presidents’ Day and we were correct in our thinking as stocks gave back most of their gains to finish the day little changed. That concern proved to be on the nose as Apple (AAPL) pre-announced that it would not meet its revenue expectations for the current quarter that it laid out on Jan. 28, which was wider than usual as the company looked to account for the impact of the coronavirus - see more in Stocks to Watch. 

As we’ve all come to realize in recent weeks, the scope of the virus’s impact has been far greater than many initially expected and even as China looks to get back to work, that resumption has been slower than expected. This morning we are seeing that play out in the latest ZEW Indicators for both the Eurozone and Germany, and as we point out in today’s Data Download China is a larger trading partner for the US than Germany, and likely means we will be hearing more reports like the one from Apple in the coming days. 

On an anecdotal note, for what it is worth, one of your authors traveled through London, Dublin, and Milan over the past week. The Dublin airport was peppered with signs requesting that travelers self-identify if they had recently been in China. The Milan airport funneled all passengers, regardless of point of embarkation, through a medical checkpoint in which body temperature was checked by workers fully encased in hazmat-style protective clothing.

This realization along with a steeper than expected contraction in Japan’s economy during the December quarter led Asian equities to end trading today on a down note. European equities are down almost across the board and US futures point to decline at the market open, which is no startling surprise given Apple shares account 7.5% of the Dow Jones Industrial Average and 4.85% for the S&P 500.

Data Download

With today’s headlines dominated by COVID-19, a special briefing issued by Dun & Bradstreet concerning the global impact of the shutdowns across large parts of China ought to have investors’ attention. 

• The areas affected with 100+ confirmed cases as of February 5 are home to over 90% of all the active businesses in China.
• Just under 50% of the companies with subsidiaries in the impacted areas are headquartered in Hong Kong, 19% in the US, 12% in Japan and 5% in Germany.
• At least 51,000 companies worldwide and 163 of the Fortune 1000 have one or more direct “tier 1” suppliers in the affected region. Nearly 1/10th or 938 of the Fortune 1000 have one or more “tier 2” suppliers in the affected region.
• The impacted provinces of Guangdong, Jiangsu, Zhejiang, Beijing, and Shandong account for 50% of China's total employment and 48% of total sales volume. China as a whole generates around 20% of global GDP. If the containment continues beyond the summer, Dun & Bradstreet estimate that global GDP growth could be reduced by a full percentage point.

On Monday Moody’s revised its global growth forecasts down by 0.2%, forecasting G-20 aggregate growth of 2.4% in 2020 and China falling to 5.2%. China has experienced an averaged GDP growth rate of 9.5% from 1989 to 2019 with a record high of 15.3% in 1993 and a record low of 3.8% in 1990. It's last four quarters saw rates of 6.4% (Q12019), 6.2% (Q2), 6.0% (Q3) and 6.0% (Q4).

Japan’s economy shrank at an annualized rate of -6.3% in the December 2019 quarter, far faster than the expected 3.7% drop. We’d note this marks the first decline in five quarters for the country GDP, which is being attributed in part to the sales tax hike that hit consumer and business spending. Paired with the fallout of the coronavirus, we could see the country hit a technical recession during the current quarter. Japan is the top tourist destination for residents of Beijing.

The ZEW Indicator of Economic Sentiment for the Eurozone fell by 15.2 to 10.4 in February from 25.6 in January, substantially below the expected reading of 30 for the month. 

The February ZEW Indicator of Economic Sentiment reading for Germany fell to 8.7 from 26.7 in January, missing the 21.5 consensus, with the assessment of the economic situation component dropping to -15.7, down 6.2 points from January. The suspected reason behind the February tumble is the impact of the coronavirus on the German economy. China is Germany's third-largest export partner, accounting for 7.2% of all exports in 2018 with the United States and France accounting for 8.7% and 8.1% respectively.

Just when you thought the stock market couldn’t possibly ask for more support, hat tip to central bankers around the world, the White House is reportedly looking at ways to use the tax code to incentivize US households to invest (more) in the stock market. The proposal would allow some portion of household income to be invested on a tax-free basis outside of the traditional 401(k). For a little perspective on the notion, before the financial crisis around 62% of households owned stocks. That number fell to 52% in the wake of the GFC and has risen to just 55% in 2019. Larry Kudlow, the director of the National Economic Council and Vice President Mike Pence indicated that details could be unveiled in early Fall, before the next presidential election. It would appear that timing is indeed everything!

Later this morning we’ll receive the February readings for the NY Empire Manufacturing and NAHB Housing Market indices. Late tonight, we have several pieces of Japan facing economic data as well including December Machinery Orders and January Imports & Exports.

Stocks to Watch

Citing both demand and supply from China, Apple announced it does not expect to meet its March quarter revenue guidance of $63-$67 billion issued in late January despite strong demand outside of China. Given the coronavirus, Apple is “experiencing a slower return to normal condition” than it anticipated for both its manufacturing partners and its retail stores. The company noted that “worldwide iPhone supply will be temporarily constrained.” Odds are this news will have a ripple effect across the smartphone supply chain and weigh on known iPhone supply companies including Qualcomm (QCOM), Skyworks (SWKS), Qorvo (QRVO), Broadcom (AVGO) and Cirrus Logic (CRUS).

Walmart (WMT) reported January quarter EPS of $1.38, below the expected $1.44, on revenue of $141.7 billion that matched expectations. The bulk of the bottom-line miss was attributed to disruptions in Chile and legal issue.  Comp sales for the quarter rose 1.9% while the company’s e-commerce business soared 35% YoY with strong growth in grocery pick-up and delivery. Walmart issued in-line guidance for the coming year with EPS of $5.00-5.15 vs. the $5.12 consensus. Alongside those results, Walmart also raised its annual dividend by 1.9% to $2.16 per share.

ConAgra (CAG) reduced its 2020 revenue and EPS guidance following softer than expected quarterly performance that included “consumption declines”  across the food industry. The Company now expects its 2020 organic net sales growth to be flat to +0.5% and its EPS in the range of $2.00-$2.07. We’d note this paints a very different picture than the one offered by the January Retail Sales Report that showed sales rising 6.1% YoY for three month period ending January 2020 at food services & drinking places as well as January grocery retail sales climbing 2.5% YoY.

The Financial Times is reporting the European Union has rejected Facebook’s (FB) latest vision of how online content should be regulated, “warning that the social media company will have to assume more responsibility for illegal material on its platforms.”

Dairy Farmers of America announced Monday that it has agreed to purchase Dean Foods (DFODQ), America’s largest milk producer which has been in Chapter 11 bankruptcy since November after suffering net losses in seven of the past eight quarters. The deal will need to be approved by the bankruptcy court and the Department of Justice. Dean Foods has been one of the victims of the headwinds that are part of Tematica Research’s Cleaner Living investment theme as consumers move away from traditional dairy products and towards nondairy alternatives.

General Motors (GM) announced over the weekend that it will "wind down" its sales, design and engineering operations in New Zealand and Australia, plans to discontinue its Holden brand in the region by 2021 and will exit Thailand. The company expects these actions to result in a $1.1 billion charge, mostly in the first quarter. This comes after the company sold its European operations in 2017 to French automaker PSA group.

Casinos in Macau are set to re-open Wednesday (Feb. 20), which is expected to provide some relief to casino operators including Las Vegas Sands (LVS), MGM Resorts International (MGM), Wynn Resorts (WYNN) and Galaxy Entertainment Group (GXYEF) among others.  

Troubled home furnishings retailer Pier 1 (PIR) filed for bankruptcy yesterday and announced it will try to find a buyer for the company. While the company has closed more than 400 stores, as of yesterday it had more than 500 open.

Shares of financial services company HSBC Holdings (HSBC) fell on the news the company plans to shed about 35,000 jobs as part of its downsizing its operations in Europe and the US and warned of the impact to be had on its business from the social unrest in Hong Kong and the coronavirus outbreak. 

Reports suggest Dell Technologies (DELL) is nearing a deal to sell its RSA cybersecurity business to technology-focused private equity firm STG Partners LLC for more than $2 billion. 

Simon Property Group (SPG), the biggest US mall owner, who is already finishing up an $81 million deal to rescue the bankrupt teen apparel retailer Forever 21, is now planning to acquire rival mall owner Taubman Centers (TCO)in a deal valued around $3.6 billion - seriously doubling down on bricks over clicks.

After the closing bell for the US equity markets is rung today, investors will be besieged by a barrage of corporate earnings reports. Given the news of the day, we can expect investors will continue to pay close attention to any and all coronavirus impact. The focal point of these post-market close earnings reports is likely to be Brookdale Senior Living(BKD), Groupon (GRPN), Herbalife Nutrition (HLF), Lending Club (LC), Scientific Games (SGMS), TiVo (TIVO) and Vornado Realty Trust (VNO). More detailed information on these and other expected earnings reports suggest visiting Nasdaq’s earnings calendar page. 

On the Horizon

• • Upcoming IPOs:
    • • For a complete list of upcoming IPOs by month, please visit the Nasdaq IPO Calendar.
  • Dates to mark:
    • • Feb. 19: European Central Bank rate decision
      • Feb. 24-27: Mobile World Congress
      • March 3: 2020 Presidential Election Super Tuesday
      • March 5-6: OPEC meeting
      • March 12: European Central Bank rate decision
      • March 17-18: Federal Reserve FOMC meeting
      • April 28-29: Federal Reserve FOMC meeting
      • April 30: European Central Bank rate decision
      • May 12-14: Google I/O Developer Conference
      • May 25: US stock market closed for Memorial Day

Thoughts for the Day

“You call it eating 5 boxes of Girl Scout cookies alone. I call it supporting young female entrepreneurs.” ~ Anonymous (we can neither confirm nor deny this came from one or both of your authors).

Disclosures

• Qualcomm (QCOM) and Walmart (WMT)  are constituents in Tematica Research's Thematic Dividend All-Stars Index. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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