Daily Markets: Coronavirus Escalation Forces Companies To React

Today’s Big Picture

Despite a rough start yesterday, the major US equity indices managed to close little changed after the World Health Organization (WHO) calmed rising fears around the coronavirus coming out of China. The WHO's declaration that coronavirus is not a global emergency helped travel stocks such as American Airlines (AAL) and United Airlines (UAL) rebound. In contrast to the WHO, however, yesterday the Centers for Disease Control and Prevention (CDC) escalated its health warning to a level 3.

Overnight things coronavirus continued to escalate and as we write today's Daily Markets note, there are 875 confirmed cases with reported deaths now totaling 26, and all but two of China's 31 provinces and municipalities reporting cases of the virus. In response, China has instituted travel restrictions that will affect at least 20 million people across 10 cities. The big concern here is how the outbreak will impact China's Lunar New Year holiday season that spans Jan. 25- Feb. 8. The restricted travel is likely to hit consumer-related activity hard during the holiday season, and we are already starting to see companies such as Walt Disney (DIS) take action while others, like Remy Cointreau (REMYY) are warning over the potential impact to their business - we discuss both below. Until the virus is contained, we suspect the ranks of companies taking action and issues warnings will only grow in size as will the impact on China's economy in the current quarter.

The Shanghai market was closed for the first day of the Lunar New Year festival, the Hang Seng finished 0.2% higher on a shortened session and Japan’s Nikkei finished with a gain of 0.1%. European equities are higher following the WHO's declaration that coronavirus is not a global emergency and this morning's Flash January IHS Markit Eurozone Manufacturing PMI that came in at 47.8 vs. the consensus of 46.8. US equity futures point to a rebound at the market open as the indices look to recover the week's lost ground for the Dow Jones Industrial Average and the  S&P 500 as investors digest corporate earnings and continue to assess the impact to be had of the coronavirus.

Data Download

Earlier today, we received several January Flash PMI reports, which offer the first take on how the global economy fared entering the new year:

• The Flash January Jibun Bank Japan Composite PMI rose to 51.1 from 48.6 in December, led by a rebound in the Services component (52.1 in January vs. 49.4 in December) while Manufacturing activity continued to contract month over month (49.3 vs. December’s 48.4). 
• The Flash January IHS Markit Eurozone Composite PMI registered an unchanged reading of  50.9 falling short of the expected 51.2. The Services component slipped to 52.2 in January from 52.8 in December, while the Manufacturing economy contracted at a slower pace, coming in at 47.8 vs. 46.3 in December. 
• The IHS Markit January Flash PMI for Germany rebounded to 51.1, up from December's 50.2, marking a five-month high. The month over month improvement was led by a faster-growing Services economy (54.2 vs. 52.9 in December), while the country's Manufacturing activity improved but remained firmly in contraction territory (45.2 vs. December's 43.7). 
• Later this morning IHS Markit will publish its January Flash for the US and investors will be sizing up the report relative to the December Composite PMI reading of 52.7 that saw Services come in at 52.8 and Manufacturing at 52.4.

Stocks to Watch

American Express (AXP) reported December quarter EPS of $2.03, $0.02 ahead of the consensus forecast; revenue for the quarter rose 8.6% year over year to $11.37 billion, matching expectations. The quarter marked the company’s 10th consecutive quarter of FX-adjusted revenue growth at or above 8%. During the quarter, 70% of the company’s new Card Members opted for fee-based products. For 2020, American Express sees FX-adjusted revenue rising 8%-10% YoY and EPS in the range of $8.85-$9.25 vs 2019’s EPS of $8.20.

Shares of mobile infrastructure company Ericsson (ERIC) are down in pre-market trading despite in-line December quarter results as the company shared its operating expense will trend higher in 2020 due to spending on “digitalization, compliance, and security." With Ericsson retaking the 5G lead with 78 commercial 5G agreements and 24 live 5G networks on four continents, we suspect 2020 margins may also reflect some aggressive pricing to win back share from the likes of Huawei and Nokia (NOK). We'd also note Ericsson's comment on the slowdown in its North American business during the quarter, which was tied to the pending merger between T-Mobile (TMUS) and Sprint (S). No surprise there as should the two successfully merge, the combined entity will likely rationalize capital spending as well as suppliers. 

Shares of Remy Martin cognac and Cointreau liquor, Remy Cointreau came under pressure earlier today as the company reported its quarterly sales fell 11.3% and suspended its guidance. Sales for the company's cognac in Hong Kong were already under pressure due to the protests and warned about the potential impact of the coronavirus outbreak on demand for its premium cognac in China during the Lunar New Year holiday.

As coronavirus concerns spread, Walt Disney announced, “Shanghai Disney Resort is temporarily closing Shanghai Disneyland, Disneytown including Walt Disney Grand Theatre and Wishing Star Park, starting January 25, 2020.” A reopening date is TBD.  

Chipmaker Broadcom (AVGO) announced inked two multi-year deals for higher performance wireless components and modules with Apple (AAPL). Per a filing with the SEC, over the next three and a half years these agreements are expected to generate revenue of around $15 billion from Apple products launched beginning in January 2020.

After denying the company was for sale earlier this month, Grubhub (GRUB) CEO Matt Maloney shared the company would "evaluate any offer" and there is a "reckoning coming to the industry." While we tend not to engage in rumor-mongering, likely potential suitors could include Google (GOOGL) as well as Oracle (ORCL), which acquired hospitality software company MICROS in 2014.

Today, the Department of Homeland Security will publish a report outlining its immediate actions and longer-term goals for enlisting online players to combat counterfeits. This follows the phase one agreement that requires China to take additional steps against counterfeiters or face enforcement actions that could trigger new tariffs. Digital shopping hub companies to watch include Amazon (AMZN), Shopify (SHOP), Walmart (WMT), Alibaba (BABA), and JD.com (JD).

Activision’s (ATVI) Call of Duty League named its initial sponsors for the 2020 season, which includes’ PepsiCo’s (PEP) Mountain Dew, Sony (SNE) PlayStation, Astro Gaming, Scuf Gaming and the US Air Force. 

More layoffs ahead at Union Pacific (UNP). The company aims to operate its railroad with ~3,000 fewer employees in 2020 as it turns to its new operating plan that runs fewer, longer trains. Such a cut equates to roughly 8% of the company’s workforce and would follow the company’s 2019 staff reduction of 11%.

Associated Capital Group (AC), a diversified global financial services company, fell over 17% yesterday after lowering guidance for the December quarter to be significantly weaker than for the same quarter in 2018. 

Citrix Systems (CTXS) rose over 7% yesterday after the company reported December quarter results that beat expectations.

Intel (INTC) shares rose more than 7% in extending trading yesterday after the company reported better-than-expected top and bottom-line results. It also forecasted earnings for the March quarter and for full-year 2020 that were higher than expected.

FuelCell Energy (FCEL) closed down over 21% yesterday after reporting December quarter results that were a major disappointment to investors. This comes after shares were a major Nasdaq comeback story, rising from an all-time low of $0.13 June 26, 2019, to reach $3.00 before Wednesday's earnings release. 

General Electric (GE) found itself in the news yesterday when the Food and Drug Administration releases a warning concerning a vulnerability in certain health care data equipment made by the company - an area of concern we discuss frequently as part of the Foxberry Tematica Research Cybersecurity and Data Privacy Index.

Sonos (SONO) CEO Patrick Spence apologized to customers yesterday after the company announced that legacy speakers will stop getting new features beginning in May, but will continue to get updates for bug fixes and security patches. TBD is this affects future sales. Hawkins is not-so-silently fuming after having purchased a mind-boggling number of Sonos devices. TBD if future customers and shareholders will penalize the company for this decision.

Yesterday Moody’s Investors Services warned that default risks are rising for the nearly $1.2 trillion of speculative-grade loans and bonds and related instruments maturing from 2020 through 2024. This is record level, up 14% from 2019. Moody’s specifically mentioned that companies including Newell Brands (NWL), Western Digital (WDC) and Elanco Animal Health (ELAN), all of which carry Baa3 negative ratings, continue to risk falling to speculative grade.

After today’s US equity markets close, there are no expected earnings reports to be had but with more than 420 on deck next week vs. 207 this week, investors looking to get a jump on things may want to visit 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:
    • • Jan. 22 - Jan 25: World Economic Forum
      • Jan 28: Before the opening of trading Paycom (PAYC) will replace WellCare (WCG) in the S&P 500
      • Jan 28-29: Federal Reserve FOMC Meeting
      • Jan 31: Brexit deadline
      • Feb. 24-27: Mobile World Congress

Thoughts for the Day

“When things aren’t working, perhaps the universe is trying to save you.”

Disclosures

• PepsiCo (PEP) 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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