Weekly Report / April 16-20, 2018

EARNINGS SEASON HEATS UP

The General Market

The week saw U.S. stocks edge higher, buoyed by the stronger-than-expected earnings growth of the S&P 500 companies that presented their quarterly earnings reports. However, selling in technology shares transpired once more going into the weekend.

It has been a solid earnings season so far but inflation concerns drove the dollar higher while Treasury yields topped 2.95%. Trade also remained in the limelight.

https://www.marketwatch.com/markets

Market highlights

  • Although the Dow Jones Industrial Average fell 201.95 points (-0.8%), the blue-chip index ended the week 0.4% higher. The Nasdaq Composite Index also dropped, shedding 91.93 points (-1.3%) but the tech-heavy index rose 0.5% for the week overall
  • The broader S&P 500 Index declined 22.99 points (-0.9%) with 10 of the 11 main indexes finishing in the red. Consumer staples and technology sector led decliners, falling 1.7% and 1.5%, respectively. However, the still registered a 0.4% gain over the week.
  • Selling was heavy in chipmakers and hardware manufacturers, with Apple Inc. (AAPL) experiencing its biggest rout since early February. U.S. President Donald Trump aided the jump in American oil prices when he said they are too high to settle above $68 a barrel.
  • U.S. Imposes Ban on Sales to China’s ZTE. The Chinese telecom equipment maker was caught illegally shipping goods to Iran. For breaking the terms of an agreement reached last year, the U.S. Department of Commerce immediately slapped a seven-year ban on sales to ZTE on Monday.
  • With the ban, Qualcomm Inc. (QCOM), an American firm and major supplier of chips for ZTE’s phones will be gravely affected. The company’s products account for the lion’s share of chips inside ZTE smartphones. Qualcomm posted sales of $22 billion last year but is likely to start losing business due to this latest ban.

Information Technology Sector

 

Next week, all eyes would be focused on the quarterly earnings report of three of the five big tech stocks with the famed acronym FAANG. Netflix Inc. (NFLX) set the pace last Monday and investors are hoping the rest of last year’s market drivers would deliver.

Google’s parent Alphabet Inc. (GOOGL) will be on deck Monday, April 23 while beleaguered Facebook Inc. (FB) will report on Wednesday, April 25. Online retail giant Amazon.com Inc.’s (AMZN) report will be presented on Thursday, April 26. Apple Inc. (AAPL) will be last in early May.

When combined, the market value of the revered group is over $3 trillion. That is 13% of the market value of the entire S&P 500 stock index.

Netflix Inc. (NFLX)The Outperformance Machine

  • Netflix took the cudgels for the FAANG stocks with a fantastic quarterly earnings report on Monday. The video-streaming giant itself, not only the investors, was surprised by the record-breaking feat.
  • Netflix was nearly rock-solid in every department, from earnings and revenue results to subscriber growth figures. Although their earnings and revenue for the first quarter of 2018 were slightly better-than-expected, subscribers’ growth is unprecedented.
  • NFLX jumped 9.19% on Tuesday to $336.06 after the video-streaming giant showed an explosive subscribers’ growth during the first quarter. The global popularity of Netflix is steadily rising. The measure of its success would be the membership figures. Subscribers’ growth has a direct influence on NLFX’s direction at Wall Street.
  • Blockbuster is an understatement when you describe the company’s global popularity. NFLX has reached 125 million people already. About 96 million net U.S. streaming subscribers were added plus 5.46 million international subscribers as of March 31, 2018. Netflix’s total net gain of 7.4 million subscribers in the 1st quarter bested its previous guidance of 6.35 million by a remarkable one million subscribers.
  • The current valuation of Netflix along with the so-called FAANG stocks is below recent peaks. The market could be further boosted if the earnings reports that would come after Netflix’s impressive results could beat or at least meet estimates.

Amazon.com Inc. (AMZN)Revealing the Numbers

  • For the first time, Amazon.com Inc. disclosed the number of paying customers for its Amazon Prime subscription program. The confirmation brought to light the online retail giant besting the most prominent membership-based retail chain, Costco Wholesale Corp. (COST).
  • The data was contained in the annual letter of Chief Executive Jeff Bezos to shareholders released on Wednesday afternoon. Amazon Prime has topped 100 million paid Prime members worldwide. AMZN climbed 1.9% to $1,556.91 on Thursday after the disclosure. Its price settled at $1,527.49 on Friday. The online retail giant is now up by 30.61% for the year.
  • Bezos said in his letter, “In 2017 Amazon shipped more than 5 billion items with Prime worldwide, and more new members joined Prime than in any previous year — both worldwide and in the U.S.”
  • Costco reported 90.3 million card-carrying members as of the end of its most recent fiscal year. But many of those were multiple members paying through the same account. Hence, paid subscriptions only numbered 49.4 million.

Industrial Conglomerates Sector

 

General Electric Co. (GE) –   A Strong First Quarter Start

  • General Electric reported better-than-expected Q1 2018 adjusted earnings on Thursday but received mixed reactions from investors and some analysts. Nevertheless, its stock price jumped 3.93% on Friday to close the week at $14.54.

The one-day stock performance is a minor feat considering that GE reported negative average earnings In the last four trailing quarters. And because it will take years before the company makes a turnaround, investors remain bearish as to how GE will perform from here on.

  • CEO John Flannery views 2018 as a “reset year” for General Electric. His plan is for the industrial goods manufacturer is a turnaround. The company would concentrate on its core industrial operations after the completion of the GE Capital exit plan.
  • Flannery’s intention is to focus on only three core segments — power, aviation and health-care equipment. GE will then gradually exit from all other businesses to arrest the downtrend of its share prices. The company is also seriously considering spinning off its operations in order to maximize shareholder returns.

Honeywell International Inc. (HON)Impressive Top Line Growth

  • Honeywell surprised investors as it posted impressive first-quarter 2018 results. Revenues for the first-quarter came in at $10,392 million, surging 9.5% year-over-year. HON climbed 1.64% on Friday from $148.13 to $150.57. The last time its price stood above $150 was on March 21.
  • All business segments performed respectably year-on-year. Aerospace sales surged 12.2% ($3,977 million) while the revenues from Safety and Productivity Solutions’ revenues jumped 9.4% ($1,448 million). Performance Materials and Technologies and Home and Building Technologies also went up by 7.7% ($2,534 million) and 7.2% ($2,433 million) respectively.
  • Honeywell is ideally positioned to gain from long-term expansion in markets like aerospace and facility automation. Their automotive turbochargers and product line-up are backed by its strong market share.
  • HON has a balanced mix of long and short-cycle businesses, complemented by a decent organic growth in new products. Expansion in high-growth regions promises higher profits too. Expect Honeywell to turn better in the months ahead.

Healthcare Sector

 

Shire PLC (SHPG)Potential Mega Merger Fizzles Out

  • A potential mega-merger in the pharmaceutical industry loomed this week after two rival drug makers said they are eyeing Shire PLC. Shares of the biotech company surged by as much as 12% on Thursday in the London stock exchange.
  • SHPG jumped 9.21% in the U.S., hitting a high of $177.51. However, the price dropped sharply to finish the session at $160.74. A sudden turn of events happened.
  • The story started when Japan’s Takeda Pharmaceutical (TKPHF) said it was ready to pay about $60 billion for Shire but the latter turned down the proposal. The Japanese firm said it will continue to hold talks with Shire about a possible bid.
  • At the same time early Thursday, news agency Reuters reported that Allergan PLC (AGN) was also looking to bid for Shire. When that news broke out, the price of SHPG zoomed in London and in New York.
  • Allergan virtually confirmed the report with a statement saying it’s “in the early stages of considering a possible offer for Shire. Meanwhile, the subject of acquisition did not respond to questions about a possible offer from Allergan but revealed that it had received and already turned down two low-priced proposals from Takeda in March.
  • The biotech company from Ireland said its board and management were “focused on fully evaluating internal and external opportunities to maximize value for shareholders, including any further proposals from Takeda.”
  • Later on Thursday, Botox maker Allergan retracted. The company issued another press release stating that it is abandoning the plan to make an acquisition proposal for Shire. AGN dropped 4.22% at the close of the trading session.
  • Finally, Shire rejected Takeda’s third offer. The proposal is to acquire the company via a cash-stock deal worth around $63 billion. The offer comprised 17.75 pounds in cash and 28.75 pounds worth of new Takeda shares but Shire insists Takeda continues to undervalue its growth and deals in the pipeline prospects. However, talks between the two companies will go on.

Johnson & Johnson (JNJ)Stock Falls Despite Good 1st Q Results

  • Johnson & Johnson kicked off the earnings season for the pharma group this week. JNJ fell by 2.16% to $127.72 on mid-week after reporting their first-quarter earnings report on Tuesday. The stock went downhill from there, closing the week at $126.66.
  • JNJ presented strong numbers for both earnings and sales in the first-quarter 2018. The company is riding on a positive momentum since the second half of 2017 complemented by the remarkable improvement in their consumer segment sales. JNJ generated $20 billion sales, increasing by 12.6% from the previous quarter.
  • There was a 4% year-on-year sales growth in the Pharmaceutical segment in the first quarter of 2018 due to strong sales in both domestic and international markets, aided by a favorable currency impact. U.S. sales increased by 9.9% in the quarter while sales in the international markets grew by 33.1%.
  • Their new products, Imbruvica for cancer and Darzalex for multiple myeloma continue to perform well. About 25% of pharmaceutical sales came from Oncology products, as it increased by 45% during the quarter to $2.3 billion.
  • Sales of their Core products like Xarelto, Stelara, Zytiga, Simponi/Simponi Aria and Invega Sustenna also contributed significantly to growth. Sales of Imbruvica alone climbed 43.5% through a joint partnership with AbbVie, Inc. (ABBV).
  • Johnson & Johnson is besieged by lawsuits. On Wednesday, Kentucky’s attorney general sued the company, alleging that the pharmaceutical manufacturer is devising a deceptive marketing scheme that mischaracterized the risk of opioid abuse and addiction.
  • The lawsuit, filed in McCracken Circuit Court, accused JNJ and its Janssen Pharmaceuticals unit is being accused of misrepresentation. JNJ claims its opioid medications are safer than alternatives and were “rarely addictive” when used for chronic pain.
  • J&J defended their position stating that it marketed and promoted opioids appropriately. The company added that all its products’ labels provided information about their risks and benefits. According to the U.S. Centers for Disease Control and Prevention, more than 42,000 deaths due opioids overdose were reported.

The Week Ahead

 

The earnings growth average of the less than a quarter of S&P 500 companies that have reported is better than 18%. That is comforting for Wall Street. More importantly, those that have reported showed an upsurge in sales growth and not profits because of cost reduction measures. It suggests that economic conditions are supporting demand.

The sign is encouraging and it is setting a positive stage for the markets this year. Earnings for the full year of 2018 are expected to rise by more than 18%. That would be the strongest annual rate of growth in eight years. Large daily market swings are likely to continue. However, based on historical trends, earnings tend to dictate the broader direction for the market.

The earnings season will dominate again next week. More than one-third of the companies in the S&P 500 will be presenting their first-quarter results. Economic data to be reported includes existing Home Sales on Monday, New Home Sales on Tuesday, and GDP for the first quarter on Friday.

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