11:46 am Looking Ahead - July 26, 2017 - FOMC Meeting (SPY)
There is going to be another heavy slate of earnings reports for the market to sift through on Wednesday, but come 2:00 p.m. ET, that activity will be put on hold to take stock of the newest policy directive from the Federal Reserve.
FOMC Policy Decision (Wednesday, July 26, 2:00 p.m. ET)
- Why it's important
- The Federal Reserve is the world's most influential central bank. When it meets and issues a new directive, global markets have to listen.
- The market does not expect a rate hike at this meeting. Accordingly, a move to raise the target range for the fed funds rate by 25 basis points would be a major (and negative) surprise.
- The market is looking for further direction on when, and how, the Fed will start the process of trying to normalize its balance sheet. Some participants think the directive's language will hint at the prospect of that process starting in September.
- The wording of the directive could potentially accentuate the policy divergences between the Fed and other leading central banks, which could drive policy divergence trades in currency and bond markets
- The fed funds futures market is assigning only a 52.9% probability to another rate hike happening at the December meeting, which is nearly the same as saying market participants currently think the potential for a third rate hike this year is a toss-up. Those expectations will be influenced by the language used in the policy directive for the July meeting.
- A closer look
- The target range for the fed funds rate was raised to 1.00% to 1.25% at the June 2017 meeting
- The fed funds futures market shows only a 3.1% probability of a rate hike occurring at the July meeting
- What's in play?
- Everything is in play on an FOMC day. The question is whether the trading response will be bullish, bearish, or neutral.
- The following areas are apt to see increased trading activity based on the market's interpretation of the FOMC policy directive:
- Treasuries and related bond ETFs
- ProShares UltraShort 20+ year Treasury (TBT)
- iShares 20+ Year Treasury Bond (TLT)
- iShares 1-3 Year Treasury Bond (SHY)
- Schwab Short-term US Treasury ETF (SCHO)
- iShares iBoxx $ High Yield Corporate Bond (HYG)
- SPDR Barclays High Yield Bond ETF (JNK)
- iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
- iShares Floating rate Bond ETF (FLOT)
- U.S. Dollar and related ETFs
- Rate-sensitive sectors like utilities, REITs, and financials and related ETFs
- Volatility ETFs
- ETFs and inverse ETFs for the major averages
- Fed funds futures
- Treasuries and related bond ETFs
11:23 am Team slides to near seven-year lows as prelim results disappoint, credit amendment to boot (TISI)
Industrial services provider Team (TISI 17.45, -6.35) trades about 26.7% lower today in reaction to the company's preliminary Q2 results in addition to the finalization of negotiations for a credit facility amendment and the announcement of the company's intention to terminate 'At-the-Market' Equity Offering Program.
Specifically, TISI reported preliminary Q2 revenues of $310 million (vs $336 million last year), well under the market expectation.
Additionally, TISI's operating loss will be in the range of a $7-9 million compared to Operating income of $14 million in the prior year quarter; adjusted operating income (loss) will be in the range of a $2 million loss to about breakeven compared to adjusted operating income of $20 million in the prior year comparable quarter.
Adjusted EBITDA (a non-GAAP financial measure) will be in the range of $14 million to $16 million compared to Adjusted EBITDA of $36 million in the prior year comparable quarter.
Ted Owen, CEO of Team commented, 'We are disappointed in our second quarter results as we continue to operate in a sluggish demand environment due to continuing soft end markets coupled with customer spending deferrals.' Further, 'While we continue to see some improvement in our Quest Integrity and TeamQualspec inspection and assessment businesses, TeamFurmanite's mechanical services business continues to lag behind in the recovery cycle, resulting in weaker than expected 2017 results.'
As a result of this sluggish demand environment, TISI will eliminate certain employee positions resulting in severance charges to be recorded in Q3 between $4-6 million. These actions are anticipated to reduce TITI's annual operating expense run rate by about $30 million and will impact operating results beginning in Q3. However, TISI believes that the soft end market environment and turnaround spending by certain customers is unsustainable and fully expect a much improved market environment by 2018.
As for the amendment to the credit facility, TISI has negotiated said amendment to its credit agreement primarily conditioned upon the completion of a financing transaction with net proceeds of not less than $150 million which proceeds would be used to pay down the company's borrowings under the Credit Facility. Further, TISI currently expects to meet this condition by August 4, 2017.
The amendment will, among other things, eliminate the maximum total leverage covenants through the remainder of 2017, reduce the aggregate revolving commitment to $300 million, add a borrowing availability test and further amend the financial covenants under the Credit Facility. Management went on to comment that the company has been concerned about tight financial covenants under the agreement for several quarters.
As mentioned, TISI also announced its intention to terminate its $150 million 'at-the-market' equity offering program following completion of the Financing Transaction. The company will make no further sales of shares under the ATM Program and in fact has not sold any during the first half of 2017.
TISI also announced an offering of $175 million in Convertible Senior Notes due 2023 in a private offering to qualified institutional buyers. The company expects to use the net proceeds from the sale of the Notes to repay all outstanding borrowings under the term loan portion its banking credit facility and for general corporate purposes.
10:47 am Seagate Tech sells off on JunQ earnings; also names new CEO and announces job cuts (STX)
Seagate Technology (STX) is trading sharply lower today (-16%) after reporting 4Q17 (Jun) results last night. Before getting into the earnings, a little background would help. STX is primarily a manufacturer of hard disk drives (HDDs) used to store data. Its drives are used in systems ranging from DVRs and portable storage devices to high-end servers and mainframes. In addition to HDDs, STX makes a broad range of storage products including solid state hybrid drives (:SSHD), solid state drives (SSD), PCIe cards and SATA controllers.
Disk drives continue to be the primary medium of mass data storage due to their performance attributes, high quality and cost effectiveness. Complementing existing data center storage architecture, solid-state storage devices use integrated circuit assemblies as memory to store data, and most SSDs use NAND-based flash memory. In addition to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a large hard disk drive and an SSD cache to improve performance of frequently accessed data.
There is a major transformative shift for storage away from client servers and toward the mobile cloud. As such, STX is focusing much more on cloud and mobile storage. STX also announced a major restructuring in 2016 which consolidated its global footprint across Asia, EMEA and the Americas in order to better match its production capacity with demand. The plan included 6,500 job cuts, or 14% of its global headcount by the end of FY17. Finally, it's worth noting that STX pays a big quarterly dividend, $0.63/sh, that computes to an annual yield of approximately 7.6%.
Turning to the JunQ earnings report, non-GAAP EPS came in at $0.65, which was well below market expectations. Revenue fell 9.3% year/year to $2.41 bln, which also was below expectations. STX also announced that COO Dave Mosley has been named as CEO, effective October 1, 2017. Current CEO Steve Luczo will transition to the role of Executive Chairman on October 1.
That's not all, STX also announced an additional restructuring plan to reduce its cost structure. The company intends to reduce its global headcount by approximately 600 employees by September 30. This should result in approximately $90 mln in annual savings.
So why did STX miss EPS by so much? On the call, management said revenue was approximately 5% below plan with approximately half of that shortfall from its cloud storage systems and half from HDD enterprise weakness and channel inventory management. STX believes some of these factors, particularly China CSP demand and NSA / surveillance market demand, are temporary and supply chain-related while some of the OEM declines are more structural.
Also, non-GAAP gross margin of 28.9% was approximately 210 basis points below guidance. Within this, approximately 2/3 of the impact was due to operational issues in its CSSG business and approximately 1/3 was due to lower than expected enterprise and surveillance HDD portfolio mix.
Looking ahead, STX said the overall macroeconomic environment continues to exhibit stability and this should continue through the rest of the calendar year and well into 2018. STX remains cautiously optimistic that this will translate into moderate IT spending growth. However, some supply chain issues that the company identified last quarter will persist at least through the end of the year. At the same time, STX is expecting a stronger back half of the calendar year for exabyte growth.
In sum, this was a tough end to STX's fiscal 2017 year. In fact, it has been a difficult few months for the stock. After running from below $20 in May 2016 to above $50 by April 2017, the stock has since been under pressure and it's currently in the $33 range. The good news at least is that STX is maintaining that big dividend which has a current yield around 7.6%. Of note, STX's main rival Western Digital (WDC) reports Thursday after the close.
9:58 am General Motors Little Changed After Mixed Quarter (GM)
General Motors (GM 35.76, -0.06) has shed 0.2% after reporting mixed results for the second quarter.
The automaker reported above-consensus second quarter earnings of $1.89 per share on a 1.1% year-over-year decline in revenue to $36.98 billion, which was shy of expectations.
The company noted that efforts to restructure its international operations are moving along as expected. The restructuring involves shifting of GM India's focus to export manufacturing and transitioning GM South Africa to production of Isuzu vehicles. Furthermore, Chevrolet will be phased out of the two markets by the end of this year.
Worldwide vehicle unit sales fell 2.0% year-over-year to 2.34 million.
Deliveries in the United States totaled 725,000 with retail crossover sales growing 24.0%. This was the strongest quarter for crossover sales in the company's history and well ahead of the 9.0% growth rate for the industry. End demand was healthy, considering U.S. Daily Rental sales represented 6.0% of quarterly sales, which was the lowest ratio among full-line automakers.
Deliveries in China hit a second quarter record of 852,000 vehicles. Cadillac sales surged 62.0% and Baojun sales spiked 66.0% to lead the way.
South American deliveries totaled 160,000, which represented year-over-year growth of 18.0%, ahead of the industry growth rate of 13.0%.
The company provided a short update on its effort to field an autonomous driving fleet. Mass-production methods were used to build 130 autonomous Chevrolet Bolt EV test vehicles, increasing the self-driving fleet's size to 180.
GM's total worldwide market share ticked down to 10.2% from 10.3% with European market share slipping to 5.7% from 6.2% one year ago.
General Motors reaffirmed its guidance for the fiscal year, priming the market for earnings between $6.00 per share and $6.50 per share with adjusted EBITDA and revenue expected to grow at a pace comparable to 2016.
9:51 am Domino's Pizza Delivers Q2 Earnings Surprise, but Stock Takes a Hit (DPZ)
In the stock market, the reaction to an earnings report is often based on relative considerations. The results can be good, but the reaction can be bad if the results weren't deemed good enough. Conversely, the results can be bad, but the reaction can be good if the results were better than feared. Domino's Pizza (DPZ 198.31, -15.66, -7.3%) is encountering the former response after its good second quarter earnings report.
First, here is what Domino's delivered for the second quarter at a time when restaurants and retailers have found it increasingly challenging to increase sales and traffic:
- Revenue growth of 14.8% to $628.6 million, which was bolstered by higher supply chain revenues from increased volumes
- Domestic same-store sales growth of 9.5%
- International same-store sales growth of 2.6%
- Global net store growth of 217; and
- A 34.7% increase in diluted earnings per share of $1.32, which was comfortably ahead of analysts' average expectation
None of that is bad by any stretch of the operating imagination, yet shares of DPZ are down 7.3% in the wake of the second quarter report.
The fallout can be attributed to the company's own admission that international same-store sales growth was slightly under its expectations, as well as the recognition that the pace of domestic same-store sales growth has slowed from the previous three quarters when it was double-digits.
Separately, a higher cost of sales and increased general and administrative expenses triggered a 100 basis points compression in its income from operations as a percentage of total revenues (18.0% vs. 19.0% a year ago).
The stock of DPZ has been a beauty this year, up 34.4% as of Monday's close, and an absolute beast in this bull market, soaring close to 7000% from its November 2008 low.
It has won acclaim as a growth stock and entered today's session trading at approximately 39x estimated FY17 earnings. Accordingly, a good report that carries a blemish can lead to some profit-taking action, like it is today, although we wouldn't rule out some underlying concerns about difficult comparisons to its past success as another contributing factor for today's selling interest.
9:22 am Analysts Like What They See in Tintri; Shares Popping After Bullish Initiations (TNTR)
This morning, the quiet period expired for recent cloud software IPO Tintri (TNTR), allowing firms involved with the IPO their first opportunity to publish analysis and set financial estimates on it. As we discuss in more detail below, the consensus among analysts was decisively bullish, which has shares gaping higher by about 7% in pre-market trade. The good news is certainly a welcomed development for the company and its shareholders because it has been a rough ride thus far.
To rewind a bit, back on June 29 TNTR slashed the size of its IPO, reducing the expected price range to $7-$8 from $10.50-$12.50. Then, on June 30, the 8.6 million share deal priced at the low end of that new range, ultimately raising about 40% less than originally hoped for.
Things didn't improve much when it opened for trading, either. After opening about flat on its IPO day, the stock was trading below the $6.50 mark just a few days later. Since then, shares have chopped around in the $6.80-$7.10, unable to muster any positive momentum. But, with today's bullish initiations, perhaps that is the catalyst the stock needs to turn the tide.
Before delving into those initiations, we wanted to provide a little background on what the company does. As noted above, it is a cloud software developer. More specifically, it is a developer of an enterprise cloud that provides public cloud capabilities. From a general sense, the conventional IT model, which has been constrained by siloed, costly and inflexible infrastructure, is giving way to cloud architectures. Cloud Computing can be Public (Amazon, Azure, Rackspace), where the focus is providing the lowest cost shared computing service where you pay for services as you need them (pay as you go), and there is Private Cloud Computing, where the entire cloud infrastructure (servers, storage, network) is dedicated to a single company and is behind the company firewall.
In simple terms, TNTR provides large companies with an enterprise cloud platform that offers public cloud capabilities inside their own data centers that can also connect to public cloud services. Its enterprise cloud platform combines cloud management software, web services and a range of all-flash storage systems. It sells storage appliances intended for virtual machines and software containers.
TNTR's enterprise cloud platform not only delivers many of the benefits of public cloud infrastructure, but also gives organizations the control and functionality they need to run both enterprise and cloud-native applications in their own private cloud. Organizations use TNTR's platform as a foundation for their own private clouds.
Now, taking a look at today's initiations, there are a couple that particularly stand out. For instance, Needham seems to be one of the most bullish on the stock, assigning it a Buy rating with a $15 target -- about 115% higher from last night's close. The firm says it finds the shares attractive for three reasons: they believe the company has a truly differentiated technology, it has a team with a strong track record of value creation, and the stock has an extraordinarily low valuation based on several methodologies.
Another bullish initiation that stands out is BofA Merrill's Buy and $16 rating, which is a whopping 130% higher from here. One of the few cautious initiations was Piper Jaffray, giving the stock a Neutral. However, the firm also put an $8.50 target on it, which is still 22% higher from yesterday's close.
Wrapping up, the positive news provides a much needed shot in the arm for TNTR. With the expected gains this morning, shares are on track to push above both its $7 IPO price and $7.15 opening price from June 30. In terms of changing the trajectory of this recent IPO, that is a good starting point.
8:23 am McDonald's Eyes Fresh Record After Beating Expectations (MCD)
McDonald's (MCD 156.31, +4.46) has climbed 2.9% in pre-market after beating second quarter expectations. The early gain puts the fast food giant on track to challenge its record high of $156.75, which was notched two weeks ago.
The Dow component delivered above-consensus second quarter earnings of $1.73 per share on revenue of $6.05 billion, which declined 3.4% year-over-year, but remained ahead of expectations.
The decline in consolidated revenue was due to the company's strategic refranchising initiative. On a comparable basis, sales increased 6.6%, reflecting gains in all customer segments. On a systemwide basis, sales increased 8.0% due to strong comparable sales performance and restaurant expansion.
Comparable sales in the United States grew 3.9%, fueled by national cold beverage value promotion and the launch of the Signature Crafted premium sandwich line. Segment operating income increased 5.0% thanks to higher sales-driven franchised margin dollars, savings in general & administrative expenses, and higher gains on sales of restaurants.
International comparable sales grew 6.3% thanks to continued momentum in the U.K., a strong showing from Canada and Germany, and positive results across other markets. Segment operating income grew 8.0% due to sales-driven improvements in franchised margin dollars.
Sales in the High Growth segment rose 7.0% due to a strong performance in China and positive results across the rest of the segment. Foundational Markets & Corporate comparable sales grew 13.0%.