Updated: Mar 6, 2019
Authors: Jerusan Jegatheeswaran Co-VP Education/Research, Dragos Cada Co-VP Education/Research, Sam Luo Research Analyst, Matthew Morgan Research Analyst, Bilal Lodhi Research Analyst
Equities - Market Update
Latest Developments in Equities
U.S – China Trade Talk Delays Weigh on Markets
Stocks broke a 5-day winning streak on Wednesday with concerns over US-China trade talks and corporate earnings mounting. This continued Thursday when the Dow dropped 221 points or 0.87%, while the S&P 500 fell 0.94% and the Nasdaq dropped 1.18%. Investors were expecting that President Trump and President Xi Jinping would have a meeting to discuss a trade deal by the March 2 deadline. This is the deadline U.S. Trade Representative Robert Lighthizer gave this past December to increase tariffs on several Chinese imports if there is no progress in trade talks. However, CNBC reported that, according to a senior administration official, a meeting between President Donald Trump and Chinese President Xi Jinping before March 2 is “highly unlikely.” In addition, Trump’s top economic advisor, Larry Kudlow said to Fox Business that there’s a “pretty sizable distance” to go on a potential trade deal between the US and China. He also told reporters on Thursday that China and the U.S. were still far away on reaching a trade deal. These reports negatively impacted investor confidence in the broader market at a time when they are still taking in several mixed earnings reports.
Earnings season is currently in full force with public companies releasing their quarterly earnings covering the period from October to December of 2018. Reports were mixed with large earnings beats from the likes of Disney, General Motors, Twitter, Snap, and Chipotle as well as misses from Electronic Arts, Suncor Energy, and Yum Brands. The following are some notable results:
Earnings Beat: The Walt Disney Company (DIS)
Disney reported its Q1 earnings on Tuesday which beat analysts’ expectations on both revenue and earnings. Earnings were $1.84 per share, outperforming the expected $1.55 per share. Revenue was $15.30 billion, while analysts expected $15.14 billion, which was down from $15.35 billion last year. Disney benefited from low earnings expectations as there were concerns about the impact of many television viewers cancelling their cable subscriptions and moving to online subscription services. However, cable subscriptions fell by only 1% during the quarter, which marks the sixth consecutive quarter of improvement in cable subscription losses. Cable revenues actually increased as Disney collected higher fees from affiliates carrying its channels. Meanwhile, ESPN+, one of their streaming services, reached two million subscribers.
Earnings Miss: Electronic Arts Inc. (EA)
EA’s stock suffered a drop of more than 14% after releasing earnings on Tuesday that missed on revenues. The company reported earnings of $1.95 per share, slightly beating analyst projections of $1.94 per share. Revenues were $1.61 billion, beating analyst expectations of $1.75 million. CEO Andrew Wilson had this to say about EA’s disappointing quarter: "The video game industry continues to grow through a year of intense competition and transformational change. Q3 was a difficult quarter for Electronic Arts and we did not perform to our expectations.”
Earnings Beat: Snap Inc. (SNAP)
Snap shares traded 19% higher after hours on Tuesday after releasing its Q4 earnings. Losses were $0.14 per share, beating analyst estimates of $0.19 per share. Revenues were $389.8 million, outperforming analyst estimates of $377 million and $285.7 in the previous year’s Q4. A weak area for Snap has been user growth. The company announced that it lost 2 million users in Q3. Daily active users remained flat in Q4 year over year but was down 1 million users from the end of 2017.
Earnings Miss: Yum Brands (YUM)
Yum Brands, owner of KFC, Taco Bell, and Pizza Hut reported its Q4 earnings on Thursday with a miss on the top and bottom lines along with some positive results on key sales metrics. Same-store sales increased by 3% globally while they were expected to grow by 2.5%. KFC, Yum’s largest brand, saw 3% sales growth while analysts forecasted 2.8% sales growth. Taco bell experienced 6% sales growth vs the 4.5% expected by analysts. Pizza Hut’s same-store sales remained flat, beating Wall Street’s expected 0.2% decline. Despite positive same-store growth numbers, Yum Brands’ earnings were $0.40 per share vs analysts’ expectations of $0.95 per share. Revenue also missed estimates at $1.56 billion while analysts predicted $1.59 billion.
M&A Market Update
Latest Developments for M&A
BB&T Acquisition of SunTrust
On February 7th, 2019, BB&T (a bank holding company) announced that it would acquire SunTrust Banks in an all-stock deal, which is valued at about $66 billion. As a result, the combined company will be the sixth-largest U.S. bank in terms of deposits. Together, BB&T and SunTrust will have about $442 billion in assets, $301 billion in loans, and $324 billion in deposits, the companies said.This also represents the biggest bank merger since the 2008 financial crisis, due to the Trump administration changing some of the regulations that prevented M&A in the banking sector.
BB&T is one of the biggest financial service companies in the U.S., and SunTrust is a purpose-driven bank that is committed to “lighting the way to financial well-being” for its customers. SunTrust shareholders will receive about 1.3 BB&T shares, which represents a 7% premium. After the announcement, BB&T’s stock price rose 5.2%, and SunTrust’s stock price rose an almost two times higher by 9%. Their main strategic rationale of this merger is that large U.S. national banks are gaining more shares in retail banking, so BB&T and SunTrust have to compete with them by investing more in technology. The transaction is expected to close in Q4 of 2019.
Future Industry Expectation: Analysts and industry members have predicted mergers and acquisitions would soon heat up in the financial industry.
Smith and Nephew PLC Acquisition of NuVasive (Medical Equipment maker)
Britain’s Smith & Nephew Plc (British multinational medical equipment manufacturing company) has held talks to buy U.S. medical equipment maker NuVasive in a deal that would be worth more than $3 billion.
The exact terms of any talks could not be learned, and the discussions may still fall apart, According to Financial Times.
The acquisition would serve as the first major move by Smith & Nephew Chief Executive Namal Nawana, who was appointed last April in part for his deal-making expertise and his knowledge of the U.S. market, where the London-based company makes about half its revenue.He was most recently chief executive of medical diagnostics company Alere, where he oversaw its $5.3 billion acquisition by Abbott Laboratories in 2017.
Smith & Nephew has been under pressure to improve its margins and find new sources of growth to tighten its competition with bigger rivals such as Stryker Corp, Zimmer Biomet Holdings and Johnson & Johnson.
The British maker of hip and knee replacement products last month closed the acquisition of a small California-based maker of surgical tools used in knee replacement, Ceterix Orthopaedics.
Dell exploring a potential sale of SecureWorks Corp
U.S. computer manufacturer Dell Technologies, is exploring a sale of SecureWorks Corp, a U.S. provider of cyber security services with a market value of close to $2 billion,according to people familiar with the matter.
Dell holds 85 % stake in Secureworks, and the proceeds from the sale would allow Dell to trim it’s $50 billion debt.
SecureWorks is working with investment bank Morgan Stanley on a sale process that is in its early stages, the sources said, asking not to be identified because the matter is confidential.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.