Backed by unrelenting momentum, equities set their sights on the February highs
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Weekly OFS thoughts, including our thoughts on the (empty) OFS/upstream rally, CHX merger close, and PUMP 1Q20 earnings.
The Wolfe Industrials team hosts a webcast on Fridays at 11:00AM ET to discuss industrials and transports news and themes for the week. Presenting analysts include Scott Group (Airfreight & Surface Transportation), Hunter Keay (Airlines and Aerospace & Defense), Nigel Coe (Electrical Equipment & Multi-Industry), and Rod Lache & Dan Galves (Autos, Auto Parts, & Auto Technology).
Over the past few days, we’ve received many incoming questions on the recent outperformance of Value stocks and how long this might continue. A measure of how stretched this trade has become is the P/E spread between ‘Momentum’ and ‘Value’ stocks. As of yesterday’s close, this spread remained very high.
We spoke with a private truck broker about TL demand, capacity, and pricing trends. This broker saw a 30% surge in volumes in late March and that level of volume has remained consistent throughout May as carriers look to fill their network with brokered freight. Our contact saw very loose TL capacity through April and early May but has seen capacity tighten throughout the end of May. Regionally, this broker has seen capacity tighten the most in the Southeast, Texas and L.A. In addition, gross margins have improved nicely in 2Q and are now back above 15% after compressing sharply in March. But if TL capacity continues to tighten, it could put some downward pressure on gross margins again. From a demand standpoint, our contact is seeing strength from retailers rebuilding inventories as states re-open, and he expects demand to improve further as manufacturing activity begins to pick up more meaningfully.
The Wolfe Utilities & Midstream team hosts a webcast on Fridays at 11:00AM ET to discuss utilities & power news and themes for the week. Presenting analysts include Steve Fleishman (Utilities & Power), Keith Stanley (Midstream), and Alex Kania (Midstream).
Ecolab (ECL, Market Cap ~$64 bn) announced the completion of its split-off exchange of its upstream energy business and the subsequent merger with a subsidiary of Apergy. The combined business is named Champion X (CHX).
RH reported largely better-than-expected Q1 results post-market in which overall sales contracted (19%) due to temporary store closures. After moderating to (40%) towards the end of March, demand trends improved sequentially to +7% in May and are now trending +11% early into June. A top-line rebound over the back half of the year, coupled with other operational improvements, is expected to drive year-on-year operating margin expansion at RH.
With the 2020 election around the corner, US government debt rising, and the budget deficit expanding, the potential for a corporate tax hike is top of mind. Strategist Chris Senyek dug into the possible Corporate Tax Unwind, examining the implications of likely tax reform changes that could come with a new administration. His team also provided their Tax Reform Excel spreadsheet, which can be used to estimate EPS impacts from tax reform on each US company.
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