The market is focused on a seemingly poor outlook for Brent/WTI differentials, however crack spreads in the Mid-Continent region are firm. This would suggest an out-of-consensus opportunity in Mid-Con refiners (CVI, DK, HFC), and we see positive data points potentially emerging in 2Q earnings and 3Q revisions. However, the product balance will be tested in coming periods as regional refinery utilization recovers from lower than normal 2Q levels and holds peak throughput.
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Over the weekend there was significant coverage (Washington Post, Wall Street Journal, New York Times) of new court filings made by the plaintiffs in the opioid multidistrict litigation (MDL) ahead of bellwether trials in Summit County (OH) and Cuyahoga County (OH) scheduled to begin in October. The purpose of the filing that was most frequently cited in the incremental coverage is to seek partial summary judgement on defendants’ compliance with their duties under the Controlled Substances Act (CSA) to report and not ship suspicious orders. Given that this is the primary argument for distributor culpability (vs. misrepresentation of addiction risk for manufacturers), we see this filing as an important document to review and understand. If granted, this judgement would allow the plaintiffs to “streamline” the presentation of RICO and public nuisance / negligence claims at the bellwether trials. We have included some interesting excerpts from the filing as well as the entire company-specific discussion for ABC, CAH and MCK. Please email us for a copy of the filing.
Our Total Walmart basket has taken a downward turn this week driven by the Pet category. After remaining relatively stable over the prior 4 weeks, this week our Total basket is down -0.2% sequentially due to a -1.5% decline in our Pet Basket and a -0.1% decline in our HPC basket, offset very slightly by a marginal increase in our Food basket (+0.0%). Our Pet basket was driven lower by newly implemented pricing actions on Smucker’s Milk-bone Dog Treats (-9.8%) and Clorox’s Fresh Step Cat Litter (-5.9%). The discount on Milk-bone treats went into effect this past week with prices dropping to $9.97 from $11.87 at roughly 60% of Walmart’s store base as can be seen on the maps on page 1. This discount could expand to the remainder of the store base in the coming weeks further driving down our Pet and Total Walmart baskets. On a y/y basis, Walmart’s National Basket remains up (+0.7%), Food remains deflationary (-0.6%), and HPC and Pet baskets are inflationary (+1.7% and +3.4%, respectively).
Semiconductor stocks have shown remarkable resilience. Despite trade issues and weakening cloud and industrial end demand, the SOX is up 32% year-to-date. Last week distributor Arrow missed guidance for the first time in ten years, blaming component softness and continued inventory build. The chip stocks traded off slightly the next day then resumed their rise. Are stocks discounting a now 2020 recovery or is comeuppance still ahead?
Wolfe Research Senior Healthcare Analyst Justin Lake hosted a webcast to go over estimating capital available for repo post deal close, looking at numbers for 2019 and beyond, an overview of regulatory uncertainties, and updated thoughts on the stock.
Wolfe Research's Senior Transportation analyst, Scott Group, hosted a webcast with two large private LTL carriers and one truck broker to discuss upcoming transport reports, including questions like whether tonnage is starting to improve, whether LTL pricing is holding firm, and how net revenue is tranding for brokers in 2Q and July.
DVA pre-announced 2Q19 OI of $460M-$465M, +7%/+16% above WR updated estimate / Cons of $431M / $398M. The beat vs. our model came primarily from lower cost per treatment (CPT), which declined ~$9 q/q to ~$237 from ~$246 in 1Q19, driven by “reduced calcimimetics expense and reduced labor and benefit expense due to strong productivity”. Calcimimetics benefit in 2Q is expected to be ~$40M vs. WR est. of $36M and, as the co. communicated in 1Q earnings, non-acquired treatment growth of 2.1% in 2Q continues to lag FY guidance of 2.5%-3.5% and came in 40 bps below 1Q. Core growth looks to have rebounded to positive 3-4% on strong cost leverage after negative 3-4% in Q1. Overall, we see the release as broadly positive given better core results in Q2 and share repo accelerated and at the higher end of expected range. As a reminder, we will be hosting a webcast today at 11:00am ET to discuss our updated thoughts on DVA.
Scheduled system seat capacity for the Sep-Dec four-month period shows seats +5.2% y/y, down 27bp w/w mainly on LUV MAX cuts but also on some non-MAX UAL trims. Domestic growth was down 31bp w/w to +5.5% y/y, as LUV and UAL cuts were slightly offset by adds from DAL and Frontier. Pacific capacity was flat w/w at +2.2% y/y, transatlantic was down 32bp w/w to +5.5% y/y, and Latin was up 14bp w/w to +1.0% y/y. Int’l capacity growth was flat w/w at +2.3% y/y. Domestic competitive capacity was flat w/w at +6.1% y/y.
In this weeks’ Sunday Spotlight, we piece together various indicators from bank earnings and industry calls as a read through to our Core Processor and IT Services coverage (FIS/WP, FISV/FDC ACN, CTSH, DXC, EPAM,). Earnings commentary suggests aggregate tech spend among large U.S. banks has maintained a healthy pace as enhancing digital offerings is critical to staying competitive and driving resilient deposit market share, with the ultimate goal of alleviating NIM pressure from the current low rate environment (see exhibits 1-6 below). We see this as a positive read for the Core Processors, which are optimally positioned to support large banks in the effort to enhance mobile banking, card processing, loyalty solutions, bill-pay, payments services, and others. For IT Services, while U.S. bank spend continues to exhibit healthy trends, pockets of weakness in Healthcare and Energy raise questions on aggregate investment trends, particularly in managed services.
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