The hottest names this week were IHRT (414 bps better than the S&P), OUT (362 bps), LAMR (209 bps), CCO (207 bps), and WWE (162 bps).
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We spoke with a private forwarder about recent ocean freight trends. Our contact’s volumes are down about 10% y/y so far in 3Q, similar with volume trends in 2Q. So far, this forwarder hasn’t seen signs of a real peak season yet. As a result, ocean carriers are starting to reduce more capacity than expected out of the market. Even with capacity measures and recent GRIs announced by several carriers, spot rates continue to trend lower. As a result, this forwarder’s gross margins are expanding modestly y/y in 3Q. On the trade front, more customers are trying to shift their production from China to other Asian countries and some larger vessels are now starting to make stops in Vietnam for the first time. Lastly, our contact noted that expectations are starting to moderate with respect to costs related to the upcoming IMO 2020 mandate. This forwarder was previously expecting a $300-$400 bunker fuel surcharge related to IMO, but he’s now expecting a $100-$200 surcharge.
Despite multiple headlines, markets have made very little price progress over the past week, but a key growing divergence should be monitored closely.
The past five years have been terrible for OFS and exceptionally painful for investors that have been persistently long the sector. The macro backdrop for OFS has become increasingly tenuous, such that more factors need to cooperate to sustain a modest upcycle. Whereas E&Ps previously would reliably outspend budgets by +20%, they are now more inclined to abruptly stopping work programs prior to year-end. In the current paradigm, we acknowledge that minor differences in macro views or time horizons can nullify broader stock calls, and are conscientious that a rising proportion of OFS observers are now market neutral. With this in mind, we are introducing a periodical tailored towards shorter timeframes and more actionable calls that may not necessarily mesh with our longer-term theses. In this report, we detail our thoughts for why we believe SLB is primed to outperform HAL into 3Q earnings, and also rehash our thesis for why we prefer HAL to SLB longer-term.
Recent opioid litigation news flow has been fairly intense and has inspired us (forced us) to introduce a weekly note discussing key developments, summarizing relevant news coverage, and flagging interesting tidbits that may have otherwise slipped through the cracks.
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