Sandler O’Neill Cuts BB&T To Hold On Lower Earnings Potential


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BB&T (BBT) is lower Wednesday, after Sandler O’Neill cut its rating on the bank’s stock.

Analysts Stephen Scouten and Peter Ruiz cut their rating from Buy to Hold, with a $37 price target. They also lowered their 2016 and 2017 estimates for the company, given a higher expense run-rate and a slightly lower net interest margin. They write that the bank’s commentary from its first quarter, along with the expected timing of the cost saves related to recent transactions, and an ongoing low-rate environment made the rating cut necessary.

From the note:

The biggest deltas in our model came as we moved 2Q expenses up towards the company’s guidance of $1.75B and spread out the pending cost saves further into 2017 from NPBC and Swett & Crawford. In addition, we had also been assuming that loan growth could come on in the 3-4% range, but we think that more tempered expectations are appropriate and that the 3% level should be the top-end of the expected rage, especially given the bank’s 1%-3% guidance.

 While we continue to view BB&T as one of the most well-diversified large regional banks – both in terms overall revenue generation and within its loan book in particular – we think that given the current earnings profile through 2017, our BUY rating is no longer warranted. We are lowering our rating to HOLD and our PT to $37 – which is ~11.8x our 2017E. We think that the benefits of BB&T’s diversified franchise will eventually be realized, but that the bank will first have to spend time to fully-integrate its recent acquisitions before it can move forward with more rapid growth plans.

For the second quarter, they expect BB&T to report 69 cents a share, ahead of the 66 consensus. They warn that the results will be “somewhat noisy” due to the NPBC deal that closed in April, but that there won’t be many cost saves from that transaction until after the third quarter, meaning expenses could be elevated in the near term.

BB&T was off by two cents in recent trading, although it’s down nearly 10% for the year.

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Is Brexit Good for Biotech? Maybe


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The aftershocks from Brexit continue to roil the markets, with the Dow down triple digits in morning market action. RBC analyst Michael Yee makes an argument that biotech stocks could benefit. The iShares Nasdaq Biotech ETF (IBB) fell more than 5% Friday with the news that the U.K. voted to bail on the European Union and dropped another 1.7% today to just below $245. The fund is down 32% over the past 12 months.

Yet Yee says the risk/reward scenario for the sector may have improved with continued economic and political uncertainly battering the broader market.

We could make an argument that Brexit might be positive for biotech stocks and better risk/reward because if economic and political uncertainty continues to weigh on the overall market, then:(1) healthcare and biotech should see less economic uncertainty than other sectors (i.e. higher earnings visibility for healthcare) and a defensive rotation could be in play “shifting money flow” to healthcare and out of more economically sensitive groups until we know more, thus selling riskier sectors and buying less risky earnings sectors, (2) biotech has very low exposure to UK (1% of revs on average) and not that much to the Euro (20% of revs on average, i.e. half of their OUS revenues which are about 20-40% on average) and they also hedge currency; see exposures on page 2 from our note on Friday (AMGN and BIIB have the least OUS exposure) (3) politicians could be less focused on drug pricing – and more focused this summer on what Brexit means for various countries and the US and the economy and immigration will likely be more important topics. Thus if biotech stocks are trading towards the bottom end of their historical 12-25x multiple over the last decade, then risk/reward of biotech probably got better, not worse if other sectors’ earnings visibility becomes more challenging.

Yee does offer a “flip side,” citing currency exposure, delays in pricing reimbursement and investors selling off “higher risk” assets, such as biotech.

As for individual stocks, Yee updated his thoughts on the Big Biotech players, a list that includes Celgene (CELG), Biogen (BIIB), Vertex (VRTX), BioMarin (BMRN), Amgen (AMGN) and Gilead (GILD).

CELG – continue to like this name, REMARC expectations keep coming down, we think GED-0301 interim futility will be fine (mgmt wants to tell docs the drug is working and speed enrollment); BIIB – getting increasing call volume on this one… $229 we think this stock is near its “zero pipeline” value of $225 as investors have been struggling what to do after LINGO disappointment; we think it keeps getting more attractive and Q2 earnings should be fine…we don’t see 6/29 Eisai R&D day as much of a catalyst and low expectations on BAN2401 upcoming Alzheimer’s interim; VRTX – questions on risk/reward on triple data coming soon but that’s much better at $82 level; the Orphan stocks were hit Friday on Brexit due to perception of OUS and currency exposure risk (VRTX 40-50% Kalydeco is OUS; ALXN 65% sales OUS, BMRN 50%+ OUS); some investor worry on EU reimbursement timing and pricing so bulls have to stick with a 12m thesis on triple and keep the thesis through short-term uncertainty; BMRN – hit on OUS exposure/currency recently and perception of no short-term catalysts; our conversations w/ mgmt suggest July 27th hemophilia update will show good data and more pts well into “double-digit” Factor 8 production…the “backup” program mgmt spoke about might be used because the first one is “too potent” which would be ironic…AMGN – good defensive name – waiting on REGN injunction decision within 1-3 months, and recent questions are on biosimilar Enbrel panel from Sandoz coming July 13th…(AMGN Humira biosimilar panel is July 12th). GILD – most defensive at 7x multiple; the sentiment on GILD has swung from most loved biotech in 2013-15 to the one that fund managers on “the least” in meetings now….we want them to take a “String of Pearls” BD approach.

FYI: Some Big Biotech names are far more exposed to foreign currencies than others, according to Yee. Vertex, for instance gets more than 50% of sales from outside the U.S., while Biogen relies on foreign markets for 20% to 25% of its top line. But in many cases, exposure to the U.K. is limited. BioMarin, for instance, gets less than 5% of its sales from the U.K.

In recent market action, BioMarin fell 2.3%, making it today’s big loser. Biogen dropped 1.5%, followed by a 1.3% drop by Gilead. Celgene fell 1% today to $95.36, while Amgen and Vertex each fell 0.7%.

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50 Stocks to Brighten the Post-Brexit Blues


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RBC’s Jonathan Golub and team argue that Brexit has killed the value trade–and urges investors to consider “Stable Growers”–stocks that have earnings growth, pay dividends, and low dispersion of analyst estimates–including MasterCard (MA), Johnson & Johnson (JNJ), United Parcel Service (UPS), Verizon (VZ), and Phillip Morris (PM). They explain why:

We believe that the outperformance of low-P/E stocks that characterized the market in the first half of 2016 is now behind us, and that Stable Growers will re-assert their leadership…In the past, we have made the case for extending portfolio risk during periods of heightened volatility. While there will be opportunities to re-allocate portfolios as the result of current turmoil, we believe that investing on this dip will result in only modest upside given the limited pullback that has occurred thus far.

Here’s Golub’s list of 50 Stable Growers that he argues will outperform in a post-Brexit world:

Shares of MasterCard have dropped 2.1% to $89.51 at 10:51 a.m. today, while Johnson & Johnson has dipped 0.3% to $115.27, United Parcel Service has fallen 1.6% to $102.70, Verizon has gained 0.6% to $54.74, and Phillip Morris has ticked up 0.2% to $97.87.

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Nike: Is an Olympic Win Ahead in Rio?


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The 2016 summer Olympic games in Rio kicks off in August. The global sports extravaganza has in the past been a winning even for Nike (NKE). The athletic apparel giant has in the past successfully used the event to kick off new products.

According to some reports, about 3.6 billion people tuned in to the 2012 London games, with 100,000 hours of global television coverage and 150 million tweets.

But before ringing the cash register, investors will need to look closely at the growth in future orders Nike reports when it unveils fiscal fourth quarter financial results tomorrow, says UBS analyst Michael Binetti.

F4Q Futures Growth is Key. F4Q futures will be the first look at the growth rate to expect post-Olympics (F4Q futures extend to Oct/Nov). We estimate +11% global futures (ex-FX) in F4Q. Industry checks suggest Nike has already allowed retailers flexibility to lower orders for Fall to reduce channel inventories (we believe F3Q futures already started to reflect this). We believe NKE’s recent P/E compression suggests that the stock is pricing in risk to Street FY17 ests. In our view, if NKE can deliver +11% global futures growth in F4Q, it would imply a +HSD run rate post-Olympics—which should bolster conviction that NKE still has wholesale order growth to deliver its +HSD/LDD FY17 rev growth guidance (with an ongoing +3-4pp DTC lift), which should support P/E re-expansion vs the market.

What does this mean for the stock price?

Down 1.3% today to $51.91, Nike’s share price has fallen more than 20% since hitting a 52-week high of $67.65 in November. Yet Binetti sees the stock hitting $70 in the next 12 months.

In recent months, NKE’s P/E rel to the S&P has compressed from a 3-yr peak to a 3-yr trough. Despite recent macro/competitive pressures—and our view that NKE will guide 1Q below Cons (UBSe: $0.66, Street: $0.71) due to Olympics spend—we think NKE’s F4Q update will bolster conviction that FY17 rev & EPS guidance is still achievable— which should support a P/E re-rating back to historical avgs. Longer-term, we’re still forecasting Nike’s EPS to grow 2.5x faster than Consensus S&P EPS growth for the next 3-yrs. And with an ROIC that is 3x the S&P (reflecting a proven, global reinvestment opportunity), we believe NKE continues to warrant a significant premium vs the market.



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GE Will Benefit From Growing IT In Industrials: Credit Suisse


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Credit Suisse’s Julian Mitchell and team attended General Electric’s (GE) digital investor meeting, and reiterated an Outperform and $34 price target on the stock Friday.

They write that it’s been “clear for some time” that GE looks like it could be far better positioned than most electrical equipment and multi-industry companies in terms of taking advantage of the emergence of IT in the industrial world, thanks to its financials, the complex nature of its products and its willingness to invest in its own business. The meetings just reinforced their bullish view:

 We came away from today’s event re-assured that GE seems to be taking advantage of this potential, and aside from the revenue opportunity (Digital can not only increase the company’s topline, but also lower its sales cyclicality in market downturns, as evidenced currently in Transportation for instance) there is also a considerable productivity dividend to be reaped in the coming years. Services / AM profits have grown at a 7% CAGR at GE since 2011, but Digital could drive this higher in future (note that the $2+ in EPS by 2018 requires a 5% total profit CAGR). On a broader note, the CFO reminded us that 2016 will be a very 2H-loaded year for orders, sales and earnings for GE, and confidence was expressed in the Alstom synergy targets. In terms of the stock, we removed GE from our Focus List last November, but think the recent sell-side downgrades and muted YTD share price performance are starting to render it more attractive for the 2H16.

GE is down 2.6% to $30.30 in recent trading. Phases & Cycles was bullish on GE earlier this week.

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Honeywell: Achieving Critical Mass?


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Deutsche Bank’s John Inch and Karen Lau argue that Honeywell International (HON) is “achieving Asian critical mass.” They explain:

After over a decade of aggressive and earnest Asian investment including seed planting and cultivation of local Asian talent, we believe Honeywell has emerged from behind other western countries in China and the rest of Asia to leading position across its served markets. Honeywell claims (and we believe it is true) that it has become “the” Chinese/Asian competitor that local rivals look to emulate. Honeywell’s profit margins in China are above the corporate averages across the company’s businesses. Meanwhile, we learned that Honeywell is sometimes even the local price leader, such as for scanning and mobility products.

Within China, we estimate Honeywell’s sales to be closing in on $2.8bn (6-7% of company total), roughly flat last year (dragged last year by PMT’s down results due to the collapse in oil prices and associated project deferral), up low to mid single-digits this year (ACS is running up double-digits YTD) and up double-digits next year (and beyond). As part of the $2.8bn, the company reportedly has realized ~$750mm in sales that it classifies as “East for East” (E4E) – developed and produced almost entirely in local markets for local customers (i.e., ACS and turbo with some PMT product applications). We believe the $750mm to be a laudable achievement – particularly given the rapid pace of change of China’s economy over the past decade coupled with aggressive local competition. Honeywell retains #1/#2 positions across a swath of the markets it serves.

Honeywell’s achievement of Chinese “critical mass” opens lots of new doors for the company, in our opinion, including talent attraction/retention and new partnership opportunities. Many of these doors would appear to lead to accelerating future sales. The other prospective benefit of critical mass – specifically driven by the continuity and tenure of Honeywell’s regional leadership team (Honeywell High Growth Region/HGR President & CEO Shane Tedjarati has lived in China for 24 years) – would appear to be a high confidence level toward pursuing and integrating regional M&A. This is not to say that we expect Honeywell to abandon its M&A cost discipline that has earned the company its highly regarded reputation. Honeywell may ultimately pursue only a handful of regional deals over the coming years. Still, as “the” Chinese competitor, more M&A doors are at least increasingly likely to open for Honeywell to evaluate, in our opinion.

Shares of Honeywell International have gained 1.2% to $117.26 at 3:38 p.m. today, while the Industrial Select Sector SPDR ETF (XLI) has risen 1.1% to $56.34.

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Aetna & Humana: Yes We Can


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The Wall Street Journal reported that government regulators are pushing back against Anthem’s (ANTM) purchase of Cigna (CI). California, however, seems to have few issues with the proposed combination of Aetna (AET) and Humana (HUM). Leerink’s Ana Gupte explains:

The Department of Managed Care (DMHC) has been reported to have approved the Aetna-Humana deal, according to a tweet from Chad Terhune of Kaiser Health News. While California is not a critical State for the deal given Humana’s small presence, it is another indication that the merger anti-trust review is on track with only four States remaining for approval. The news is also significant in light of the recent pushback Anthem is being reported to face from California’s Department of Insurance Commissioner David Jones. We would be looking to see if Anthem (OP) also receives approval for the Cigna (OP) deal from the DMHC which is an important catalyst given Anthem and Cigna have meaningful market share overlap in the state. We reiterate our 80+% probability of Aetna-Humana close and our OP rating on Aetna and Humana.

Shares of Aetna have gained 1.6% to $122.99 at 3:07 p.m., while Humana has risen 1.9% to $190.71, Anthem has advanced 0.7% to $133.29, and Cigna has dropped 1.2% to $128.00.

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Three Stocks That Could Crater if Brexit Becomes a Reality

Man Putting Coin in Piggy Bank

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Susquehanna’s Pablo Zuanic and team argue that Coca-Cola Enterprises (CCE), Mondelez International (MDLZ) and SodaStream International (SODA) are most at risk if Britain votes to leave the European Union. They explain why:

The impact from “Brexit” on our coverage would at first be mainly FX driven (various reports point to as much as a 20% drop in the pound, and a 5-10% drop in the euro), while later on we would see the consequences of any potential economic slowdown on the underlying businesses. In our coverage Coca-Cola Enterprises (proforma CCEP) has 100% exposure to both currencies (22% to the £), SodaStream has 62% exposure (11% to the £), and Mondelez 39% (6% to the £). The rest of the companies in our coverage have exposure below 20% to the euro and pound on a combined basis (Kellogg (K) 19%, the proforma Molson Coors Brewing (TAP) 17%, Mead Johnson Nutrition (MJN) 15%, PepsiCo (PEP) 15%, Kraft Heinz (KHC) 15%, WhiteWave Foods (WWAV) 14%, and the rest 12% or lower). So if we take the scenario of a 20% drop in the pound and a 5% drop in the Euro, then the negative sales impact on Cocal-Cola Enterprises would be more than 8% (likely greater on earnings, given $ denominated fixed costs), about 5% at SodaStream, and c3% for Mondelez. We rate all three stocks Neutral, but on valuation, recent stock performance, and context, we think Coca-Cola Enterprises shares are the most exposed.

Shares of Coca-Cola Enterprises have jumped 3.2% to $38.65 at 10:27 a.m. today, while Mondelez International has gained 1.8% to $44.81, SodaStream International has risen 1.7% to $22.08, Kraft Heinz has advanced 1.6% to $86.14, and PepsiCo is up 0.6% at $104.04.

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Lumber Liquidators: ‘Potentially Catastophic?’


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Raymond James analyst Budd Bugatch and team write that a class-action lawsuit against Lumber Liquidators (LL) could be “potentially catastrophic” despite today’s decision by the Consumer Product Safety Commission not to recall the company’s Chinese-made laminate flooring. They explain why:

Thursday evening, Lumber Liquidators cleared another regulator hurdle related to laminate flooring sourced from China. The Consumer Product Safety Commission (CPSC) issued a statement and does not recommend that consumers pull up Chinese-laminate flooring installed in their homes as it could expose residents to increased levels of formaldehyde…

Together with the Consumer Product Safety Commission (CPSC), Lumber Liquidators announced an agreement stating: 1) the company will not sell the Chinese-made laminate flooring that was subject to the CPSC inquiry (which was pulled from store shelves in May 2015); and 2) it will continue the existing air quality testing program for consumers that purchased Chinese laminate from its stores between February 2012 and May 2015. In homes where Chinese-made laminate flooring is found to emit elevated levels of formaldehyde, the company will provide any required remediation…

So what is left? The last remaining serious legal issue is the Multi District Litigation (MDL) product liability lawsuit. Language in the company’s filings indicated that this consolidated class action lawsuit is scheduled to go to trial in November unless the parties reach a settlement before then…

We recently hosted the company’s senior leadership at our spring Boston conference. Prior to that, we also visited the company in Richmond, VA and toured a nearby store. Much progress has been made in a variety of business and governance areas. That said, the consequences of a negative result of the MDL – even if we believe the facts argue in favor of the company and that the likelihood is low – are potentially catastrophic. Accordingly, we continue to monitor the situation closely, awaiting further developments.

Bugatch rates shares of Lumber Liquidators Market Perform.

Shares of Lumber Liquidators have jumped 18% to $15.64 at 11:12 a.m. today.


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Exact Sciences: ‘We Do Not Expect to See an Uptick in Adoption’


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Benchmark’s Jan Wald and Erica Layon explain why they’re curbing their enthusiasm about changes to a recommendation for Exact Sciences (EXAS) colorectal cancer test:

The USPSTF has published a new Recommendation on Colorectal cancer screening that may impact Exact Sciences, a Hold rated stock with a $9 price target. We’ve gotten ahold of the USPSTF recommendation published on the JAMA website…To us, the recommendation has not changed, though the way it is formatted in the report has. The fact that there are no longer two categories may be meaningful, but the description of the benefits and harms has not changed. That may be viewed as a positive, but we are not sure. In a press release published yesterday, Exact Sciences implies that it has, but, again, we are not sure. As we have said in the past if the current recommendation stands (and it seems to us that it has more than it has changed), we do not expect to see an uptick in adoption that might be expected if it had.

Shares of Exact Sciences have jumped 12% to $10.43 at 10:10 a.m. today after getting upgraded to Buy from Hold at Craig Hallum.

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