A Close Look At Thursday’s Key Market Events (Update)

A Close Look At Thursday’s Key Market Events (Update)

$XLI, $IJY, $FXR, $VIS, $BA, $BBY

Thursday, the 2 Key items that will attract attention are the Durable Goods Orders report for January and the Best Buy earnings report. Both will be released before the opening bell.

I. The Durable Goods Orders Report for January, Thursday, 25 February at 8:30a EST

Note: Durable goods orders jumped 4.9% in January (consensus 2.0%) on the heels of a revised 4.6% decline from -5.0% in December. Excluding transportation, orders rose 1.8% (consensus +0.4%) after declining an revised 0.7% from -1.0% in December.

The January upturn followed on the back of M-M declines in both November and December. On a Y-Y basis, durable goods orders are up only 0.6%.

The durable goods orders data are volatile due to the influence of aircraft and defense spending.

Both played a big part in driving the January turnaround.

Orders for non-defense aircraft and parts surged 54.2% after a 29.1% decline in December while orders for defense aircraft and parts increased 84.8% following a 66.8% decline in December.

New order gains were seen in several areas, including primary metals (+0.7%), fabricated metal products (+1.6%), and machinery (+6.9%).

The strength in January could simply be a rebound from a depressed base of order activity. We will know more when the February report is released.

For now, it can be seen as encouraging news, particularly since non-defense capital goods orders excluding aircraft  increased 3.9%.

The damper on things is that shipments of these goods, which factor into GDP computations, declined 0.4%.

Why it is important

1. It sheds light on business activity for US manufacturers
2. It enables economists and investors to develop a sense of business spending levels
3. The relevant line item in the report is new orders for non-defense capital goods, excluding aircraft
4. Durable orders can be volatile due to aircraft orders. Accordingly, the underlying impression of manufacturing activity flows out of the level of new durable orders, ex-transportation.
5. This report will factor into Q-1 GDP computations
6. The relevant line item in the report pertaining to the GDP outlook is shipments of non-defense capital goods, excluding aircraft

A closer look

The Numbers:
Thursday, 25 February                                                     Est           Cons       Prior

Durable Orders 8:30 EST                                                2.5%         2.0%     -5.0%
Durable Orders, ex-Transportation 8:30a EST          0.2%         0.4%      -1.0%

What is  in play?

1. Industrial Select Sector SPDR ETF (XLI)
2. iShares U.S. Industrials ETF (IYJ)
3. Industrials/Producer Durables AlphaDEX Fund (FXR)
4. Vanguard Industrials ETF (VIS)
5. Boeing (BA)

Treasuries

S&P futures

Fed funds futures

II. Best Buy F-Q-4 Earnings Report before the open

Note: The Best Buy Co. Inc. (NYSE: BBY) earnings report was less than great, despite being slightly ahead of earnings estimates.

The electronics and home appliances retail giant posted 1.53 in adjusted EPS and revenues of $13.62-B. Thomson Reuters was calling for EPS of 1.30 and $13.61-B in revenue.

One key driver here was news that Best Buy was boosting its dividend by more than 20% to 0.28 per Quarter. Best Buy also announced a special dividend of 0.45/share and a new share buyback plan of up to $1-B.

Why it is important

1. The company is a leading consumer electronics retailer, offering merchandise in four Key revenue-generating categories: Consumer Electronics, Computing and Mobile Phones, Entertainment, and Appliances (Services and Other comprise the company’s 2 remaining revenue segments)
2. While Best Buy has some international exposure, it caters primarily to the US (89% of sales), meaning it provides telltale insight into the consumer discretionary spending activity of US consumers
3. Its results influence expectations for pricing and profit margins across the consumer electronics landscape
4. Sales at Best Buy, and commentary from management, influence expectations for investors in companies supplying products to Best Buy
5. In FY 2015, Apple (AAPL), Samsung, HP, Inc. (HPQ), Sony (SNE), and LG Electronics represented approximately 47% of total merchandise purchased at Best Buy
6. Shares of BBY are up 1.2% year-to-date, leaving it well ahead of the broader market and reflecting some hopeful expectations that Best Buy will deliver encouraging guidance. Failure to do so could lead to a material sell-off in the stock.

What Best Buy said following holiday sales update in mid-January

1. In the domestic business, we are expecting (1) a revenue decline of near 1.5% Vs our previous expectation of near flat due to softer consumer demand in mobile phones and greater than expected declines in the NPD-reported categories; and (2) a non-GAAP operating income rate decline of 10-15 bpts Vs previous expectation for decline of 20-35 bpts.
2. The shift of the Super Bowl into Q-1 FY 2017 is driving an expected 40 bpts of pressure in Q-4 revenue.
3. Enterprise outlook includes (1) a revenue decline of near 4% versus our previous expectation of a low single-digit decline; and (2) a non-GAP operating income rate decline of approximately 15-30 bpts versus previous expectations for decline of 25-45 bpts.
4. Non-GAAP effective income tax rate from continuing operations to be in range of 34.5% to 35.0% ves 34.2% last year. This is expected to result in a negative 0.01 to negative 0.03 Y-Y non-GAAP diluted EPS impact in Q-4 FY 2016.

What is in play?

BBY (NYSE)

Direct competitors

1. Amazon.com (AMZN)
2. hhgregg (HGG)
3. Walmart (WMT)

Suppliers

1. Apple (AAPL)
2. HP, Inc. (HPQ)
3. Sony (SNE)
4. GoPro (GPRO)
5. Blackberry (BBRY)
6. Fitbit (FIT)
7. Garmin (GRMN)
8. SanDisk (SNDK)
9. Western Digital (WDC)
10. Seagate (STX)
11. Microsoft (MSFT)
12. Whirlpool (WHR)
13. Electronic Arts (EA)
14. Activision (ATVI)
15. Zagg (ZAGG)
16. Skullcandy (SKUL)
17. Samsung
18. LG Electronics

Mobile Network Carriers

1. AT&T (T)
2. Verizon (VZ)
3. Sprint (S)
4. T-Mobile (TMUS)

Consumer Discretionary Select Sector

1. SPDR (XLY)

III. Economic Reports

These economic reports scheduled to be released to the market include: 1) Initial claims (Consensus 270-K), 2) Continuing claims (Consensus 2268-K), 3) Durable Orders (Consensus 2.0%), 4) Durable Goods ex-transportation (Consensus 0.4%).

Note:

IV. Earnings Reports

Stay tunes…

Paul Ebeling

HeffX-LTN

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