Interactive Brokers - The U.S. Week Ahead (Feb 25-Mar 1)

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Includes: AMC, AMZN, BBY, HD, JCP, JEF, LB, M, MSFT, NFLX, NVDA, SHAK, T, TJX
by: Interactive Brokers
Summary

The earnings calendar will be lined with discretionary sector companies such as Shake Shack, Home Depot, Macy’s, L Brands and AMC Entertainment Holdings.

The retailers’ quarterly results fall against a backdrop of December’s retail sales plunge, as well as further deterioration in consumers’ confidence at the start of 2019.

Meanwhile, AMC could face some headwinds from the disruption of streaming video services such as Netflix and Amazon Prime, which have been generally stealing younger generations away from traditional theaters.

Also, a long list of attendees is slated to attend the 2019 Morgan Stanley Technology, Media & Telecom Conference - and Fed chair Jerome Powell will deliver his two-day semi-annual testimony to Congress.

Economic activity will be also be rife with updates, including the pace of fourth-quarter GDP growth, personal income and spending, and a fresh ISM Manufacturing PMI.

On the Corporate Front: AMC’s Earnings Could Be Challenged By Netflix

While economic activity in the week ahead will be rife with updates, including the pace of fourth-quarter GDP growth, personal income and spending, as well as a fresh ISM Manufacturing PMI, investors will also be keeping an eye on corporate earnings as the season winds down.

The earnings calendar will be lined with discretionary sector companies such as Shake Shack (NYSE: SHAK), Home Depot (NYSE: HD), Macy’s (NYSE: M), L Brands (NYSE: LB), TJX Companies (NYSE: TJX), J C Penney (NYSE: JCP) and AMC Entertainment Holdings (NYSE: AMC).

The retailers’ quarterly results fall against a backdrop of December’s retail sales plunge, as well as further deterioration in consumers’ confidence at the start of 2019. However, preliminary data in the University of Michigan’s Index of Consumer Sentiment showed an uptick in February, which reflected the end of the partial government shutdown, as well as a more fundamental shift in consumer expectations due to the Fed's pause in its tightening of monetary policy.

Investors may glean further insights into the Federal Reserve’s policymaking decisions when Fed chair Jerome Powell delivers his two-day semi-annual testimony to Congress beginning Tuesday, February 26.

Furthermore, the recent resurgence of risk appetite appears to have been bolstered by reported progress in U.S.-China trade talks.

Bill Baruch, president of Blue Line Futures, noted that “the market is focused on an accommodative Fed and the headlines that exacerbate such without really caring to understand why they may want to be accommodative in the first place.

“Instead, the market is focused on an agreement to agree on what must be achieved in order to make an agreement between the U.S. and China on trade.”

Baruch highlighted that the market has “gone straight up for nearly two months, now investors and portfolio managers find it easy to cling to gains and throw caution into the wind, ‘who needs protection’. Never mind the fact that the VIX is at the lowest level since October 5th.”

Elsewhere on the corporate front, a long list of attendees is slated to attend the 2019 Morgan Stanley Technology, Media & Telecom Conference, which is scheduled to be held from February 25-28 in San Francisco at the Palace Hotel. Firms set to gather at the conference include Microsoft (NASDAQ: MSFT), NVIDIA (NASDAQ: NVDA), Facebook (NASDAQ: FB) and AT&T (NYSE: T).

Coming attractions

Among the thick crowd of companies awaiting to announce earnings in the week ahead, AMC Entertainment Holdings is set to deliver its Q4’18 results.

The Kansas-based exhibitor could face some headwinds from the disruption of streaming video services such as Netflix (NASDAQ: NFLX) and Amazon Prime (NASDAQ: AMZN), which have been generally stealing younger generations away from the movie theater experience.

Netflix, for example, tacked on 8.8 million global paid memberships during Q4’18, well-above its stated estimate of 7.6 million. The company posted 1.5 million new subscribers in the U.S. and 7.3 million new international subscribers.

Moreover, the film slate in 2018 appeared to have mixed results in terms of ticket sales. According to Box Office Mojo, while October’s gross revenues exceeded the prior year by nearly 77.5% -- based largely on the success of Venom – they suffered in November and December, as the likes of The Grinch and Aquaman competed with titan tentpoles Thor: Ragnarok and Star Wars: The Last Jedi in the same year-ago months, respectively.

In its Q3’18 report, AMC posted admissions revenues that were about unchanged at US$751.4m compared to US$753.5m for the same period a year ago – mainly due to an 8.6% surge in attendance at its U.S. theatres in the same year-ago quarter.

Although total revenues increased, AMC suffered US$100.4m in net losses, an increase of US$42.7m from Q3’17. Included in the losses was a US$54.1m non-cash expense as a result of an increase in fair value of its new derivative liability related to convertible notes, which the company said will be marked to market quarterly, going forward.

AMC had attracted a US$600m investment from private equity giant Silver Lake in the form of 6-year 2.95% convertible notes. The company pegged the proceeds from these notes to buy back roughly 24m shares from Chinese film production company Wanda and issue a US$1.55 per share special dividend to its shareholders.

As part of its debt reduction strategy, and to comply with China’s federal foreign ownership policy, Wanda had recently shed a third of its stake in AMC.

Adam Aron, CEO of AMC, also pointed out his company has been benefiting from its packaged/discount promotional programs AMC Stubs and AMC Stubs A-List, which it launched in late June 2018.

Aron said AMC Stubs members make up more than 40% of its U.S. clientele, enabling AMC to develop data analytics to exploit moviegoing habits and histories.

Together with its A-List program, Aron added that its membership base already translates to US$120m of annual recurring revenue for movie admission ticket buying at AMC theatres, “even before considering the continued growth in membership and revenue that is surely ahead of us.”

However, the success of the discount program may be somewhat foreboding for Q4’18 earnings, given the gloomy retail sales report for December.

Ward McCarthy, chief financial economist at Jefferies, characterized the data as “truly dreadful pretty much across the board.

“Taken literally, this data release would indicate that the consumer sector collapsed in December. This release is such an outlier and so incongruous with the general trend in consumer spending, holiday consumer sales reports and holiday seasons consumer credit data that it does raise suspicions of data reliability.”

McCarthy added that the results were “sufficiently weak that it will no doubt fire-up the fear-of-recession anxieties that have percolated so many times this cycle.

“From the Fed standpoint, it will also make policymakers more conformable that the ‘patient’ approach to rate policy is appropriate, and it could influence policymakers in making decisions about the appropriate size of the balance sheet, which is an ongoing process.”

While December retail sales sorely disappointed analysts’ expectations, registering the largest month-over-month drop since 2009, it would not be surprising to see a drop in box office receipts as moviegoers spent fewer dollars at the door and perhaps subscribed to a streaming service such as Netflix.

AMC is set to unveil its Q4’18 earnings results Thursday, with analysts’ generally expecting the company to earn US$0.17 per share compared to US$0.26 in the same year-ago quarter.

Note: This material was originally published on IBKR Traders' Insight on February 22, 2019.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: I am receiving compensation from my employer to produce this material.