October 21, 2016

Stocks gapped down at the open but are paring losses. The Dow and SPX are currently down 93 pts & .25%, respectively. Tech and consumer-related sectors are up a bit but energy, healthcare and telecoms are down about 1%. The dollar is higher on the day and commodities are mixed. WTI crude oil is trading flat around $50.50/barrel. Bonds are mostly unchanged. Today’s trade is not about commodities or bonds—it’s about earnings announcements and mergers. 

British American Tobacco (BATS) offered to buy Reynolds American (RAI) for about $56.50/share. That’s a roughly 20% premium to yesterday’s closing price. BATS already owns 42% of Reynolds. Bloomberg says this deal would create the world’s largest tobacco company. The Financial Times is reporting that Reynolds is open to the deal but wants a higher price. RAI is up about 15% this morning. And by the way, all the other tobacco stocks are up as well as takeover speculation spreads around the industry. 

General Electric (GE) reported a mixed quarter, beating earnings estimates but falling short on revenue. Revenue rose 5% y/y and earnings climbed 10%. So far, so good. Product orders shot up 16%, but actually fell 4% on an “organic” basis. That means all of the growth came from acquisitions. Indeed, Management cut full-year 2016 organic sales growth guidance (from core industrial businesses) to 0-2%.  CEO Jeff Immelt said a stronger dollar, lower oil prices and a tepid global economic environment are restraining growth. The stock is down about 1.5% this morning. 

McDonald’s (MCD) Beat both revenue and earnings expectations in the third quarter, and says it is seeing improving sales overseas. In fact, same-store-sales globally increased 3.5% vs. Wall Street’s consensus forecast for 1.5%. US same-store-sales were up only 1.3%, tracking along with other restaurant chains like Darden (DRI). The stock is up 2.5% this morning. 

AT&T (T) is apparently in advanced talks to acquire Time Warner (TWX) and CNBC is reporting the deal could be announced this weekend. Now, Jeffries notes AT&T management has said its plate is full [with the DirectTV acquisition] and another large deal is unlikely. In addition, BTIG says other suitors are out there for TWX and anyway, it might be tough to get a T/TWX deal through the FCC. Finally, Bloomberg notes AT&T has a rather large debt load already and is doesn’t want to jeopardize its investment-grade credit rating. The stock is down 2.7% today, telling you that investors don’t like this. 

Microsoft (MSFT) reported strong third quarter results with 14% y/y earnings growth. Revenue rose 3% y/y and fell a bit short of expectations. But the company doubled its cloud-based service revenue, and this is the reason the stock is up 4% today. Equity research shop Jeffries now says the stock is “grossly overvalued.”


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