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.”

*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.