U.S. Purchasing Manager Index Falls To Lowest Reading Since 2013 Due To Coronavirus Outbreak

Plus, Coca-Cola warned the virus could dent first quarter earnings, Deere delivered an earnings beat, and online pet food supplier Chewy got an upgrade.

Stocks fell to start Friday with the Dow dipping 218 points, or 0.8%. The S&P 500 sank 0.8%, while the Nasdaq traded 1.2% lower.

The IHS Markit Services purchasing manager index came in below 50 for the first time since 2013. The index measures composite output at factories and service providers and fell by 3.7 points to 49.6, indicating contraction. The reading indicates that the coronavirus is hitting supply chains and has made firms hesitant to place orders, a warning sign that the outbreak is beginning to dent the U.S. economy. The deterioration “was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions,” said IHS Markit economist Chris Williamson in a statement. After this first major piece of economic data to show a sizable hit from the coronavirus, the 30-year Treasury yield dropped to a record low of 1.89% while the 10-year Treasury note fell to 1.453%, its lowest level since early September 2019.

Speaking of COVID-19, total confirmed cases have surged above 76,700 while total deaths have climbed to at least 2,249. Iran confirmed 4 deaths from the virus and a total of 18 cases across several Iranian cities, a health ministry official said, while the first case of the coronavirus has been confirmed in Lebanon. South Korea’s cases now top 200 as the tallies in Singapore and Japan have risen above 85, excluding the quarantined cruise ship docked in Japan with 600-plus cases. The rapid spread of the virus in other Asian countries is weighing on investors as they consider the impact of a wider regional outbreak on economic growth and corporate earnings. “The sudden jump in infections in other parts of Asia, notably in Japan and South Korea, has sparked renewed concerns,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. “This points to a new phase in the outbreak, and one which will see continued disruption and more economic impact than previously thought.”

Coca-Cola said this morning that the coronavirus outbreak could dent its first-quarter earnings by as much as $0.02 per share, unit case volume by 2% to 3%, and organic revenue by 1% to 2%. The company still expects to meet its full-year targets, however, and estimates its organic revenue will growth by 5% in 2020 and its adjusted earnings per share will increase by 7% to $2.25. China is Coca-Cola’s third-largest market in terms of unit case volume, and the company said it expects growth to continue in the long term. It also said that it has taken precautionary measures to protect employees in China by providing face masks and hand sanitizers, installing temperature screening in offices and manufacturing facilities, and setting up health monitoring mechanisms across the system in China.

Deere shares are up more than 8% this morning after the agricultural equipment manufacturer delivered an earnings beat for its fiscal first quarter. The company reported adjusted earnings per share of $1.63 on revenue of $6.53 billion, compared to analysts’ expectations for earnings per share of $1.25 on revenue of $6.409 billion. “John Deere’s first-quarter performance reflected early signs of stabilization in the U.S. farm sector,” said CEO John May in a statement. “Farmer confidence, though still subdued, has improved due in part to hopes for a relaxation of trade tensions and higher agricultural exports.”

And Chewy shares are up around 4% after RBC Capital analyst Mark Mahaney upgraded the online pet food seller to Outperform and maintained his $38 price target on the stock – nearly 25% higher than the current price. Mahaney said he sees a “highly favorable risk-reward outlook” for Chewy, and said the company is “fundamentally strong” with 30% growth in active customers and 70% of revenue on Autoship with consistent near-term traffic trends. Long-term, Mahaney expects “an asset with strong sustainable fundamentals” with revenue growth above 25% a year, “materially expanding margins,” and “significant option value on new business lines, like private label products, veterinary pharmacy and international expansion.”

Stocks We’re Watching

Adesto Technologies (NASDAQ: IOTS): Adesto Technologies shares rocketed 55% higher yesterday after Dialog Semiconductor announced yesterday that it had signed a definitive agreement to acquire Adesto for $12.55 per share, or roughly $500 million. “Together with Dialog, we are positioned to create unique Industrial IoT solutions through the integration of our best-in-class technologies for today’s increasingly connected world,” said Adesto CEO Narbeh Derhacobian. “We are extremely pleased to join Dialog to bring more value to our combined customer base.” The deal is expected to close in the third quarter of 2020.

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