Symbol: CREE

Highlighted Charts

U.S.: Arcelor Mittal Cl ( MT ), News Corporation ( NWS ), Hyatt Hotels ( H ), Schlumberger Ltd ( SLB ), Packwest Bancorp ( PACW ), Varian Medical Systems ( VAR ), Cheesecake Factory ( CAKE ), HD Supply Holdings ( HDS ), Finisar Corporation ( FNSR ), Pegasystems ( PEGA )

 

Developed: Orica Limited ( ORI.AU; ORI AU ), Nidec ( NDEN.JP; 6594 JP ), Telefonica ( TEF.ES; TEF SM ), Salvatore Ferragamo ( SFER.IT; SFER IM ), Kose ( OSEC.JP; 4922 JP ), Inter Pipeline Fund ( IPL.CA; IPL CN ), ASX ( ASX.AU; ASX AU ), Sonova ( SOON.CH; SOON SW ), Compass Group ( CPG.GB; CPG LN ), Rocket Internet ( RKETX.DE; RKET GR ), Brother Industries ( BI@N.JP; 6448 JP ), Square Enix Holdings ( ENIX.JP; 9684 JP ), Ana Holdings ( ANAW.JP; 9202 JP )

 

Emerging: Larsen & Toubro ( LST.IN; LT IN ), Sun TV Network ( NSV.IN; SUNTV IN ), Lg Electronics ( JHD.KR; 066570 KS ), Shin Kong Financiual Holding ( SHK.TW; 2888 TT ), Quanta Computer ( QUM.TW; 2382 TT ), SK Holdings ( C&C.KR; 034730 KS )

Stocks worth focusing on in this week’s Global Laggards:

U.S.

HD Supply Holdings ( HDS ) – Retail ( $7B market cap ) – Industrial distributor in North America

 

HDS shares have come under pressure since the Company reported Q2 FY 2019 results on September 5 and are now 16% off highs. The next level of support is at ~$35 (-10%).

For the quarter, HDS delivered revenue and adjusted EPS growth of 18% and 90%, y/y, respectively, to $1.6B and $0.74. For the full year, it raised its guidance and now expects sales to reach $5.95B-6.00B, compared with $5.12B in FY 2018.

Despite the beat-and-raise quarter, we believe the market is concerned about margin compression, which is expected to continue in the near term.

For Q2, gross margin was down 100bps y/y to 38.9%, out of which 40bps was attributed to the product mix following the acquisition of A.H. Harris by the Company’s Construction and Industrial business ( 49% of Q2 FY 2019 revenue ). In the Facilities Maintenance segment ( 51% of Q2 FY 2019 revenue ), gross margin declined 50bps from a high base due to higher growth of lower-margin HVAC sales and installation and the property improvement business.

HDS is expected to meet its target of revenue growth of more than 300bps above that of the market. For FY 2019, the Company sees its end markets growing ~3%, a key assumption of which is mid-single digit growth in the residential construction market. In our view, residential construction market growth will slow going forward on account of the rising interest rates in the U.S., which will impact the Company’s prospects.

If the Trump administration’s proposed tariff hike to 25% on $200B of Chinese imports goes into effect, it will put further pressure on the Company’s gross margin.

 

Developed

Kose ( OSEC.JP; 4922:JP; $9.3B market cap ) – Personal care company whose products include cosmetics, skin care, and hair care

 

Expected Slowdown in Earnings Growth — Japanese Tourism Badly Affected

Kose relies on its international presence for its sales. As of Q1 FY 2019, about 26% of revenues were international. Including sales made to consumers touring in Japan, international customers represented 35% of total sales.

Per data from Japan’s National Tourism Organization, the number of visitors to Japan fell 5.3% y/y in September, the slowest growth since January 2013. Tourists from China fell 3.8%, while visitors from South Korea plunged 14%. The primary reasons for the decline include natural disasters such as earth quakes and typhoons.

This impacted Japanese companies that have revenue exposure to market inbound sales ( foreign visitors to Japan ). With about 10% of Q1 FY 2019 revenues from sales to foreign tourists in Japan, the Company’s Q2 revenues will be affected.

Media reports quoted a customs official announcing that Chinese visitors returning from foreign trips should declare goods if they surpass the tax-exempt amounts for travelers. This is expected to negatively impact the Company’s top-line, as it derives about 76.7% of its revenues from the cosmetics segment (high prestige), which has the highest margins. The increased scrutiny will deter tourists from purchasing high-end cosmetics, which will also impact margins.

Decaying Technical Factors

With Japanese tourism badly affected, the Company’s EPS growth has been revised down to 18% and 8%, y/y, respectively, for FY 2019 and FY 2020.

A/D Rating has declined to E due to above average selling for the past three weeks.

Sharp deterioration in RS Rating to 39 currently ( versus 75 on August 24 ), reflecting the poor stock performance compared with the markets.