Citing the recent spread of fears and headlines related to the Wuhan coronavirus that are pressuring regional travel and Macau traffic, Bank of America analyst Shaun Kelly downgraded Wynn Resorts (WYNN) to Neutral. Meanwhile, his peer at Oppenheimer downgraded Estee Lauder (EL) to Perform following recent developments in China, citing both the new coronavirus outbreak and the stock’s premium valuation.
NEW CORONAVIRUS: A new coronavirus has killed 81 people in China and infected over 2,800 worldwide, including the U.S. A total of 1,900 new cases were diagnosed over the weekend alone, according to the World Health Organization and Chinese state media. Multiple cases of the virus have been confirmed in the U.S., France, Australia, Japan, Hong Kong, Macau, Taipei, Thailand, Vietnam, South Korea, Singapore and Malaysia. A single case has also been confirmed in Nepal and another in Cambodia, according to a report by Reuters.
In a tweet, President Donald Trump said that, "We are in very close communication with China concerning the virus. Very few cases reported in USA, but strongly on watch. We have offered China and President Xi any help that is necessary. Our experts are extraordinary!"
The coronavirus family includes those that cause the common cold. However, some found in animals like bats or camels have evolved into severe illnesses such as SARS, or severe acute respiratory syndrome, and MERS, Middle East respiratory syndrome.
MAINLAND CHINESE VISITORS TO MACAU PLUNGE: The number of mainland Chinese visitors to Macau fell 80% on Sunday, the third day of the Lunar New Year holiday, compared with the equivalent day during last year's Lunar New Year break, Bloomberg's Richard Frost reported, citing the city's tourism office. The outlook is unlikely to get any better as China limits travel for its citizens, including overseas tour bans, amid the growing death toll caused by the deadly coronavirus, the report noted. Macau's leader Ho Iat Seng said on Thursday that he couldn't rule out closing all casinos in the city due to the disease outbreak. Publicly traded companies in the Macau gaming space include Las Vegas Sands (LVS), MGM Resorts (MGM), Wynn Resorts and Melco Resorts (MLCO).
Meanwhile, Bank of America's Kelley downgraded Wynn Resorts to Neutral from Buy with a $150 price target. The analyst cited the recent spread of fears and headlines related to the Wuhan coronavirus, pressuring regional travel and Macau traffic. Kelley added that the scope of the virus is starting to look comparable to SARS with over 2,500 people reportedly infected, though the new coronavirus does not appear quite "as deadly."
MOVING TO SIDELINES ON ESTEE LAUDER: In a research note to investors, Oppenheimer analyst Rupesh Parikh downgraded Estee Lauder to Perform from Outperform, lowered his price target on the shares to $210 from $230, and removed the stock as a Top Pick. Following recent developments in China with the coronavirus, coupled with the premium valuation at which shares trade, the analyst no longer views the risk/reward as attractive from current levels. Although difficult to measure the precise impact and the length at which the coronavirus-related challenges could persist within the Chinese economy, he now expects Estee Lauder's higher margin travel-retail segment to be adversely impacted at least in the third quarter and potentially longer.
Acknowledging that the new coronavirus thus far is much less widespread and less lethal versus SARS, Credit Suisse analyst Michael Binetti noted that the retail stocks with significant China exposure such as Estee Lauder, Nike (NKE), and Tapestry (TPR) have started to underperform. Binetti's checks suggest that retailers are bracing for a disappointing Chinese New Year, with China now having a much bigger input to revenues/EPS for global brands. If Coronavirus continues, it could be a 3%-5% hit to EPS for China-exposed stocks like Nike/Estee Lauder next quarter in a "reasonable base case scenario," the analyst contended, adding that media "fear factor" could potentially drive relative P/E's another 10%-15% lower as well.
CLOSURES IN CHINA: Yum China (YUMC) has temporarily closed some of its KFC and Pizza Hut stores in Wuhan, China as a response to the coronavirus outbreak there, Ismail Shakil and Nivedita Balu of Reuters reported, citing an emailed company statement. Yum China said, "We will continue to evaluate the need for additional actions and preventive health measures."
McDonald's (MCD) also has confirmed temporary store closures due to the coronavirus outbreak. The situation has prompted the company to suspend operations indefinitely in five cities in China - Wuhan, Ezhou, Huanggang, Qianjing and Xiantao, all in Hubei province - starting Friday," according to the New York Post.
Over the weekend, Reuters reported that Starbucks (SBUX) closed all shops and suspended delivery services in China's Hubei province for the week-long Lunar New Year holiday amid the new coronavirus outbreak. Starbucks said that the move is out of "health concerns" for its customers and employees, the report noted.
Among the restaurant stocks he covers, Guggenheim analyst Matthew DiFrisco pointed out that Starbucks has the greatest exposure to China as measured by percentage of worldwide system revenues and operating income, followed by McDonald's and Domino's Pizza (DPZ). He estimates China accounts for about 10% of Starbucks' sales and about 12%-15% of its operating income. The analyst has Buy ratings on McDonald's and Domino's, and a Neutral rating on Starbucks.
PRICE ACTION: In morning trading, shares of Wynn have dropped almost 8% to $124.64, while Estee Lauder's stock has slid over 5% to $194.18. In addition to the continued weakness in casino stocks, other travel and leisure stocks also continued to be pressured, including United Airlines (UAL), Delta Air Lines (DAL), American Airlines (AAL), Royal Caribbean (RCL), Norwegian Cruise Line (NCLH) and Carnival (CCL).
United Airlines
-4.15 (-5.07%)
Delta Air Lines
-2.74 (-4.66%)
American Airlines
-1.81 (-6.54%)
Royal Caribbean
-8.8 (-6.96%)
Carnival
-2.22 (-4.67%)
Carnival plc
-2.1 (-4.68%)
Norwegian Cruise Line
-2.28 (-4.08%)
Wynn Resorts
-10.65 (-7.90%)
Estee Lauder
-11.12 (-5.42%)
McDonald's
-2.23 (-1.06%)
Yum China
-2.46 (-5.55%)
Starbucks
-3.4 (-3.69%)
Las Vegas Sands
-4.69 (-6.91%)
MGM Resorts
-1.24 (-3.93%)
Melco Resorts
-1.21 (-5.69%)
Nike
-2.14 (-2.10%)
Tapestry
-0.695 (-2.55%)
Domino's Pizza
-2.55 (-0.89%)