Rudd’s MarketView for Friday, June 16, 2017

Summary

The major domestic equity indexes ended little changed on Friday even as Amazon’s $13.7 billion deal to buy Whole Foods roiled the retail sector and rocked shares of an array of companies including Wal-Mart and Target.

Energy sector shares helped buoy the S&P 500 and the Dow Jones Industrial Average, while Apple dragged on the Nasdaq. The deal by Amazon, a proven retail disruptor, marked a major step by the internet retailer into the brick-and-mortar retail sector.

Wal-Mart sank 4.7 percent, weighing on the Dow. Shares of Target, Walgreen Boots and Costco fell between 5 percent and 7 percent.

Amazon gained 2.4 percent, making the stock the largest boost to the S&P 500. Whole Foods surged 29.1 percent.

The S&P consumer staples sector index fell 1 percent, by far the worst performing major sector. The S&P 500 food and staples retailing index fell 4.2 percent.

Kroger was the largest loser on the S&P 500, falling 9.2 percent, while Supervalu dropped 14.4 percent.

The technology sector index fell 0.2 percent, continuing its recent slump. Apple ended the day down 1.4 percent.

Tech has led the S&P 500’s 8.7 percent rally this year, but posted its second week of declines.

The energy index rose 1.7 percent, propping up the S&P 500. Oil prices bounced off the year’s lows as some producers reduced exports and domestic rig additions slowed.

Homebuilding fell for a third straight month in May to the lowest in eight months as construction activity declined broadly.

Approximately 9.7 billion shares changed hands on the major domestic equity exchanges, a number that was well above the 6.8 billion share daily average over the last 20 trading sessions.

Amazon Rocks Wall Street

Amazon said on Friday it would buy grocer Whole Foods Market $13.7 billion in a move that gives the online retailer a physical network of stores to distribute fresh food and other goods to millennials and wealthy consumers.

Amazon, which is known for squeezing suppliers and has been experimenting with its own outlets, will take over a natural and organic grocer pioneer brimming with 456 stores and high-end shoppers but struggling to rein in prices and integrate technology.

The deal sent shockwaves across the food distribution market and beyond. Shares of Kroger fell 11 percent, while Wal-Mart was down 5 percent, signaling fears that Amazon could cut prices and broaden Whole Foods’ product mix, turning it into a much broader retailer.[]

Amazon’s shares were up 3 percent at $993.40, adding more than $14 billion to its market capitalization.

Amazon has agreed to pay $42 per share in cash for Whole Foods, a 27 percent premium on the company’s closing share price on Thursday. Whole Foods shares were trading just above that level on Friday, as investors saw negligible regulatory risk to the deal closing.

Amazon has been looking at stores that could allow traditional in-store purchase, online ordering with on-site pickup, and home delivery, using the store’s warehouse as a distribution point.

Still, Amazon is playing catch-up in the grocery business. Wal-Mart Stores Inc already offers in-store pickup. Amazon announced a similar service called AmazonFresh Pickup at two locations. Amazon also has dealt with technology problems at a prototype store inside its corporate office in Seattle, called Amazon Go, where sensors and tech-savvy cameras detect what shoppers pull off the shelves and charge their Amazon accounts when they leave.

And while is expected Amazon to bring vast buying power to Whole Foods, Amazon’s heft in the food market is far smaller than in other areas, and high demand for organic products gives farmers unusual bargaining power.

Whole Foods has posted seven straight quarterly sales declines at established stores and had overhauled its board of directors in the face of pressure from activist hedge fund Jana Partners LLC.

The deal is for $13.4 billion in cash and the remainder in debt. The acquisition price implies a trailing 12-month price-to-earnings multiple for Whole Foods of 31 times, versus a 14.4 average for the S&P 500 Food Retail index.

Amazon and Whole Foods expect to close the deal during the second half of 2017.

The grocer will continue to operate stores under the Whole Foods Market brand and John Mackey will remain as its chief executive officer, the companies said. Whole Foods’ headquarters will still be in Austin.

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