Closing Recap

Thursday, July 20, 2023

Index	Up/Down	%	Last
DJ Industrials	163.22	0.47%	35,224
S&P 500	-30.92	0.68%	4,534
Nasdaq	-294.71	2.05%	14,063
Russell 2000	-17.72	0.89%	1,967

 

 

 

 

 

 

 

 

 

U.S. stocks closed sharply lower, with the Nasdaq down as much as 2% in the final hour of trading, as Netflix (NFLX) declined over -8% as weaker revs/guidance overshadowed a surge in subs, and TSLA dropped over -9% on lower operating income and weaker margins, hurting the Nasdaq and S&P as well as a flush of -3.6% in semis after TSM softer guidance. The Dow Jones Industrial Average however posted its best winning streak in over 4-years, making it a 9^th straight day higher as strong earnings and guidance from JNJ, TRV and IBM helped propel the index higher. Dow Transports end little changed as airlines finished mixed with UAL rising on results while AAL shares declined post earnings (into CSX, KNX earnings tonight). The S&P 500 fell around -0.6% but has not fallen by more than 1% for 38 straight sessions now, a bullish streak last matched in late 2021 when investor optimism fueled the run up to its all-time high. With 77 S&P 500 companies having reported results, second-quarter earnings are expected to have declined 7.9%, Refinitiv data showed, more than the 5.7% fall expected at the start of the month. The Nasdaq has led the 2023 gains, so a big drop in large cap tech was long overdue as we head into a big week coming up with AMZN, META, MSFT, GOOGL among names expecting to report next week.

 

Economic Data

·     Jobless Claims fell to 228K in the latest week from 237K prior (est. 242K); the 4-week moving average fell to 237,500 from 246,750 prior and continued claims rose to 1.754M from 1.721M prior.

·     Existing Home Sales for June fell -3.3% to 4.16M unit rate vs. est. 4.2M; June inventory of homes for sale 1.08 mln units, 3.1 months’ worth; June national median home price for existing homes $410,200, -0.9 pct from June 2022.

·     Philadelphia Fed’s manufacturing gauge remains in negative territory in July for 11th straight month, falling -13.5 vs. -10.0 consensus and -13.7 in June as Business Conditions rose +29.1 vs. +12.7 prior, Employment -1.0 vs. -0.4 prior, New Orders tumbled -15.9 vs. -11.0 prior and the Prices Paid component rose +9.50 vs. +10.50 prior.

·     Leading Index Change MoM Actual -0.7% (Forecast -0.6%, Previous -0.7%).

 

Commodities

·     WTI crude oil for August delivery rose $0.28, or 0.4%, to settle at $75.63 a barrel, Brent Crude futures settle at $79.64/bbl, up 18 cents, 0.23% and August natural gas added 15 cents, or 5.9%, to settle at $2.76 per million British thermal units. Prices rose on lower U.S. crude inventories and firm buying from China, but a weaker demand outlook kept investors cautious. Prices fell in the previous session after data showed U.S. inventories fell less than analysts expected. Gold prices fell -$9.90 or 0.5% to settle at $1,970.90 an ounce.

 

Currencies & Treasuries

·     The US dollar gained vs. most currencies following a mixed batch of economic data that showed Americans filing new claims for unemployment benefits unexpectedly fell last week, boosting expectations the Federal Reserve may continue hiking interest rates. Market expectations are for a 25-bps hike at next Wednesday’s FOMC policy meeting; it’s the outlook on possible further hikes that is uncertain for markets currently. The euro fell -0.6% to $1.1113, the British pound extended its decline a day after data showed that Britain’s rate of inflation was its slowest in more than a year at 7.9%; the buck rose 0.27% against the Japanese yen to 140.07. The 10-yr Treasury yield rose 11.2 bps to 3.853%, biggest 1-day gain in over 3-weeks.

 

 

Macro	Up/Down	Last
WTI Crude	0.28	75.63
Brent	0.18	79.64
Gold	-9.90	1,970.90
EUR/USD	-0.007	1.1128
JPY/USD	0.50	140.17
10-Year Note	0.112	3.852%

 

 

Sector News Breakdown

Consumer

Autos:

·     TSLA shares slide after quarterly results; the Q2 EPS beat fueled primarily by below the operating line benefits (overall EPS $0.91 vs. est. $0.82) and revs $24.93B vs. est. $24.48B; posts Q2 margin at 18.2%, lower than 19.3% in Q1; also operating income of $2.4B missed views for $2.7B and fell 2.6% y/y and FCF was about $1B vs. est. $1.88B.

·     In auto parts: GPC raises FY23 adjusted EPS view to $9.15-$9.30 from $8.95-$9.10 prior and reaffirmed FY23 revenue view up 4%-6%, consensus $23.44B while sees FY23 effective tax rate 25%. Sees FY23 free cash flow $900M-$1B.

·     In auto retail: CVNA was downgraded to Underperform at RBC Capital but raise tgt to $30 from $9 noting CVNA’s better Q2 results, debt restructuring & newly enabled access to equity capital reduced liquidity risks once again – a big positive for the stock…but believes LT margin improvements are now likely well/ overly appreciated.

 

Retailers, Consumer Staples & Restaurants:

·     In Beauty: EL downgraded from Overweight to Equal Weight at Barclays and cut tgt to $193 from $210 saying its recent disclosure of a cybersecurity incident that "caused and is expected to continue to cause disruption to parts of the company’s business operations" increases concerns that operational challenges at Estee Lauder are broader and more systematic.

·     In tobacco: PM Q2 results slightly better, as cigarette volumes guide better, and lower end of guidance range narrowed despite FX slightly worse.

·     In Beverages: BUD assumed/upgraded from Equal Weight to Overweight at Morgan Stanley saying they see a very favorable risk reward underpinned by attractive valuation.

Leisure, Gaming & Lodging:

·     In Casinos: LVS shares slid as Citigroup noted Q2 numbers were largely in-line with ests but noted its property EBITDA margin of 38.3% came in slightly lower than expected. MCRI reported record but in-line Q2 EBITDA.

·     In Leisure: POOL Q2 EPS $5.91 misses est. $6.12 and below $7.63 y/y and sales fell nearly -10% y/y to $1.86B below est. $1.89B and sees FY23 EPS $13.14-$14.14 below consensus $14.94 (follows recent lower guide from competitor LESL in pool industry).

·     In Lodging: Oppenheimer upgraded HST to Outperform, but downgraded BHR, CLDT, HT, and RLJ to Perform from Outperform saying the Lodging REIT sector appears to be on a slow road to nowhere. Industry RevPAR trends have underperformed expectations and are unlikely to inflect higher. An unfavorable cost of capital also limits capital allocation opportunities. This makes it difficult to see multiple expansion for most of the stocks in our coverage universe.

 

Homebuilders, Building Products, Home Furnishing:

·     In Homebuilders: DHI hit record highs after Q3 top/bottom line beat and raised its FY23 revenue outlook to $34.7B-$35.1B from $31.5B-$33B prior as supply of affordable existing homes remains limited; said Q2 net sales orders grew 37% to 22,879 homes and rose 26% in value to $8.7 billion.

·     In appliances: Electrolux (ELUXY) shares fell after posting Q2 net loss of 648M Swedish kronor ($63.1M) from a profit of SEK257M as EPS were weighed by SEK643M provision, significantly lower volumes due to weaker market demand, currency headwinds, labor costs.

 

Financials

Banks, Brokers, Asset Managers:

·     In regional banks: FITB Q2 EPS of $0.87 beat by $0.04 as net interest income (NII) jumped 9% to $1.46 billion but lowered its full-year NII growth forecast range to 3% to 5%, from 7% to 10%; EWBC Q2 EPS of $2.20 misses by $0.01, revenue of $645M misses by $14.29M; KEY Q2 EPS $0.27 vs. est. $0.31; Q2 revs $1.6B vs. est. $1.63B; Q2 CET1 capital ratio 9.2%; qtrly provision for credit losses was $167M, compared to $45M y/y and $139M in Q1 Q2 average deposits totaled $142.9B, a decrease of $4.6B y/y; TFC Q2 EPS $0.92 vs. est. $1.01; Q2 revs $5.97B vs. est. $5.99B; Q2 adj. pre provision net rev (PPNR) declined to $2.41 bln vs $2.45 bln a year earlier; ZION reported better-than-expected PPNR in 2Q23 with an upside in net interest and fee income, while credit quality trends were positive in 2Q23, and the ACL increased by 5bps Q/Q. SNV Miss driven by lower NII on lower NIM and weaker earning assets

 

Bitcoin, FinTech, Payments:

·     In Consumer finance: DFS shares tumble after saying it pausing buybacks and posted 2Q charge-offs that are higher than expected; 2023 guidance was reduced on several metrics with flattish y/y NIM (11%) versus prior for modest expansion, and operating expenses up low-teens y/y versus <10% previously; Q2 EPS $3.54 vs. est. $3.67.

·     In credit cards: Bank America said total card spending per HH was up 0.8% y/y in the week ending Jul 15, according to BAC aggregated credit and debit card data. Airline, entertainment & transit spending picked up on a y/y basis in the last week, while most goods categories decelerated.

 

Insurance & Services:

·     TRV reported a 98% decline in quarterly profit citing severe wind and hailstorms pushing up its catastrophe losses, while revs rose 11% y/y to $10.1B from $9.14B a year ago; said posts record net written premiums of $10.3 bln, up 14% y/y.

·     P&C Cat losses: ALL said June catastrophe loss $1.01b, +14% m/m and that total Q2 cat losses for $2.7B pre-tax; THG said experienced significant catastrophe losses in Q2 of about $262M, before taxes, or 18.5 points of net earned premium and expects to report a Q2 combined ratio of 111.3%, and combined ratio, excluding catastrophes of 92.8%.

·     In financial services: EFX mixed 2Q adj EPS $1.71 vs est. $1.67 on revs $1.32B vs est. $1.325B; guides 3Q revs $1.32-1.34B vs est. $1.352B; sees FY revs $5.27-5.33B vs prior $5.28-5.38B and est. $5.321B; says later in qtr saw US mortgage activity at levels below expectations and slowing US hiring activity, says expect FY mortgage originations to decline about 37%.

 

Healthcare

Biotech & Pharma:

·     JNJ beat and raise quarter as Q2 adj EPS $2.80 vs. est. $2.62; Q2 revs $25.5B vs. est. $24.63B; raises FY23 adjusted EPS to $10.70-$10.80 from $10.60-$10.70 (est. $10.65) and boosts FY23 revenue view to $98.8B-$99.8B from $97.9B-$98.9B (est. $98.96B).

·     CTLT rises after Bloomberg reported Elliott Investment Management has built a significant stake in the co and is pushing for changes to the company’s board. https://tinyurl.com/yc382xrp

·     VIR shares tumbled as announces topline data from phase 2 PENINSULA trial evaluating VIR-2482 for the prevention of seasonal influenza A illness; said it did not meet primary or secondary efficacy endpoints.

·     ATXS receives fast track designation for STAR-0215 for the treatment of hereditary angioedema.

·     ELYM said it was exploring strategic options.

 

Industrials & Materials

Transports

·     In transports: earnings from airline UAL topped consensus ($5.03 vs. $4.03) and lifted its full-year profit outlook to $11-$12 from $10-$12 prior (and above consensus $9.77) after posting the highest ever quarterly earnings on booming demand for international travel. AAL Q2 EPS $1.92 topped ests. $1.58 and revs $14.1B beats $13.7B est. while raises FY23 EPS outlook to $3.00-3.75 vs. prior view $2.50-$3.50. In car rental, CAR downgraded from Buy to Hold at Deutsche bank saying simply put, the stock has rallied 47% (vs a 9% rise in the S&P 500) since DBAB’s May 30 post-close upgrade at $163.27 and is now less than 10% away from its $263 price target.

 

Materials, Metals & Mining

·     In aluminum: AA Q2 adj. EBITDA missed consensus expectations slightly but was above estimate, although driven by lower transformation/other costs, while segment EBITDA missed.

·     In Steels: STLD reported Q2 net sales and adjusted Ebitda that fell short of consensus estimates; Q2 adjusted EPS of $4.81, in line with mid-quarter guide and revs $1.17B vs. est. $1.21B.

·     In Gold miners: NEM shares slid as Q2 revenue fell 12% to $2.7B from $3.058B y/y and below consensus $2.933B and EPS of $0.33 missed the $0.58 estimate and said total gold production fell 17% as Newmont’s mining sites mined less gold than planned.

·     In Copper: FCX Q2 adj EPS $0.35 narrowly beats ests of $0.34 as revs rise 5.9% y/y to $5.74B vs. est. $5.73B and lowers capex to $4.8B from $5.3B.

·     In Industrials and Chemicals: the WSJ reported Private-equity firm KKR is nearing a deal to acquire specialty-chemicals company CCF for roughly $1.3 billion, including debt https://tinyurl.com/25tyt5tc ; HCCI shares rose; to be acquired by J.F. Lehman & Company for $1.2 Billion with holders to receive $45.50 per share in cash https://tinyurl.com/ycxe5fjy

 

Technology

Internet, Media & Telecom

·     In Media: NFLX reported 5.89MM net member adds in 2Q, well above consensus of 2.09M helped by paid sharing & Originals slate while saying Q3 net adds are expected to be like 2Q levels, above ests, but shares fell after Q2 sales missed ests ($8.2B vs. $8.3B est.) with weaker outlook for Q3 revs (sees $8.5B vs. est. $8.7B).

·     In Telecom: CALX Q2 non-GAAP results were $0.36/$261mn, vs the Street’s $0.31/$257.2mn and non-GAAP gross margin was 52.8%. In Towers: sector trades lower (AMT, SBAC) after CCI lowered its core Tower leasing guidance by $10M ($130M new midpoint vs $140M previously as per KeyBanc), which implies a much softer 2H leasing than originally anticipated.

 

Hardware & Software movers:

·     In Hardware: IBM reports earnings beat but misses on revenue as Q2 adj EPS $2.18 vs $2.01 per share expected; Revenue $15.48B vs. $15.58B expected, backs FY23 constant currency revenue growth 3%-5% vs. est. $62.27B; continues to expect about $10.5B in free cash flow.

·     In Video games: TD Cowen said TTWO remains top pick and stay outperform on PLTK, SONY, and EA and Underperform on RBLX; remain bullish on the video game space as believe Q2 will represent a return to y/y growth for both the console/PC and mobile sides of the industry.

 

Semiconductors:

·     Semis weaker after TSM cut its annual outlook for revenue and postponed the start of production at its Arizona project to 2025; said Q2 revenue fell 14% y/y to $15.68B while Q2 net profit fell 23% from a year earlier to $5.84B; revised down its 2023 revenue forecast to a fall of around 10%, from previous guidance of a low-to-mid single digit decline.

·     In Research: Mizuho raised price tgts on ALGM to $56 from $50, ON to $112 from $93, MCHP to $89 from $79, NXPI to $220 from $183, and TXN to $185 from $165 and raise ests in semi auto demand, particularly EV/ADAS demand, persisting into 2024E and sustaining high prices for SiC, radars and sensors though conventional analog prices could decline.

·     SMCI guided better prelim Q4 net sales of $2.15B-$2.18B v. est. -$1.81B and prelim adjusted EPS $3.35 to $3.45 vs. estimate $2.44.

·     SWKS was downgraded to Equal Weight from Overweight with an unchanged price target of $115 at Barclays as sees another mixed earnings season for semiconductors, with a few areas such as autos "holding in but most end markets on the margin weaker."