Closing Recap

Thursday, May 30, 2024

U.S. stocks started the day lower behind weak earnings and guidance results from Salesforce (CRM), as shares of the software giant fell over -20% and weighed on the Dow Jones Industrial Average/other software stocks (ORCL, SAP, NOW) but NYSE breadth was strong (3:1 advancer led), as other sectors picked up the slack into tomorrow’s key Core PCE monthly inflation data. Stock selling accelerated late day behind weakness in tech/chip stocks as NVDA, AMD sold off on reports the U.S. is reining in AI chip sales to Middle East by both chipmakers as the U.S. is worried about the technology getting diverted to China. Late day comments reported by Politico saying that Biden secretly gave Ukraine permission to strike inside Russia with U.S. weapons, also raised geopolitical fears for the market and fears of an escalation of war with Russia. The Dow Jones is now down about 2,000 points from its all-time highs above 40,000 just a week ago and Nasdaq down about 300-points off weekly highs. Retailers a bright spot this week as results from BBY, BIRK, BURL, FL all surpassed expectations sending shares higher (though AEO, BBW, KSS declined on results). After leading the declines yesterday on surging treasury yields, Smallcaps were the leaders today with the Russell 2000 jumping over 1% back above key technical moving averages.

Economic data was mixed today, with some surprise bad news from the housing sector as pending home sales posted a much bigger-than-expected drop in April as home buyers are feeling the toll of higher rates, and housing prices. U.S. Treasury yields slid (10-yr back to 4.56% after highs above 4.63% Wednesday) after GDP Q1 data (2^nd est.) showed the U.S economy grew more slowly than previously estimated as consumer spending was revised lower. Next up, at 8:30 AM tomorrow, the April PCE Price Index M/M for April is expected to rise +0.3% and on a Y/Y basis rise +2.7%, both in line with the prior month’s readings. The core PCE Price Index M/M for April is also expected to rise +0.3% and on a Y/Y basis rise +2.8% (again both in-line with prior month readings). We also get monthly personal income and spending data. There are also several notable earnings results tonight in retail (COST, ULTA, GPS) and many in tech (DELL, MDB, MRVL, NTAP, PD, S and ZS among them).

• Weekly Jobless Claims climbed to 219,000 in latest week from216,000 and vs. consensus 218,000; the 4-week moving average climbed to 222,500 from 220,000 prior week; continued claims climbed to 1.791M from 1.787M prior week and the U.S. insured unemployment rate unchanged at 1.2%.
• U.S. Advance goods trade deficit jumped to (-$99.4B) in April, much bigger than expected, after widening to (-$92.3B from -$91.5B) in March. This is the widest since the May 2022 figure of (-$102.6B). Exports were up 0.5% to $169.9B after dropping -2.9% prior and Imports surged 3.1% to $269.3B after falling -1.7% in March. Advance wholesale inventories increased 0.2% to $896.3 B in April after slipping -0.4% to $894.8B.
• Pending Home sales fell (-7.7%) in April to 72.3 from an upwardly revised 78.3 reading in March, the largest since February 2021 and the index level was the lowest since the record-low reading of 71.8 in April of 2020. The index is meant to be predictive of completed home sales transactions one to two months later.

• Reuters reported today that OPEC+ is working on a complex deal to be agreed at its meeting on Sunday that will allow the group to extend some of its deep oil production cuts into 2025. The report said the deal might include extending some or all the current voluntary production cuts of 2.2M barrels per day, expiring in June, into Q3 or Q4. The deal would also include extending a separate part of cuts of 3.66 million bpd, expiring at the end of 2024, into 2025.
• August gold prices edge higher $2.40 to settle at $2,366.50 an ounce as yields/US dollar give back gains into PCE. The 10-year yield, after hitting 4-week highs around 4.64% yesterday, saw a sharp pullback today, falling 8-bps to 4.54% after data showed the U.S economy grew more slowly than previously estimated in the first quarter as consumer spending was revised lower, suggesting the Federal Reserve is firmly on track to cut interest rates this year.

• Department store KSS shares tumbled after results with Q1 comp sales -4.4%, missing the est. -1.74%, as overall sales dropped -5.3% y/y to $3.18B missing the $3.34B estimate; forecasts FY operating margin 3%-3.5%, below prior view 3.6%-4.1% and guides EPS $1.25-$1.85, down from prior forecast $2.10-$2.70.
• In Apparel Retail: AEO reported a sales miss but EPS beat, driven by better Gross Margin (benefits from product/transportation costs, clearance strategy shift, and sales leverage), sales came in slightly below Street (but in-line with guidance), as Aerie saw weakness in Swim (comps +6%, but +11% excluding Swim); guided Q2 sales/EBIT in line and FY guide was reiterated.
• In Luxury Retail: CPRI Q1 revenue declined y/y for all brands and regions as the Americas remained weak at -8% (vs. -8% in F3Q) while declines in EMEA and Asia worsened q/q; Q4 adj EPS $0.42/$1.22B missed ests $0.65/$1.29B; said Q4 continued to be impacted by softening demand globally for fashion luxury goods; said Q4 Versace revs fell -3.6%, Jimmy Choo revs fell -9.3% and Michael Kors revs fell -9.7%.
• In Footwear: BIRK shares rise as the footwear retailer Q2 revenue of 481.2M euros tops expectations of 466.1M; raises FY revenue forecast to $1.77B-1.78B euros vs. prior view 1.74B-1.76B euros on the back of benefits from full-price selling and strong demand for its sandals; raises FY adj EBITDA 535M-545M euros from prior 520M-530M euros. FL Q1 results better as EPS $0.22 tops $0.12 estimate though sales fell -2.8% y/y to $1.87B vs. est. $1.89B, but comp sales improved to -1.8% from -9.1% y/y and vs. est. -1.9% (affirms year EPS, rev, comp sales views); CAL Q1 sales of $659.2M fell short of consensus but reiterated year sales outlook.
• In Off Price/Discount Retail: BURL shares jump as Q1 sales rose 11% y/y to $2.35B just above ests $2.34B and EPS of $1.42 topped $1.05 estimate while boosted its FY24 adj EPS view to $7.35-$7.75 from prior outlook of $7.00-$7.60 per share. DG Q1 profit and sales rise above expectations, full-year outlook kept intact; Q1 comp sales rose +2.4% vs. est. +1.7% and overall sales grew 6.1% to $9.91B vs. est. $9.89B; said value of merchandise inventories as of May 3 declined 5.5% y/y to $6.9B and were down 9.5% on a per-store basis (shares reversed lower after warned that margin headwinds related to promotions will continue at least through the first half of its fiscal year).
• In Food Sector: HRL shares dropped after Q2 EPS $0.34 missed est. $0.36 and Q2 revs fell -3% y/y to $2.89B also below consensus est. $2.97B as -7% declines in both retail and international sales offset 6% growth in foodservice sales; raised its guidance range for adjusted EPS to $1.55-$1.65 from $1.51-$1.65 but maintained sales outlook. NSRGY shares rose after comments at JPM conference saying the company is picking up pace thanks to brand support kicking in and easing supply-chain disruptions.

• In Leisure: FWONA was upgraded to Buy at Deutsche Bank and raised tgt to $83 from $73 driven by its higher EBITDA and FCF estimates, as well as the inclusion of the pending MotoGP acquisition. The firm said it believes that a secularly well-positioned business like F1 should be valued in the low to mid 4% UFCF yield range and is unlikely to devalue to a higher yield absent a deceleration to a MSD growth rate, which it does not expect over the next few years.
• In Casinos & Gaming: IGT was upgraded from Hold to Buy at Stifel and tgt raised to $26 following recent March downgrade noting IGT has disclosed incremental details on the Lotto tender (JV consortium including most credible competitor; unchanged 6% take-rate), substantially reducing risk of displacement or ROI erosion. Jefferies said RRR and MGM were positioned to outperform in Las Vegas going forward as investors shift focus from the modestly growing regional gaming segments. Notes the Las Vegas market set-up supports the firm’s two top picks.
• In Cruise lines: Reuters reported cruise operators CCL, RCL, NCLH are offering summer discounts looking to fill empty cabins. The cruise liners are lowering summer prices in part because more vessels are headed for already popular Caribbean and Alaskan destinations – and as they reroute ships away from Red Sea destinations due to the ongoing conflict between Israel and Hamas. In the Caribbean and Bermuda, Royal Caribbean’s seven-day itinerary prices in June are down 21% year-over-year as of May. Similar Norwegian and Carnival itineraries are down 12% and 11% respectively, according to TripAdvisor’s Cruise Critic.

• In Transports/Shipping: The Transport index bounces after yesterday’s decline following airline AAL lower earnings, margin, and CASM guide; the Baltic Dry Index climbed 11 points, or 0.61%, to 1,801. The Capesize index gained 76 points, or 2.84%, to 2,750. The Panamax index fell for the fourth consecutive session, slipping 44 points, or about 2.50%, to 1,718, marking its lowest level since April 12.
• In Aerospace & Defense: The Federal Aviation Administration does not expect it will allow BA to increase 737 MAX production for at least a few more months as it addresses ongoing safety issues, the agency’s administrator said Thursday. PLTR received a $480M firm-fixed-price contract for the Maven Smart System prototype, an artificial intelligence tool that assists in combat using image and video analysis. FTAI agreed to purchase a unit of LMT Canada for $170M. OSIS receives $42M Airport Security Systems Contract.
• In Industrials: GNRC was downgraded to Sell from Neutral at Guggenheim with $120 tgt noting the stock has risen by 32% since the beginning of March (vs. the S&P 500 up 3% over the same time) and believes primarily because the market is reacting to reports that 2024 is likely to see an active hurricane season.

• Financial Services: FDS was downgraded from Neutral to Underperform at Bank America and cut tgt to $407 from $500 to reflect its view that Annual Subscription Value and revenues will remain stuck in a multi-quarter rut amid an uncertain operating environment and sluggish capital markets activity.
• n Banks: BAC shares dipped after CEO speaking at conference forecasts trading revenue up in single digit percentage in Q2 vs year ago and notes equities have been stronger, fixed income broadly flat; OZK shares partially rebound after analysts weighed in on prior day weakness (fell -14% Wednesday) after Citigroup initially downgraded to Sell citing "substantial concerns" over two individual loans tied to the beleaguered commercial real estate sector. UBS said the math in OZK case was less sensational than the headlines and that the selloff was likely overdone.

• SRPT will replace SWAV, which is being acquired by JNJ in the S&P MidCap 400 index. Separately, STAT News reported article asking did Sarepta Therapeutics earn $4 billion from exon-skipping drugs that don’t work? Said it’s a legitimate question following the announcement Monday from Japanese drugmaker Nippon Shinyaku that its own exon-skipping drug, called Viltepso, failed to improve outcomes for boys with DMD in a placebo-controlled confirmatory trial.
• SMMT shares jumped late day after ivonescimab monotherapy decisively beats MRK’s pembrolizumab (sold under brand name Keytruda) monotherapy head-to-head, achieves statistically significant superiority in PFS in first-line treatment of patients with pd-l1 positive NSCLC in China; shares of MRK fell on the headlines.
• TEVA said it had received US FDA approval for Austedo XR as a one-pill-per-day treatment option for patients with tardive dyskinesia or patients with Huntington’s disease-associated chorea.
• European Pharma sector initiated at Goldman Sachs with NVO initiated Buy $156 tgt, NVS Buy $120 tgt, AZN Buy $97 tgt, neutral rated on BAYRY, GSK ($47 tgt) and sell rated on RHHBY. The firm said while earnings momentum is one of the key drivers of share prices in the Pharma sector, Goldman prefers equity stories that have both a strong innovation narrative and near and mid-term earnings momentum. AZN and NVO fit this theme, and see this, supported by consensus earnings upgrades, driving an expansion in P/E multiples for these stocks relative to the rest of the sector. Goldman is also positive on Novartis, with a strong execution story in 2024, and while news flow is quiet, it anticipates this will pick up again into 2H25.

• In Managed Care: CNC said it had bigger-than-expected Medicaid claim receipts in April and the trend of higher medical costs continued into May; the headlines came a day after UNH identified a near-term disturbance around Medicaid reimbursement rates due to program-wide enrollment hurdles that began about a year ago.
• Healthcare Services: OSCR was downgraded from Buy to Neutral at Bank America saying believes its new valuation of ~$21 (was $25) appropriately reflects the expected margin trajectory. Additionally, as we get closer to the election, it is believed that the uncertain status of the exchange subsidies will weigh on the stock.

• Social media: Reuters reported TikTok is working on a clone of its recommendation algorithm for its 170 million U.S. users that may result in a version that operates independently of its Chinese parent and be more palatable to American lawmakers who want to ban it.
• Security Software: OKTA posted Q1 EPS, cRPO and revenue beat but guided Q2 cRPO of 10-11% y/y which missed consensus 12% y/y, while FY25 revenue, EBIT, and FCF margin guided solidly above.
• Data Storage: PSTG shares rose in storage after Q1 revs $693.5M topped $681M estimate and forecast Q2 revenue of $755M, topping the $750.3M estimate with Q2 non-GAAP operating income $125M and non-GAAP operating margin 16.6%. NTNX shares declined after Q3 results beat, but Q4 guidance was below consensus (sees Q4 revenue $530M-$540M, below consensus $546.1M) and a narrowed FY forecast, citing downtick in new and expansion business.
• In Optical/Equipment: GLW was upgraded to Overweight at JP Morgan saying cyclical and secular drivers in the primary businesses of Display and Optical are lining up favorably for the company and should position it well to leverage the upcycle in revenue, with limited incremental operating expense and capital investment, driving significant EPS upside. HPQ shares jump on earnings Q2 adj EPS $0.82 vs est. $0.81 on revs $12.8B vs est. $12.599B and said Sales of HP’s personal systems segment rose 3% to $8.4B from a year ago.
• In Semiconductors: NVDA and AMD pulled back late day following Bloomberg headlines that the U.S. is reining in AI chip sales to middle east by Nvidia, AMD as the U.S. is worried about the technology getting diverted to China; MRVL, AMBA among names report tonight; Philly semi-index (SOX) back into positive territory, more than 50-point bounce off lows by midday to 5,220 as markets pared losses; LRCX shares volatile midday after a report in theinformation said officials are investigating whether Ronda Korea has been selling components using technology developed by Fremont, CA, based LRCX to sanctioned Chinese companies.
• Other Software related earnings movers:
• AI posted a strong $9M/12% FQ4 subscription revenue beat as subs revs accelerated to 41% y/y from 23% with broad-based strength, including in Fed (+100% y/y in FY24); 13 GenAI pilots completed in the quarter and 58 for the year; FY25 revenue guide of 23% y/y at the midpoint beat consensus 20%; but EBIT margin guided well below consensus.
• NCNO reported F1Q revenue ahead of the Street (1% upside) on subscription/ pro services upside, non-GAAP operating profit/margin came in ahead of the Street as well (31% upside) but benefited from expense timing; despite Q1 revenue upside, revenue guidance (total and subscription) was unchanged.
• PATH shares tumbled as CEO steps down, posted Q1 revenue slightly ahead of consensus (a 0.6% beat), but management significantly lowered its FY25 revenue growth guidance from 19% to 8%, citing pressures on multi-year deals due to macro challenges and execution issues; guides FY revs $1.405-1.41B vs est. $1.557B and lower Q3 revs.