Closing Recap

Thursday, September 08, 2022

Equity Market Recap

·     US equities resumed their volatile trend today, rotating between gains and losses but managed in the end to extend yesterday’s strong advance as the S&P 500 moved back above the 4,000 level, within 20 points of its 50-day moving average. Fed Chair Powell’s commentary this morning was no more hawkish than what we have heard recently (expectations continue to grow for a +75bps move at the next meeting) and the market seemed pleased there were no surprises. On the other hand, a +75bps move from the ECB and more restrictive commentary weighed on indices. Incremental concern about the potential negative impact to the EU from the ongoing energy crisis also pressured equities. Yields ended at the highs, while the dollar eased.

·     Sector-wise, Financials, Healthcare and Materials (XLF, XLV, XLB) led the gainers. Energy and Consumer Discretionary also managed solid gains (XLE, XLY). Lagging groups were paced by Consumer Staples, Communication Services and Technology (XLP, XLC, XLK). More broadly, value outperformed growth as yields rose and pressured some higher-multiple names.

Economic Data:

·     Weekly Jobless Claims fell to 222K in latest week from 228K prior and below consensus 240K; the 4-week moving average fell to 233K from 240,500 prior; continued claims rose to 1.473M from 1.437M prior and the US insured unemployment rate unchanged at 1.0%

Commodities, Currencies & Treasuries

·     Oil prices rebound after yesterdays near 6% decline, with WTI crude up $1.60 or 1.95% to $83.54 per barrel and Brent Crude futures settle at $89.15/bbl, up $1.15, 1.31%. Natural gas prices in the US close the session 0.9% higher at $7.915/MMBtu, ending three-session, -15% drop in prices that was the largest three-day decline in ten weeks. Gains for oil came despite a report from the EIA that showed an 8.8M-barrel weekly rise in U.S. crude inventories.

·     Gold prices fell -$7.60, or 0.4%, to settle at $1,720.20 an ounce on Comex as the dollar and Treasury yields rose pressured by remarks from Federal Reserve Chairman Jerome Powell that implied the central bank will continue to boost interest rate as it attempts to bring down inflation.

Sector News Breakdown

Consumer

·     Retailers: GME posted mixed Q2 results with smaller loss than expected but revs miss, while announced a new partnership with crypto exchange FTX US; AEO tumbles as 2Q results missed Street expectations with EPS of $0.04 missed the $0.14 consensus driven by higher markdowns which contributed 750 bps to the GPM decline y/y, EBIT margin was under meaningful pressure and revenue trends decelerated starting in mid-June; CURV Q2 EPS of $0.22 missed by 2c and Q2 same-store sales only rose 1% while cuts FY22 rev view to $1.26B-$1.3B from $1.3B-$1.365B; LOVE Q2 EPS of $0.45 missed by 2c but sales and Ebitda results topped views

·     Auto sector: TSLA sold 76,965 Chinese-made vehicles in August, nearly triple its sales from a month ago; exported 42,463 Model 3s and Model Ys from China last month, the China Passenger Car Association (CPCA) said. In July, it sold 28,217 vehicles and exported 19,756; CPRT reported F4Q22 sales modestly above consensus, but EBIT below, with the slight EPS beat driven by a lower tax rate and on top line, upside to vehicle sales offset modest downside to service revs; RIVN and Mercedes-Benz Vans signed a memorandum of understanding for a joint venture to produce electric vans in a factory in Central or Eastern Europe within the next few years

·     Consumer Staples; MKC guides Q3 prelim EPS $0.79 vs. est. $0.83; cuts FY22 adjusted EPS view to $2.63-$2.68 from $3.03-$3.08 (below est. $3.04) and cuts FY22 revenue view to flat to up 2% from up 5%-7%; CHD was downgraded to Hold from Buy at Truist and cut tgt to $85 from $100 noting two of the company’s fastest growing businesses during the pandemic – vitamins and cat litter – will drag on organic growth well into 2023; KR tgt cut to $55 from $60 at CSFB to reflect the likelihood of near-term market share losses to mass merchandisers; FRPT downgraded to Hold from Buy and tgt to $40 from $70 at Truist after CFO departure and results

·     Restaurants: PLAY Q2 EPS of $0.59 fell $0.45 below consensus driven by modestly softer comps, inflation, and ~$0.30/share in one-time costs; in research coverage, Bernstein initiated CMG with an Outperform and $2,000 tgt, DPZ with an Underperform and $334 tgt, WEN with an Outperform and $25 tgt, YUM an Outperform and $144 tgt and DRI an Outperform and $153 tgt

·     Casinos, Gaming, Lodging & Leisure sector; MGM was downgraded to Hold from Buy at Argus warning that high costs and competition will offset growth in the U.S gaming industry along with the management’s ability to implement its growth initiatives; WWE was upgraded from Peer Perform to Outperform at Wolfe with a $98 tgt saying the stock’s fundamental risk/reward and says a potential acquisition represents a "free" call option; ride hail delivery companies outperformed with LYFT outperforming UBER in the boating sector, MCFT said it expects to report lower sales for 2023 as sees ending year with sales of $580M-$615M, which compares with reported sales of $707.9M the prior year (MBUU, BC fell in sympathy)

Energy

·     Pipelines: WMB acquired NorTex Midstream from an affiliate of Tailwater Capital in a $423M; KMI upgraded to Neutral from Sell at Goldman Sachs on a mix of valuation, potential consensus EBITDA upside, and catalysts. We view KMI as well positioned to benefit from incremental natural gas pipeline growth — both in volumes and new projects; WMB downgraded from Neutral to Sell at Goldman Sachs as see three key drivers of likely underperformance for the stock including: 1) downside to consensus EBITDA on our estimates, with growth slowing after 2022; 2) limited flexibility for incremental shareholder returns and 3) a shifting asset mix that argues for a lower valuation vs. WMB’s historical EV/EBITDA multiple

·     Utilities & Solar; several solar rating changes at Goldman Sachs as they downgraded CSIQ to Sell from Neutral and cut tgt to $38 from $43, and downgraded SHLS to Sell from Buy and trim tgt to $21 from $23, while upgraded MAXN to Buy from Sell and up tgt to $27 from $9, and FSLR upgraded to Buy from Sell with a price target of $172, up from $60; SOL forecasts Q3 revs of $22 mln-$25 mln, above consensus of $20.98 mln; MAXN announced CEO to step down and current CO Babcock appointed interim CEO

Financials

·     Bank movers; sector outperformed, led by large cap bank strength BAC, FITB, WFC, JPM; U.S. banks reported $64.4 billion in profits in the second quarter of 2022, as higher net interest income offset growing reserves to guard against loan losses, the Federal Deposit Insurance Corporation said; BEN downgraded to Underperform and cut its price tgt to $25 from $28 at Bank America saying the company’s net flows have deteriorated for two consecutive quarters and will decline again next quarter amid larger net redemptions in active equity and active fixed income trading

·     Finance, FinTech & Payments; financials in general getting a nice pop today, but in Fintech, Wells Fargo downgraded FIS and MQ to Underweight and PAY to Equal Weight and CDLX to Underweight in IT Services saying the message conveyed by Fed Chairman Jerome Powell at Jackson Hole on August 26, was decidedly negative for Fintech companies, in their view and expect the ‘pain’ Mr. Powell and the Fed see as required to drive inflation down to 2% — and then remain there — will negatively impact future growth in consumer and business spend

·     Bitcoin news: the WSJ reported SEC Chairman Gary Gensler signaled that he would support Congress handing more authority to the SEC’s sister markets regulator to oversee certain cryptocurrencies such as bitcoin. Mr. Gensler, speaking at an industry conference, said Thursday he looked forward to working with Congress to give the Commodity Futures Trading Commission added power, to the extent the agency needs greater authority to “oversee and regulate crypto non-security tokens and related intermediaries.” https://on.wsj.com/3eyyEB7

Healthcare

·     Pharma movers: AMLX surges after its treatment for amyotrophic lateral sclerosis FDA adviser panel support, voting 7-2 to back approval of the treatment (same committee of advisers that narrowly opposed the treatment, AMX0035, earlier this year) – and now the FDA must decide on whether to clear the treatment by Sept. 29 (shares of RETA and ARDX on the news on their Friedreich’s ataxia therapy, omaveloxolone with PDIFA 2/28/23 and ARDX is facing its own AdCom meeting in November for Xphozah); ALNY noted Patisiran helped patients with ATTR-CM walk about 14.7 meters more over the course of six minutes compared to those who got placebo – which was statistically significant, and it’s expected to be enough to win FDA approval – but analysts expected a roughly 30-meter difference between Patisiran and placebo on the six-minute walk test, a number that would match the observed benefit of PFE’s competing pill; in research RHHBY was upgraded to Buy at Jefferies while the firm downgraded GSK to Neutral after analysis at the potential scope and scale of a Zantac US legal settlement across the group; BHC tumbles as the FDA grants tentative approval to Norwich Pharmaceuticals’ generic Xifaxan

·     Biotech movers: REGN’s Aflibercept 8 mg meets primary endpoints in two global pivotal trials for DME and wAMD, with a vast majority of patients maintained on 12- and 16-week dosing intervals; MRNA upgraded to Buy, with $165 tgt at Deutsche Bank as views the company’s Q2 results solid and expects it to end FY22 with $20B, or 40% of its market capitalization, in cash; for APLS Citigroup noted the CEO, in a fireside chat, disclosed that the FDA mid-cycle review for GA has occurred and that FDA reiterated during this interaction that the agency would not be convening an ADCOM for pegcetacoplan in GA; RVNC said the FDA approved a new antiwrinkle treatment that could be the most formidable challenger to date to market leader Botox (ABBV)

·     Medical Devices, Life Sciences & Healthcare Services: CAH said Crawford will step down as CEO of pharmaceutical segment and Debbie Weitzman, president of pharmaceutical distribution, named CEO of pharmaceutical segment – said role of president of pharmaceutical distribution will be eliminated; TNDM shares jumped mid-afternoon, rising more than 10% following commentary at the Wells Fargo healthcare conference.

Industrials & Materials

·     Aerospace & Defense; AVAV reported mixed Q1 results (EPS miss and slightly better revs) while mid-point of year EPS view below views ($1.35-1.65 vs est. $1.53) and files for mixed shelf; HXL upgraded from Underweight to Equal weight at Morgan Stanley calling it one of only a few companies that have the capabilities to produce intermediate modular carbon fiber, a high barrier to entry – and says the recent approval of the 787 for delivery is incrementally positive for HXL given the amount of composite content on the aircraft; AL announced a long-term lease deal with Air Transat (Canada) for the placements for four new Airbus A321XLR aircraft.

·     Transports: Shipping rates are still falling, in another sign that a global recession may be coming – CNBC reported. The World Trade Organization latest Goods Trade Barometer shows the volume of world merchandise trade has plateaued. Year-on-Year growth for Q1 slowed to 3.2%, down from 5.7% in the final quarter of 2021; KeyBanc lowers estimates on ODFL and SAIA to reflect August tonnage updates that materialized below their expectations. That said, yields ex-fuel were generally stable, with weight per shipment positive; UAL agreed to purchase 200 four-seat electric aircraft from EVE with options for 200 additional aircraft, and said will invest $15M; in airlines, ALGT upgraded to Outperform at Raymond James, downgraded MESA and SKYW to underperform as believe the pilot rates being established across the regional industry will diminish the earnings power of regional airlines

Technology, Media & Telecom

·     Media, Internet; ROKU upgraded from Sell to Hold at Pivotal saying the shares have reached a level that we view as properly balancing risk/reward and we would take profit on short positions; AMZN’s $13B, 11-year deal with NFL begins next week, Bloomberg reported; IRDM said it has reached an agreement with SpaceX to launch up to five of the company’s remaining ground spare satellites from the Iridium® NEXT program, on its Falcon 9 rocket; the WSJ reported that TWTR had agreed in June to pay roughly $7 million to the whistleblower whose allegations will be part of Elon Musk’s case against the company

·     Software movers: ASAN Q2 results were solid as paid subscribers increased to >2.5M, generating revenue of $134.9M on 51% y/y growth. cRPO also remained healthy, growing 55% y/y, boosted its outlook and said CEO bought $350 million of shares in a private placement; TRMB downgrade from Overweight to Neutral at Piper and cut tgt to $70 from $82 saying while that is an attractive LT setup, organic revenue growth is still set to decelerate NT; INTA posted a beat and raise quarter as key metric, cloud ARR, ended the year with 49% growth – sees FY revs $324.5M-$328.5M vs. est. $317.7M

·     Hardware, Components & Services; VRNT reported mixed results, as revenue and gross profit 1% below estimate, but non-GAAP EPS 3% above on low tax rate, minority interest, and shares outstanding while also announced retirement of CFO; BASE Q2 revenue/EPS exceeded consensus estimates (after guiding conservatively last quarter), with ARR/customer showing continued improvement and DBNRR consistently >115%