Closing Recap

Tuesday, September 21, 2021

Equity Market Recap

·     Stocks were unable to stage a strong comeback from yesterday’s worst selloff in months as they sputtered after a strong open and were unable to recapture the levels seen in the first half hour of trading. The S&P experienced a late decline into the closing bell and ended negative for the 10^th time in the past 12 sessions. The Dow underperformed and suffered a late roll to also end in the red as Disney’s stock sharply dropped in the afternoon after its CEO provided a business update at a conference, acting as an anchor for the 30-stock index. Meanwhile, the Fed’s two-day September FOMC began today and tomorrow’s economic coverage should be dominated by their formal policy statement at 2PM followed by Chair Powell’s press conference, along with the anonymous dot plot that lays out where each member thinks interest rates are headed. The current consensus is that there will be no rate hikes through next year, so any indication that the timeline for rate hikes has creeped forward has the potential to add negative pressure and sentiment to a market that is already suffering from downward momentum this month. In Covid news, Johnson & Johnson said their Phase 3 study shows a 2^nd booster shot provides a strong immune response when administered two or six months after the original dose. A few companies will also report earnings with FedEx, Adobe, and StitchFix scheduled after the bell tonight and General Mills scheduled pre-market tomorrow.

·     Stock/sector news; UBER surges after raising its guidance, now seeing breakeven Q3 EBITDA with sequential Q4 improvement with strong US volumes, lifts LYFT; DIS plunged in the afternoon on CEO Bob Chapek’s comments at a Goldman conference that sounded cautious on the quarterly Disney+ numbers and said they were experiencing production delays due to Covid; COP, RDS.A both jump after COP purchases Shell’s Permian Basin assets for $9.5B in cash; USB rises after purchasing MUFG’s personal banking arm for $8B in cash and stock deal; Solar (TAN, RUN, NOVA) outperforms after President Biden pledges to double climate funding again and after KeyBank initiated OW rating on ENPH; AZO nears new ATHs after its earnings beat, while LEN pares overnight losses on its revenue miss during its conf call and Q4 guide, and CBRL slides on its top and bottom line misses; DKNG rolls after offering to acquire UK sports betting company Entain for $20B

Economic Data:

·     US Housing Starts Number Actual 1.615M (Forecast 1.55M, Previous 1.534M); US Housing Starts Change MoM Actual 3.9% (Forecast 1%, Previous -7.0%)

Commodities, Currencies & Treasuries

·     Gold prices were higher for the second straight day, gaining $14.40, or 0.8%, to settle at $1,778.20/oz as the safe asset benefitted from uncertainty stemming from Chinese real estate developer Evergrande’s debt crisis and the ongoing FOMC meeting.

·     Oil prices rose with WTI crude adding $0.27, or 0.38%, to settle at $70.56/barrel ahead of weekly API data tonight and on tighter supply as the fallout from Hurricane Ida will impact production in the Gulf of Mexico through year-end at least.

Sector News Breakdown

Consumer

·     Retailers; Jefferies downgraded ZUMZ to Hold as they expect top-line and margin trends to lag peers near-term and upgraded SHOO to Buy with a $50 PT as the company’s best-in-class supply chain and proactive measures to circumvent disruption are an even bigger asset in an unprecedentedly difficult supply chain environment; Benchmark initiated CTRN at Buy with a $115 target as CEO David Makuen has led 8 consecutive quarters of SS growth since his appointment and longer-term guidance and details on prototype stores should be catalysts; Piper downgraded BIG to Neutral and lowered their PT to $50 from $60 on macro headwinds of lapping stimulus check headwinds, rising ocean freight rates, and retail wage pressure that is unlikely to abate soon; Argus upgraded BBWI to Buy as they believe the new company is positioned for more consistent sales growth and margins post-spinoff and is trading at multiples that undervalue it at 14x FY23 EPS estimate (vs peer average 19x) and at its historical median price/sales

·     Auto sector; AZO reported Q4 EPS $35.72 vs est. $29.81 on revenue $4.9B vs est. $4.57B, same-store sales +4.3%; KAR withdrew its FY21 financial outlook due to the continued disruption caused by the chip shortage and lack of visibility into used vehicle volumes in its marketplaces, and sees Q3 adj EBITDA $95M-$100M and expects approximately 2.6M vehicles sold in 2021; QS signed a 2nd collaboration agreement with a top-10 OEM; EVGO said it has now topped 300k customers and was initiated at OP with an $11 PT by Credit Suisse on the benefits from rapidly growing EV adoption, supportive policies and potential incentives for the industry under the infrastructure bill, first move advantage with strategic partnerships, and an attractive valuation after recent pull back

·     Housing & Building Products; LEN reported Q3 adj EPS $3.27 that nearly matched est. $3.26 on revs $6.94B that missed est. $7.25B and net new orders 16,277 vs est. 16,248, and guided Q4 new orders 15,200-15,400 and deliveries about 18,000, though said unprecedented supply chain challenges should continue for the foreseeable future; APOG Q2 adj EPS 53c vs est. 54c on revs $325.8M vs est. $319.7M and sees FY adj EPS $2.20-2.40 (est. $2.28)

·     Consumer Staples & Restaurants; Morgan Stanley downgraded GIS to UW from EW, upgraded TWNK to OW, and assumed coverage at EW on K, KHC, HSY; Guggenheim upped their price target on PEP to $175 due to their accelerating core business that is taking market share from KO, the recently announced divestiture of its low-growth and margin Tropicana juice business, and expansion in the energy category that is driving growth and margin upside; CBRL Q4 adj EPS $2.25 and revenue $784.4M both came in shy of expectations of $2.33 and $794.9M, and same-store sales -6.8% vs 4Q19

·     Casinos, Gaming, Lodging & Leisure sector; UBER raised its Q3 EBITDA guidance to ($25M)-$25M from their previous view of a loss exceeding ($100M), narrowed its bookings forecast to $22.8-23.2B from $22-24B, and sees Q4 EBITDA $0-$100M, said last week had the best U.S. volumes since March and gross bookings are 35-40% above IPO levels; MTN was upgraded to OW with a $355 PT at KeyBank who said their previous view that the company would suffer from FY21 demand hurdles was wrong and FY22 destination demand indicators are above pre-pandemic levels; SRAD announced Michael Jordan will increase his investment into the company and will assume a role as a special advisor; Northland initiated TDAC at Outperform with a $16 PT ahead of their expected merger with Lottery.com in Q4 (and subsequent ticker change to LTRY) who is well-positioned to benefit from the digitalization of games of chance around the world, as many markets ease restrictions on lottery games to attract new users and drive tax revenue; Stifel reiterated their Buy rating and $112 PT on PENN with an attractive entry point after the recent sell-off and as their favorite way to play regional operators who also has geographic diversification to mitigate risk from Covid-19; DKNG made a $20B cash and stock offer to UK sports betting and gaming group Entain, though any deal would need MGM’s approval as Entain’s exclusive U.S. partner

Energy

·     E&P and Majors; COP purchased RDS’s Permian Basin assets for $9.5B in cash; RDSsaid it expects lower production offshore Gulf of Mexico into early next year due to Hurricane Ida; OXY said it reduced its debt by about $1.3B in August and September

·     Utilities & Solar; OEG won a contract to construct 1,910 miles of rural broadband network in Virginia for undisclosed terms; KeyBank launched coverage at OW on ENPH ($179 PT), NEP ($89) and Sector-Weight ratings on FSLR, HASI, AY; Solar stocks (TAN, RUN, NOVA) were active after President Biden said that the U.S. will double climate funding again at his speech to the UN General Assembly

Financials

·     Bank movers; USB agreed to purchase the personal banking arm of MUFG in a deal worth $8B, including $5.5B in cash and 44M USB shares (2.9% stake); Goldman initiated COWN at Sell with a $35 PT as the bank’s strong growth has been driven by high-risk business that Goldman expects to normalize, and Buy ratings on JEF ($45 PT) as the market is underappreciating its transition from a merchant bank to a pure play, full service investment bank and PIPR ($168 PT) who closely resembles a full-service independent advisor after completing its multi-year transition, though the market is not factoring this in; PACW was upgraded to Buy at Truist due to its growing excess liquidity that should improve earnings power, loan growth that is positioned to accelerate, credit issues now in the rearview mirror with lower YTD losses vs peers, and its material EPS discount to peers; Da Davidson upgraded SSB to Buy; JPM launched its digital bank Chase in the UK

·     FinTech & Payments; Citi reinitiated UPST at Neutral/High-Risk with a $350 PT vs their previous Buy/High-Risk rating and thinks investors should wait for a better entry point as the stock’s +644% YTD rise is pricing in the company achieving dominant market share; Barclays said SQ appears to have begun to pilot a Cash App-branded BNPL service on a limited basis, and the company also launched its business software services in France; ATLC was initiated at Market Outperform with a $82 PT at JMP; European fintech company Revolut, valued at $33B in July, will soon offer commission-free stock trading to U.S. customers; PYPL introduced its new app that now offers a high-yield savings account and will soon offer investment capabilities and shopping tools and rewards; QTWO announced a partnership with Plaid to deliver digital banking tools

·     REITs; COLD lowered their FY adj FFO/share outlook to $1.15-1.20 from $1.34-1.40

Healthcare

·     Pharma movers; JNJ Phase 3 study shows booster shot at 2 months after 1st dose provides 94% protection against COVID-19 infection, 100% effectiveness against severe disease, and 4-6x increase in antibody levels, while booster shot at 6 months increased antibody levels by 12x; BIIB is reportedly working with AAPL for a project to help diagnose cognitive impairment

·     Biotech movers; VRCA received a Complete Response Letter from the FDA identifying deficiencies at a facility of a contract manufacturer for its new drug application for VP-102 for the treatment of molluscum contagiosum, though noted the issues were not related to the manufacturing of VP-102 but instead related to the broader quality issues of a facility of a contract manufacturing organization; NOTV agreed to purchase Envigo, a leading global provider of research models and services, for $545M via $200M in cash and more than 9.36M shares; SGEN received accelerated FDA approval for Tivdak, designed to treat recurrent or metastatic cervical cancer; RXRX was initiated at Buy with a $37 PT (42% upside) at Berenberg; JMP initiated Outperform ratings on EFTR ($33 PT) as its preliminary data is generating exceptional results and INBX ($46) on compelling Ph1 clinical studies; OpCo initiated PRTG at OP with a $30 PT and cut their PT on SYRS to $9 from $13 after Ph1 data fell short at an ESMO presentation yesterday, though remain Buy on the company’s core business; Piper started coverage at OW on GOSS ($26 PT) and LIFE ($19)

·     MedTech Equipment; BSX to buy the remaining 84% of private Devoro Medical for $269M upfront and up to $67M in additional payments; Raymond James reinstated BAX at Outperform with a $93 target as they say the revenue and EPS growth from the HRC deal should support a higher multiple and the stock should have more downside support than most MedTechs since it is only trading at about 16x their 2023 EPS estimate; Stifel downgraded SDC to Hold after the stock’s modest bump off post-2Q21 lows given concerns of losing market, future growth opportunities, and the balance sheet as they would need evidence of progress and that unit economics work for the company’s model; JPMorgan reiterated their OW ratings on recent IPOs CVRX, NPCE, RXST and TMCI and say it is a question of when, not if, they begin to outperform peers as their domestic focus on elective procedures has cause them to struggle, though this should be transient and these are now attractively valued high-growth opportunities; CFMS lowered Q3 revenue view to $13.7M-$14.3M from $15.5M-$16.5M due to higher levels of deferred and rescheduled knee and hip procedure as a result of the Delta variant; Cowen reiterated OWLT at Outperform and their $14 target as they believe it is uniquely positioned to become the de-facto parenting ecosystem with multiple growth levers and Google search trends suggest growing domestic brand awareness

Industrials & Materials

·     Industrial & Machinery; AXTA cut its Q3 sales guidance by about $40M and EBITDA to $130-140M from prior $138M midpoint on continued supply chain disruptions that should impact global production by 11M units from their previous forecast of a 7M unit impact; HRI announced new strategic initiatives and capital allocation plan, and raised its 2021 adj EBTIDA guidance to $870M-$890M from $840M-$870M, sees FY22 adj EBITDA $1.05B-$1.15B, set 2021-2024 organic CAGR growth goals of 12-15% in rental revenue and 17-20% in adj EBITDA, and announced a dividend of 50c/share; BGRY was initiated by Credit Suisse at N with an $8 target; OSK was downgraded to Hold at Jefferies on near-term delivery headwinds and medium-term headwinds to sales and margins in Defense

·     Transports; FDX will raise shipping rates starting January 3, 2022 by an average of 5.9%, and also reports earnings tonight; DSX was downgraded to Neutral at BTIG who sees a mid-cycle pause in drybulk shipping; British Airways reported searches for US destinations were 7x higher vs last week in the hours after yesterday’s travel ban was lifted for vaccinated travelers; The Justice Department is planning to challenge the alliance between AAL and JBLU on antitrust grounds

·     Metals & Materials; TECK updated its FY21 production guidance at its analyst day and said the British Columbia wildfires have had a negative impact on operations, now seeing FY zinc production 285-290k tons from 290-300k, while cutting Q3 sales forecast to 145-155k tons of zinc from 180-200k and cut their Q3 steelmaking coal sales by 300-500 mt; AA announced plans to restart 268,000 metric tons per year of aluminum capacity at the Alumar smelt in Sao Luis, Brazil, which has been fully curtailed since 2015 and sees Q4 restart expenses between 5c-7c per share, and their CFO made comments in the afternoon that they forecast Q3 EBITDA to be $100M better; UBS launched coverage of UNCR with a Buy rating and $32 target as the leading North American distributor of chemical materials with a simplifying story after facing unfavorable industrial macro conditions

Technology, Media & Telecom

·     Internet; Jefferies raised their price target on ETSY to $265 from $220 given upside to consensus GMS and a 25%+ 3-year EBITDA CAGR; Needham reiterated REAL as a Buy and Top Pick as they say the new CFO eliminates a big overhang on the stock

·     Semiconductors; UBS expects some potential moderation in DRAM and NAND WFE through next year, and trim their target on Buy-rated LRCX to $715 from $780 and MU to $95 from $100

·     Software movers; Citi resumed coverage of VMW with a Buy rating and $190 PT that reflects the belief that VMW can leverage its strategic position in the data center and with CIOs to help organizations navigate an increasingly complex architectural future; Stifel named FTNT as a new Buy with a $355 price target as its proprietary ASIC chips offer strong performance, are 30-40% cheaper than competitors, and enable the company to introduce adjacent capabilities into its firewall appliances; Wedbush said they believe yesterday’s sell-off in CGNT on weaker guidance was overdone given its healthy subscriber transition and it is in the middle innings of a major growth opportunity; BILL plans to raised $1.5B via a $1B stock offering and $500M notes offering; The DoJ is reviewing the pending ZM acquisition of FIVN to investigate ZM’s China ties to see if the deal poses any national security risks

·     Media & Telecom movers; Loop initiated coverage with Buy ratings on TMUS ($160 PT), CMCSA ($71), and Hold ratings on AT($30), ATUS ($28), CHTR ($815), and VZ ($57); VIAC launched its Paramount+ and Showtime bundle today at $9.99/mo for the essential plan and $12.99/mo for the premium plan; Benchmark reiterated their Sell rating and $448 target on NFLX as any shortfall to the consensus 8.5M member growth in Q4 could elicit a rerating; WMG was upgraded to Outperform at Credit Suisse with a $48 PT from $37 as they should benefit from the global transition to on-demand music streaming as one of the top three global music labels; HLBZ announced partnership with AMZN to stream on Amazon Prime video channels; DIS was started with a Buy rating and $225 PT at Daiwa; Universal Music Group gained more than 35% in its first day of trading in Amsterdam; DIS shares rolled in the afternoon after CEO Bob Chapek spoke at a Goldman Sachs conference where he was cautious on Q4 Disney+ numbers, said the Delta variant was causing Q4 production delays, and said the stock’s dividend will not return until the pandemic ends