Mid-Morning Look

Wednesday, August 31, 2022

U.S. stocks in rebound mode early, led by technology, healthcare, and defensive sectors such as REITs, while energy and materials the biggest laggards as stocks look to snap their 3-day losing streak – though prices have quickly retraced after the S&P failed around its 50-day MA resistance (4,015). Proxies for global growth such as energy, metals, mining, and materials are seeing some of the biggest declines early (and in recent days), with the likes of OXY, XOM, CVX, SLB in energy, FCX, AA in metals and MOS, NTR in chemicals down. Economic data mixed with manufacturing and private jobs data also out. A slide in oil prices helped ease some worries about inflation for the time being but fed funds probability has risen this week, looking for another aggressive 75-bps rate hike by the Fed at the September meeting (which would follow two prior 75-bps rate hikes in June and July). Cleveland Fed President Loretta Mester said this morning that “it would be a mistake to declare victory over the inflation beast” and that “it is far too soon to say that inflation has peaked, let alone on a downward path to 2%” (echoing recent Fed commentary and tough talk on rates). In technology, lower guidance from STX in the HDD space, a lower cut from HPQ in the PC sector and AMBA falls in chip sector on weaker guide and miss. Retail also a mixed bag with lower guidance from PVH and BBBY tumbles on strategy update, lower sales, and stock offering news. Month-end today, as equities marginally underperforming for the month with the S&P 500, Dow, Nasdaq, and Russell 2000 all down between 1%-2% month-to-date.

Economic Data

·     Chicago PMI for August reported at 52.2 vs. 52.1 consensus and 52.1 prior

·     ADP payrolls for August rose +132k vs. +300k est. & 270k in prior month; report has been on pause since May and ADP has teamed up with Stanford Digital Economy Lab to rework report’s methodology

Sector Movers Today

·     Retailers; BBBY announces strategic changes to strengthen its financial positioning as secured financing commitments for more than $500 mln of new financing and files for common stock shelf from time to time; plans 20% reduction in corporate/supply chain workforce and cutting capex by $150mn – also cut sales guidance; PVH slashed its 2022 adj EPS forecast to around $8 from around $9, saying customers are lowering their discretionary spending in the face of high cost of living and it needs to discount more to clear an inventory glut – inventory increased 19% from a year earlier and guided 2022 revenue to decrease 3% to 4% from a year earlier, vs. prior forecast for an increase of 1% to 2%; CHWY lowered sales guidance for the year to $9.9B-$10.0B from prior $10.2B-$10.4B consensus, and active customers only grew 2.1% during the quarter; CHS raises full-year 2022 sales and profit forecast as now sees sales $2.14B-$2.17B from prior $2.13B-$2.16B and EPS 79c-87c from prior 64c-74c but noted Q2 inventories totaled $338.8 mln, compared to $202.1 million, a year earlier; DBI posted a beat and raise quarter; VRA cuts FY net revenue forecast, misses estimates; BNED falls as quarterly loss widens; EXPR w/lower outlook

·     Auto sector; CHPT reported stronger-than-expected 2Q23 revenue of $108.3M surpassed the $100M level for the first time and beat consensus forecasts while backs FY23 revenue view $450M-$500M vs. est. $476.47M and backs FY23 adjusted gross margin view 22%-26%; TM revealed plans for spending $5.6 billion on electric-vehicle battery capacity, with about $2.5 billion on scaling up production at a plant it is building in North Carolina and another roughly $3 billion will be invested in plants in Japan as well as a facility operated by Prime Planet Energy & Solutions Co., a joint venture of Toyota and Panasonic Holdings Corp.; ZEV said it entered into a partnership with GoBolt to make 170 all-electric vans and trucks over the next 12 months

·     Aerospace & Defense; NASA said it aims for Artemis launch attempt on Saturday after reviewing rocket engine problem; the Air Force announced that CACI beat three other bidders for the $5.7B, 10-year enterprise information technology as a service Wave 1 contract (William Blair noted this contract has the potential to scale to be CACI’s largest contract by revenue); RKLB upgraded to Outperform and tgt raised to $8 from $6.50 at Cowen for key execution milestones, an improved competitive position, and benefits from Russian sanctions.

Stock GAINERS

·     BABA +4%; US listed Chinese stocks seeing strength – JD, KWEB – after a volatile Tuesday session

·     CACI +3%; beat three other bidders for the $5.7B, 10-year enterprise information technology as a service Wave 1 contract

·     CHPT +15%; reported stronger-than-expected 2Q23 revenue of $108.3M surpassed the $100M level for the first time and beat consensus forecasts while backs FY23 revenue view $450M-$500M vs. est. $476.47M and backs FY23 adjusted gross margin view 22%-26%

·     PYPL +3%; was upgraded from Neutral to Buy at Bank America with $114 tgt saying for the first time in about a year, they see upside potential to out-year consensus EPS estimates

·     SNAP +15%; confirmed it will lay off 20% of all staff and shut down projects, including mobile games and novelties like a flying drone camera, helping the company save an estimated $500M in costs annually – while giving a gloomy outlook on revs

Stock LAGGARDS

·     AMBA -15%; posts a net loss of $23.7M, greater that the loss of $7.2M y/y and guided Q3 revs $81M-$85M vs. est. $85M

·     BBBY -24%; announces strategic changes to strengthen its financial positioning as secured financing commitments for more than $500M of new financing and files for common stock shelf from time to time; plans 20% reduction in corporate/supply chain workforce and cutting capex by $150M – company still cut sales guidance

·     CHWY -6%; lowered sales guidance for the year to $9.9B-$10.0B from prior $10.2B-$10.4B consensus, and active customers only grew 2.1% during the quarter

·     CRWD -3%; despite strong beat-and-raise quarter with ARR up 59% YoY and net new ARR a record $218M, total customers up 51% YoY to 19,686, achieving a rule of 84 on a FCF basis, the highest DBNR in 7 quarters, quarterly revenue surpassing $500M for the first time, and raising the 2023 revenue guide to 53-54% growth from 51-52%.

·     HPQ -5%; after significantly reduced its forward outlook as FCF guide midpoint now $3.5B vs. prior $4.5B+ guide) and lowers year adj EPS to $4.02-$4.12 from prior $4.24-$4.38

·     PVH -6%; slashed its 2022 adj EPS forecast to around $8 from around $9, said inventory increased 19% from a year earlier and guided 2022 revenue below prior outlook

·     STX -3%; lowered its Q1 business outlook against a worsening macro-economic backdrop as now sees Q1 revs of $2.1B plus/minus $100M vs. prior view of $2.5B plus/minus $150M and with non-GAAP EPS expected to be meaningfully below prior guide of at least $1.20