Mid-Morning Look

Friday, December 06, 2024

No slowing the upside momentum in U.S. stocks, getting another boost from an in-line (strong) Nov jobs report, steady expectations of a Fed rate cut in 2-weeks, massive strength in heavily weighted technology stocks after a good week of earnings, and more FOMO market buying into end of year “Santa Claus” rally. Investors continue to exhibit no signs of fears, reacting positively to new President elect Donald Trump policies/plans/cabinet appointees. With today’s bounce, the S&P 500 and Nasdaq each hitting new record highs and more impressively, S&P futures (Spuz) have now made it a 14^th consecutive day of making higher highs (topped yesterday high of 6,107.25). The 10-yr yield new lows below 4.13%, down over 5bps following jobs data and at multi week lows. CBOE Volatility index (VIX) down again around 13 (no fear).

This week has been all about technology and consumer discretionary, as the heavily weighted sectors are all up this week, lifting the S&P 500 and Nasdaq, despite the other eight S&P sectors being down on the week. Energy (XLE) is down -1.75% today (-4.75% on week), down 7 of last 9 days as investors buy Tech (XLK +3.3% this week), Consumer Discretionary (XLY +3.87% this week) and Communications (XLC +2% this week) – the only three S&P sectors up on week.

The November jobs report offered little surprises, with headline nonfarm and private payrolls in-line with consensus along with upward revisions from the prior months, unemployment ticked higher, and wages rose showing a continued strong economy, but also not changing the expectation of a Fed rate cut at its meeting in 2-weeks. Following the data, fed-funds futures market now reflects an 89% probability of a rate cut in 2-weeks, up from 72% before the jobs report. Also note today is the last day for Fed officials to speak their minds before the pre-meeting quiet period.

• The November unemployment rate rose to 4.2% from 4.1% but was in-line with the consensus 4.2%. U.S. November average hourly earnings +4.0% from year earlier (cons +3.9%) and on a M/M basis rose +0.4% vs. est. +0.3%. U.S. November average hourly earnings all private workers +0.4% from prior month (cons +0.3%).
• University of Michigan surveys of consumers sentiment prelim Dec 74.0 (consensus 73.0) vs final Nov 71.8; current conditions index prelim Dec 77.7 vs final Nov 63.9; expectations index prelim Dec 71.6 vs final Nov 76.9
• University of Michigan surveys of consumers 1-year inflation outlook prelim Dec 2.9% vs final Nov 2.6% and University of Michigan surveys of consumers 5-year inflation outlook prelim Dec 3.1% vs final Nov 3.2%.

• In Lumber/Timber: BMO Capital upgraded shares of PCH ($51 tgt) and WY (tgt $38) as believes higher export duties on lumber coming from CN will raise the cost floor and push prices higher. With 100% of its lumber capacity in the U.S. and Idaho sawlog prices linked to lumber, PotlatchDeltic’ s EBITDA should improve nicely and will benefit producers like Weyerhaeuser with a greater mix of production in the U.S. Canfor (CFPZF) was downgraded at BMO saying believes that Canfor’s lumber performance for the next couple of years will be challenged due to a significant jump in export lumber duties (likely to 35-40%).
• Oil Equipment: PUMP upgraded to Neutral at JP Morgan, downgraded ACDC to Underweight, and upgraded NESR to Overweight saying in a more challenging macro environment, the firm thinks companies that can demonstrate the most earnings resiliency are best positioned to deliver alpha. FTI remains JP Morgan favorite way to play tightness in SURF, which remains the tightest ecosystem within OFS. Said BKR and GTLS look to be prime beneficiaries of the potential lifting of the U.S. LNG permit pause. Internationally, retains its Overweight on SLB. Separately, FTI was upgraded to Buy at Jefferies saying the continual improvement of its operational & commercial delivery and the sustained visibility of its market position for Subsea awards are proving difficult to ignore.

• DOCU +22%; better-than-expected Q3 results with EPS and rev beats; Billings growth of 9% y/y accelerated nicely from 2% in Q2; new customer growth (11%, consistent with Q2); guidance was better for Q4 revs of $758M-$762M (consensus $756M), up ~7% y/y, subscription revenue of $741M-$745M (consensus $736M), up ~7% y/y.
• GTLB +4%; reported Q3 revenue and Op margins above consensus, driven by broad-based strength and continued momentum with Duo, and provided better than expected F4Q guidance.
• LULU +9%; posted a Q3 beat; raised FY guidance as revenue grew +9% y/y, with solid Black Friday trends, and EPS of $2.87 driven by stronger than expected gross margins; mgmt also called out newness is on track to be in line with historical levels by Q125; international displayed strength (33% y/y; China +39% y/y).
• RBRK +30%; strong beat and raise on ARR and margins; saw acceleration and material upside of revenue, ARR hyper-growth durability (ARR beat by $30M), positive FCF, and implied 4% FQ4 guide-raise; FY25 subscription contribution margin guide raised to -2.5% from -6.5% and -12% the prior two quarters.
• UBSFY +13%; shares surged after Reuters reported shareholders are considering how to structure a possible buyout of the video game maker without reducing the founding family’s control, two people familiar with the matter told Reuters. https://tinyurl.com/yj47bcrf
• ULTA +10%; reported a beat across the board, driven by strength in fragrance and skincare; implied Q4 guidance is below consensus, but the Q3 beat and full year guidance raise more than offset this; Q4 comps were guided down low-single digits, which is more in line with consensus.
• VEEV +9%; reported an across-the-board beat in FQ3, delivering 12% revenue growth, 15% subscription growth, and 12% billings growth, each on a normalized basis. Non-GAAP operating margins came in at 43.5% in the quarter and LTM FCF margins were 39.7%.
• ZUMZ +9%; after Q3 sales rose to $222.5M, above consensus and prior year on better earnings, helped by strong North American business and gains in apparel and footwear categories.

• AMC -8%; as the company files up to 50M share ATM (at-the-market) agreement with Goldman Sachs.
• GWRE -12%; reported better earnings and guide; but shares pulled back.
• PATH -5%; reported modest ARR upside on lower expectations but net revenue retention decelerated to 113% (from 115%), representing the fourth consecutive quarter of decelerating growth; customer count declined -1% y/y; Guidance for Q4 ARR growth of 14% represent a deceleration from 16% in Q3.
• SWBI -19%; shares tumbled, downgraded to Hold from Buy at Lakestreet and cut tgt to $13 from $18, after the company reported fiscal Q2 sales and earnings that missed the firm’s expectations and management broadly discussed the outlook for Q3 and FY25 results with a soft outlook