Mid-Morning Look

Tuesday, January 18, 2022

U.S. stocks on the decline, with several factors weighing on market sentiment including weaker economic data, handful of disappointing earnings/guidance results and rising Treasury yields as inflation fears again push growth stocks lower. Energy among leaders again, a strong start to 2022 with oil prices rising sending energy stocks higher. High growth tech stocks feeling the pain again as the benchmark 10-year yield above 1.835% up 6 bps, while 2-yr yield up about 5 bps to 1.01% (first move above 1% since Feb 2020); the 30-yr up 4.7 bps to 2.16%. A big miss on January Empire Manufacturing data with -0.7 reading, well below the estimate of +25.7 and prior month reading of 31.9 – index in negative territory for first time since June 2020. Bank earnings results mixed thus far, with Dow component Goldman Sachs (GS) shares falling after its headline earnings missed on weaker trading revs. The Fed recently changed the market narrative, turn much more hawkish on interest rate hikes in 2022 after being dovish for over a decade, with expectations rising that rate hikes could top 3-4 times this year to help prevent inflation from getting further out of control. In corporate news, a mega deal in the software space as Microsoft (MSFT) agreed to acquire video game maker ATVI in a whopping $68B deal, causing waves in the gaming sector. Housing stocks, along with other interest rate sensitive sectors seeing pressure this morning on the rising yields and weaker data

Economic Data

·     NY Fed’s empire state current business conditions index an unexpected negative reading of -0.7 in January (consensus +25.0) vs +31.9 in December – in negative territory for first time since June 2020 as new orders index -5.0 in January vs +27.1 in December and prices paid index +76.7 in January vs +80.2 in December; employment index at +16.1 in January vs +21.4 in December

·     January NAHB Housing market index 83 versus 84 in December while index of current single-family home sales 90 versus 90 in December; the index of home sales over next six months 83 versus revised 85 in December

Sector Movers Today

·     Software movers; big news in the video game industry as MSFT agreed to acquire ATVI for $95.00 per share, in an all-cash transaction valued at $68.7 billion as deal is expected to close in fiscal year 2023 and will be accretive to non-Gaap earnings per share upon close (shares of other game makers EA, TTWO, RBLX jumped in reaction; in other software, CTXS rises after a weekend report that Elliott Investment Management and Vista Equity Partners are in advanced talks to buy the software-maker https://bloom.bg/3nzviiZ ; SNOW upgraded to Outperform at William Blair as believe the various risks that we discussed in our notes are better reflected in the stock today. We remain cautious about increased competition and market pressures long term but believe the company will be able to sustain strong growth over the next few years; TENB, PANW added to the Wedbush Best Ideas List; ZS upgraded to Overweight at Morgan Stanley with a price Target of $325, down from $330 saying checks suggest a strong pipeline of larger deals in 2022

·     Bank movers; GS weighs on the Dow after saying Q4 profit dropped 13% to $3.94B or $10.81, missing the $11.77 estimate, while revs rose 8% to $12.64B, topping the $12B estimate while saying qtrly net revenues in equities were $2.12B, 11% lower due to significantly lower net revenues in equities intermediation – Trading revs $3.99B missed the $4.27B estimate; PNC Q4 EPS $3.68 tops est. $3.50 as net interest income $2.86 billion, +18% YoY and net interest margin 2.27% vs. 2.32% YoY; BK Q4 EPS $1.01, in-line w ests; Q4 revs $4.02B vs. est. $3.98B; Q4 CET1 capital ratio 11.1%; Q4 tangible book value per share $24.31; qtrly total noninterest expense of $3.0 bln, increased 1%; or 6% excluding notable items; Q4 AUM rose 8.5% YoY to $2.4 tln; SBNY Q4 EPS $4.34 vs. est. $3.95; Q4 book value per share $117.63 and Q4 CET1 capital ratio 9.58%; Q4 total deposits rose $10.57B and NII rose 35.7% or $140.9M; TFC Q4 adj EPS $1.38 vs. est. $1.25; Q4 revs $5.59B vs. est. $5.58B; Q4 CET1 capital ratio 9.6%; Q4 net charge-offs .25%; Q4 NII rose +0.3% and provision for credit losses was a benefit of $103M

·     Chemicals weak on guidance as ASH guides issues guidance for Q1 EPS of $0.88 and revenues of $512M, below analyst consensus estimates of $0.92 and $527M, respectively saying continued supply chain and labor shortage challenges hurt its ability to meet strong overall customer demand; AXTA guides Q4 rev growth up 5.8% and 18.2% for 2021, including moderately lower than forecasted foreign exchange tailwinds (guidance was +19% Net Sales growth for FY 2021, including +2% in FX) saying limitations in availability of certain raw materials also resulted in substantial unfulfilled orders during the fourth quarter – guides Q4 adjusted EBIT exp $30 million below the midpoint of the October guidance range of $645-665M; EMN said it plans to in­vest up to $1 bil­lion in a plas­tics-re­cy­cling fa­cil­ity in France, with a num­ber of ma­jor con­sumer-goods brands al­ready signed up to use the plant.

·     Specialty Retailers; The WSJ reported Macellum Advisors GP LLC, which has a roughly 5% stake in KSS, has been urging the company to make changes including altering its board, though Kohl’s has so far rejected Macellum’s request https://on.wsj.com/3tBv4LT; Reuters later reported ACTG, which is backed by activist investor Starboard Value, has reached out to KSS to express its interest in making a bid for the retailer; BMO upgraded UAA to Outperform on compelling risk-reward after its 30% sell-off since mid-November (vs XRT -18%); Morgan Stanley is cautious on Softline, especially mall-based specialty retailers and department stores, downgraded GPS to UW as they prefer off-price and global brands with OW ratings on TJX, ROST, BURLa re-rating opportunity in CPRIand footwear (NKE, SKX, ONON, BIRD) as a particularly bright spot; UBS is bearish on Softlines’ fundamentals while envisioning downward EPS revisions and negative sentiment throughout the year and have Sell ratings on JWN, DDS, Macy’s (M), KSS and are Neutral on VFC, BURL, GOOS as strong businesses with good long-term outlooks, but warn their downside case scenarios could see these names dropping over 30%

Stock GAINERS

·     ATVI +27%; as MSFT agreed to acquire ATVI for $95.00 per share, in an all-cash transaction valued at $68.7 billion as deal is expected to close in fiscal year 2023 (shares of other game makers EA, TTWO, RBLX jumped in reaction https://cnb.cx/3A9Ks3g

·     CTXS +6%; Elliott Investment Management and Vista Equity Partners are in advanced talks to buy software-maker Citrix Systems Inc. (CTXS), according to people familiar with the matter. Elliott and Vista have tapped banks to finance their offer https://bloom.bg/3nzviiZ

·     FCX +3%; positive mention in Barron’s this weekend, along with general strength in commodity related stocks/sectors amid further rotation out of tech

·     KSS +2%; Reuters reported ACTG, which is backed by activist investor Starboard Value, has reached out to KSS to express its interest in making a bid for the retailer;

·     MRO +2%; energy continues to be 2022 leader thus far with XLE up 17% YTD so far with major oils and E&P names among top leaders in S&P (APA, COP, FANG) on rising oil prices

·     NURO +38%; after receives FDA breakthrough device designation for treatment of chronic chemotherapy induced peripheral neuropathy – significant developments

Stock LAGGARDS

·     BABA -1%; after a Reuters report that the Biden administration is reviewing whether its cloud business poses a risk to U.S. national security, according to three people briefed on the matter

·     BNTX -8%; after earlier study headlines shows 4th Pfizer doze insufficient to ward off Omicron

·     GS -7%; weighs on the Dow after saying Q4 profit dropped 13% to $3.94B or $10.81, missing the $11.77 estimate, while revs rose 8% to $12.64B, topping the $12B estimate

·     PLXS -8%; guides Q1 revs $825M-$865M vs. est. $846M; sees Q1 EPS $0.80-$0.84 vs, est. $1.12 saying unexpected supplier delivery shortfalls in Americas region resulted in rev, Gaap operating margin, Gaap eps and free cash flow shortfall

·     PTON -4%; is hiking prices for its fitness bike and treadmill by $250 and $350 respectively and reported it is working with McKinsey to review its cost structure

·     SEM -9%; cuts guidance over the weekend saying for Q4, experienced a higher-than-expected use of agency clinical staff and higher than expected costs for agency in our hospitals

·     SI -15%; Q4 EPS 66c vs. est. 72c; Q4 NII $40.2M vs. $39.0M for 3Q21 and $22.4M for 4Q20; did not record a provision for loan losses for 4Q21, 2Q21

·     UL -11%; said Monday it would pursue a deal for GSK’s (GSK) consumer business, calling it a “strong strategic fit”, but shares slid amid investors doubts about its 50-billion-pound ($68.4 billion) offer.