Mid-Morning Look

Wednesday, January 25, 2023

U.S. stocks in sell-mode to start the trading day, as a bleak round of earnings and outlooks from some large cap giants weigh on investor sentiment and push the S&P 500 back down to its key 200-day moving average support around 3,960. But stock did manage to rally off that level as investors continue to take advantage of any market pullback in 2023 to add to positions. Bond prices rise a third day as yields extend recent decline (10-yr down to 3.42%) ahead of key economic data tomorrow (GDP/PCE) and Friday (CPI inflation data). Earning/guidance from MSFT in software, KMB in consumer products, BA in industrials, GD in defense, among biggest drags early while ELV rises in healthcare, AT&T (T) in telco and UBS in banks after earnings. All eleven S&P sectors are lower, the dollar is higher, commodity prices are mixed. No Fed speak until next week policy meeting. The Bank of Canada on Wednesday hiked its benchmark overnight interest rate by 25 bps (as expected) to 4.5%, its highest level in 15 years. CNBC noted this morning out of 96 S&P companies reporting so far, beat rate is 71% vs. average 78% and the size of the beat +0.9% compared to average +9.9%.

Sector Movers Today

·     Autos: TSLA to report earnings tonight. In research in EV sector, Morgan Stanley said TSLA’s recent price cuts are just the latest sign the EV market may be entering the ‘shake-out’ phase as they reduce exposure across the EV portfolio, while making Tesla our Top Pick (cuts tgt to $220 from $250), lower RIVN tgt to $28 from $55 but stay OW rated, LCID tgt to $5 from $10 and reit UW, downgraded FREY to EW from OW and slash tgt to $13 from $26, downgraded FSR to underweight and tgt halved to $4 from $8 citing need for capital, an unfavorable re-balancing of supply and demand and lastly cut LICY to Underweight from EW and cut tgt to $4 from $7.

·     Restaurants: BLMN downgraded to Market Perform from Outperform at BMO Capital and lower tgt to $26 from $29, using recent strength in shares, which coincided with accelerating BLMN/industry traffic data, as an opportunity to move to the sidelines. CAKE downgraded from Neutral to Sell at UBS with $30 tgt citing 16% YTD rise in shares, expectation for a more challenged macro this year, and view that risk exists to ’23 margin guidance – expect CAKE comps could decelerate from relatively solid levels through most of ’22. MCD highlighted as a top pick at Oppenheimer alongside QSR and DRI in restaurants as identify a unique path for earnings upside at MCD in ’23E/’24E at a time when the group’s consensus estimates tilt aggressively.

·     Aerospace & Defense: Dow component BA missed on the top/bottom line for Q4 as EPS loss of (-$1.75), which compares to consensus view of $0.26 profit, due in part to higher production/re-work costs on planes in inventory before delivery; operating cash flow $3.46B and adj FCF $3.13B above ests.; posted stronger commercial airplane revs $9.2B but Defense revs $6.18B weaker. In defense, GD 4Q EPS $3.62 tops consensus $3.54 on revs $10.85B vs est. $10.69B; backlog $91.1B rising 4% y/y with operating margin 11.3% and FCF $175M (below est. $409.5M); sees FY23 EPS $12.60-$12.65 vs. consensus $13.90. TXT Q4 results topped consensus and said it expects 2023 revenue of about $14B, vs. analysts’ ests of $13.70B and profit outlook also above consensus.

·     In solar, ENPH downgraded to neutral from overweight at Piper as demand for residential solar loans dipped more than the broker expected (shares fall to lowest levels since July). Barclays downgraded SPWR to underweight and RUN to EW from OW saying with US residential solar demand expected to slow in 2023, they are adjusting ratings to reflect our expectations for SPWR and RUN and how they will fare in the changing environment. Reiterate OW for NOVA.

Stock GAINERS

·     EHTH +31%; shares jumped after guides Q4 revs $190M-$200M vs. est. $176.5M; sees year revs $395M-$405M vs. consensus $385.6M.

·     GLOP +14%; after GasLog Ltd. made an unsolicited non-binding proposal to acquire remaining shares not owned with overall value of $7.70/unit in cash, consisting in part of a special distribution of $2.33/unit in cash. https://bit.ly/3Jb0G2V

·     LRN +22%; after quarterly results as Q2 revs $458.4M vs. est. $441.3M; guides Q3 revs $445M-$465M vs. est. $436.3M; sees FY23 revs $1.775B-$1.815B vs. est. $1.73B.

·     NWSA +8%; announced that the company’s Board of Directors received a letter from K. Rupert Murdoch withdrawing the proposal to explore a potential combination with FOXA

·     SHOP +7%; said it is raising the monthly price of Basic, Shopify, and Advanced by ~33%, while annual subscriptions were more than doubled. Shopify Plus pricing was unchanged at $2,000.

·     T +5%; Q4 EPS of $0.61 beats ests by 4c while posts a loss from continuing operations of $23.1 billion, or $3.20/shr, due to a $25 bln impairment charge; Q4 postpaid subs 656K tops views.

Stock LAGGARDS

·     BA -2%; after company missed on the top/bottom line for Q4 as EPS loss of (-$1.75) compares to consensus view of $0.26 profit, due in part to higher production/re-work costs on planes in inventory before delivery.

·     BKNG -3%; downgraded to Neutral at Bank America as favor EXPE for share stabilization in online travel – and downgraded at Gordon Haskett to Hold saying they see limited multiple expansion opportunity over coming months.

·     ENPH -7%; downgraded to neutral from overweight at Piper as demand for residential solar loans dipped more than the broker expected (shares fall to lowest levels since July).

·     FFIV -5%; better to in-line Q1 results but guidance misses citing heightened budget scrutiny, deal delays, and spending caution resulting in weaker-than-expected software demand.

·     ISRG -5%; reported topline trends largely in-line with the early January preannouncement, though worse margins were offset by below the line and reiterated procedure growth expectations of up +12% to +16%

·     KMB -1%; qtrly EPS of $1.54 tops est. $1.51 on slightly higher net sales but forecast FY23 sales and profit below analysts’ estimates (guides FY profit +2%-6% vs. est. for 15% jump) – Q4 sales marginally missed, and sales volumes fell 7%.

·     MSFT -3%; reported mixed Q2 results as EPS of $2.32 beat by 3c while revs grew 2% y/y to $52.7B vs. est. $52.9B while Q2 azure and other cloud services revs +31%, in-line with consensus, but guided Q3 revs $50.5B-$51.5B vs. est. $52.4B

·     NEE -8%; mixed Q4 as revs +22% to $6.16B but below consensus $6.55B, while EPS of $0.51 beat

·     NDAQ -7%; Q4 EPS of $0.64 just misses consensus as operating expenses rose ~3% to $557 million from a year earlier; revs of $906M misses $909.5M estimate.

·     SQ -6%; downgraded to market perform from outperform at Oppenheimer, saying the firm looks less defensively positioned than other payments names.