Mid-Morning Look

Wednesday, July 17, 2024

The Nasdaq Comp is down over -2% and the S&P 500 Index falls over -1%, led by a sharp pullback in technology (specifically semiconductor chip stocks) and consumer discretionary stocks, while defensive sectors such as food, staples, REITs, utilities advance and strength in small caps continue. Smallcap Russell 2000 outperforms early rising to highest levels since January 2022, trying for a 6^th straight day of gains (last 5 days posted more than 1% gains each day). For a change, semiconductor weakness (SOX -4%) dragging the tech space down following a triple whammy of news items including: 1) reports the current Biden administration is threatening to impose stricter curbs on the exports of chipmaking equipment to China for companies such as ASML Holding, according to Bloomberg (ASML also reported results last night beating Q2 revs/net income, but sales view weak); 2) Presidential Republican nominee Donald Trump suggested Taiwan might need to pay for its own defense in an interview with Bloomberg https://tinyurl.com/4e4pddj2  (shares of TSM, STM weaker); 3) rotation toward smaller companies, with the Russell 2000, representing small-cap stocks, gaining more than 11% over the past five trading days. Economic data this morning mixed as U.S. single-family homebuilding fell to an eight-month low in June amid higher mortgage rates, suggesting the housing market was likely a drag on economic growth in the second quarter. Meanwhile, Industrial Production for June came in above consensus expectations. Federal Reserve Governor Christopher Waller said on Wednesday that the U.S. economy is on track for a soft landing and interest-rate cuts in the second half of 2024 (a common theme by several Fed speakers in recent week, helped by last week’s cooler CPI inflation reading). The dollar is weaker, yields edge higher and oil looks to snap its 3-day losing streak as energy stocks broadly higher. Several Fed speakers are out speaking again today. The Dow Jones Industrial Average topped 41,100 for the first time, helped by JNJ after better earnings lift shares.

• June industrial output rose +0.6% vs. consensus +0.3% but down from May +0.9% as June mining output +0.3% (May -0.7%), utilities output +2.8% (May +1.9%). Capacity Utilization rate surges to 78.8% from 78.3% in May and vs. estimate 78.4%. June manufacturing output +0.4% (consensus +0.2%) vs May +1.0% (previous +0.6%).

• In the Obesity markets: shares of LLY, NVO, VKTX and other players in weight loss stumbled after Roche (RHHBY) reported promising early-stage data from an experimental obesity pill acquired as part of its $2.7B buyout of Carmot Therapeutics; Roche’s once-daily pill, CT-996, helped patients lose 6.1% of their body weight on average within four weeks in an early-stage study – said phase 1 trial results show its CT-996 drug helped patients lose 7.3% of their body weight within four weeks versus weight loss of 1.2% in a placebo group. This is above the efficacy reported with Novo Nordisk’s Wegovy and Eli Lilly’s Mounjaro.
• In Security Software: Keybanc lowered estimates on security vendors PANW, CHKP, FTNT, S, CRWD, CYBR and lowered price targets for CRWD while raising estimates and price target for ANET saying results from their Q2 IT VAR survey suggest a similar or even slightly more challenging quarter than Q1. Meets/beats vs plan, the 2024 growth outlook, macro views, and expected timing of an IT recovery worsened vs last quarter. 45% of survey respondents met/exceeded plan, down from Q1’s 50%, which was already a significant step down from prior quarters.
• In Airlines: AAL was downgraded from Buy to Hold and lowering PT to $10 from $16 at TDCowen saying they have been concerned by the carrier’s aggressive discounting this summer and believe there is downside risk to 2H24 RASM/EPS estimates. Further, the company will need to make significant investments to close the Gap with DAL and UAL. TD Cowen also cut SAVE to Sell from Hold and cut tgt to $2 as believes there is still much downside risk to estimates given oversupply in leisure markets, weakness among lower income cohorts, and myriad constraints on utilization. Separately, SAVE said Q2 total revenue estimated to be approximately $1.28B (vs. prior $1.32B-$1.34B) vs. consensus of $1.33B.

• BE +9%; announced a partnership with a cloud infrastructure provider to deploy BE fuel cells at a co-located AI data center in IL (BE did not quantify the size of the order or the terms).
• GIS +3%; as defensive food stocks CAG, CPB, HSY, K, KHC, THS all rising 2% or more amid further mkt rotation.
• GTES +3%; will replace ANF in the S&P SmallCap 600.
• GTLB +9%; after the software development tools maker, whose investors include Google parent Alphabet, is exploring a sale after attracting acquisition interest, according to people familiar with the matter. https://tinyurl.com/3v3ab4k9  
• INTC +4% and GFS shares surge; seen as potential U.S. chip maker beneficiaries after Former president and current presidential candidate Donald Trump said Taiwan should pay the U.S. for defense, in an interview with Bloomberg.
• JNJ +3%; reported Q2 adj EPS $2.82 above est. $2.70 on slightly better revenue $22.4B noting global oncology sales rose 16% to $5.09B in Q2, while medical devices, posted sales growth of 2.2% and its overall pharma unit posted sales growth of 5.5%; raised year rev view but cut sales view.
• RHHBY +7%; reported early-stage data from an experimental obesity pill acquired as part of its $2.7B buyout of Carmot Therapeutics; Roche’s once-daily pill, CT-996, helped patients lose 6.1% of their body weight on average within 4-weeks.
• USB +4%; Q2 EPS of $0.98 topped est. $0.95 on better net interest income (NII) of $4.05B (vs. est. $3.97B) and said sees NII as stable in Q3.
• VFC +8%; as EssilorLuxottica (ESLOY) has agreed to buy streetwear brand Supreme from VF Corporation (VFC) for $1.5 billion, both companies said on Wednesday.
• VLO +3%; as energy strong given rotation out of tech into other sectors; upgraded to Outperform at Mizuho in refiner preview, saying they still see risks to the outlook for U.S. refining margins, there are some green shoots and so, it selectively rates VLO (upgrade) and PARR as Outperform.

• FIVE -16%; shares tumbled after saying Joel Anderson steps down as president and CEO; lowered 2Q guidance for EPS, sales and comp sales and said will implement a greater sense of urgency around improving merchandising, shrink, self-checkout, and cost initiatives (cut Q2 EPS to $0.53-$0.56 from $0.57-$0.69 prior).
• JBHT -6%; reported a GAAP EPS miss 1.32 vs FactSet $1.48 due to lower-than-expected operating profit as brokered freight pricing continues to remain stable but volume declined 8% q/q, worse than typical seasonality.
• LLY -3%; along with weakness in other weight loss/obesity drug names (NVO, VKTX) after Roche (RHHBY) said phase 1 trial results show its CT-996 drug helped patients lose 7.3% of their body weight within four weeks. This is above the efficacy reported with Novo Nordisk’s Wegovy and Eli Lilly’s Mounjaro.
• SAVA -32%; after saying CEO Remi Barbier has resigned and named Richard Barry as interim chief executive.
• SAVE -9%; downgraded to Sell from Hold at TD Cowen and cut tgt to $2 as believes there is still much downside risk to estimates given oversupply in leisure markets. Separately, SAVE said Q2 total revenue estimated to be approximately $1.28B (vs. prior $1.32B-$1.34B) vs. consensus of $1.33B.
• SCHW -7%; after falling -10% on Tuesday after Q2 bank deposits fell 17% y/y to $252.4B and net interest revenue also fell, dropping 6% to $2.16B for the quarter.