Mid-Morning Look

Thursday, June 02, 2022

U.S. stocks choppy again today, with the Nasdaq leading early, led by software and semis, despite MSFT lowering guidance citing FX impact. Economic data was dreadful today as Q1 Nonfarm Productivity -7.3% vs. -7.5% expected and +6.6% prior marking the biggest decline in productivity since Q3 1947, while unit labor costs surged +12.6% vs. +11.6% expected and +0.9% prior. Private payroll data also missed the mark (ADP), falling short of consensus ahead of the nonfarm payroll report on Friday while Factory Orders also missed consensus. Treasury yields are jumping across the board, with the 10-year above 2.93% and 30-yr above 3.1%. Oil a top story today as OPEC+ agreed to a bigger-than-expected oil-production increase of 648,000 barrels a day in July and August, OPEC delegates said, allowing Saudi Arabia to potentially pump more crude oil, paving the way for a potential deal with the U.S. The WSJ noted the move would represent a significant shift for the Saudis, who have resisted calls from the U.S., U.K., and other Western countries to pump more oil to help reduce a price boom resulting from Russia’s invasion of Ukraine. Oil prices jumped above $116 per barrel despite the OPEC output increase before paring gains. Stocks are trying to recover from yesterday warning from JPMorgan CEO Dimon about the U.S. economy, equating it to a “hurricane: and advised we “brace ourselves”, while also noting he expects price turmoil in commodities to continue as fallout from the Ukraine war. Fed Vice Chair Brainard said this morning in CNBC interview that the market pricing for 50 bps rate hikes in June and July seems like a reasonable path. If we don’t see deceleration in inflation, may well be appropriate to have another 50-bps hike. Getting to september it’s harder to say. Notes inflation #1 challenge.

Economic Data

·     ADP Private Payrolls data for May reported at +128K jobs, well below the +300K estimate; April total of jobs added revised to 202,000 from 247,000 – said job growth rate of hiring has tempered across all industries

·     Weekly Jobless Claims fell to 200K from 211K prior week (est. 210K); as the 4-week moving average fell to 206,500 in latest week from 207,000 prior; continued claims fell to 1.309M from 1.343 mln prior; the U.S. insured unemployment rate fell to 0.9% from 1%

·     U.S. Q1 non-farm productivity revised to -7.3% from -7.5% (which was also consensus), while Q1 non-farm unit labor costs revised to +12.6% above prior and consensus reading of +11.6%

·     U.S. April factory orders rose +0.3% below the consensus +0.7% and the March +1.8%; April Durables orders revised to +0.5% from +0.4%; April nondefense cap orders ex-aircraft revised to +0.4% from +0.3%; April shipments unrevised at +0.8%; U.S. April inventories/shipments ratio 1.48 months’ worth vs March 1.47 months

Sector Movers Today

·     Casinos, Gaming, Lodging & Leisure sector; in autos, Ford (F) said it plans to invest $2 billion, create 3,200 jobs in Michigan and will receive at least $100.8 million in state incentives; FUN reported that preliminary year-to-date net revenues through Monday, May 30 increased 21%, or $60M, to a record $343M when compared with the five-month period ended Monday, June 3, 2019; BYD announced $500M increase to share repurchase authorization; SABR said in May 2022 gross air bookings recovered to approximately 56% vs May 2019; monthly NICS firearms data out (RGR, SWBI ) falling to 2.34M NICS firearm background checks in May from 2.728M in April; sharply lower from the 3.22M figure Y/Y and lowest monthly total since Sept 2019 (2.2M)

·     Telecom movers: AMT announced an 8.35M share offering of common stock; CCI was downgraded from Equal Weight to Underweight at Wells Fargo not based on absolute downside risk, but rather what they view as an unfavorable relative valuation vs. its 2 tower peers (particularly AMT, but also SBAC); CMCSA and FOXA downgraded to peer perform at Wolfe Research in assumption of coverage in the sector as sees more risk to the second half and 2023 consensus for broadband and advertising, while also downgraded PARA to Underperform and lowered tgts on CHTR, DIS, T, VZ in telco and LYV, MSGE, MSGS, NFLX in media/leisure

·     Metals & Materials; lithium names have been clobbered the last few days (ALB, LTHM, LAC, PLL, SQM) after Goldman Sachs said they see a sharp correction in lithium prices over the next two years; today, ALB was downgraded from Buy to Neutral at UBS and cut tgt to $260 from $300 noting upside has been driven by lithium prices (up ~140% YTD through April), and ALB’s shift to variable rate contracts. While this benefits near term earnings, lithium prices are now well above the cost curve, and the likely direction of pricing over the next 5 years is down; UBS upgraded ECL from Neutral to Buy as believe earnings revisions have troughed and see upside potential to 2023; industrial metals outperformed early – CENX

·     Retailers; CHWY posted a big 1Q EBITDA beat and a FY guidance that was not revised lower, helping a short squeeze after analysts expressed caution into the earnings print – while active customers declined Q/Q, NSPAC grew +15% resulting in a topline beat (+13.7% vs. consensus of +13.1%); LE slips as posts Q1 loss compared with a year-ago profit and a 5.5% drop in quarterly revenue to $303.M vs. est. $327M and guides Q2 sales $335-$350M vs. $396M est.; BKE comp store sales for 4-week period increased 5.3%; Jefferies said they surveyed 900+ warehouse club members about renewal intentions and shopping behaviors, and the results are bullish for both COST and BJ; PVH reported 1Q EPS of $1.94, beating the $1.61 est. due to stronger sales and a better than expected EBIT margin and reiterated its F22 EPS guidance; DBI posts Q1 EPS beat $0.48 vs. est. $0.25 and raised FY EPS outlook to $1.90-$2.00 from $1.80-$1.90

Stock GAINERS

·     APRN +8%; is launching a new offering on Walmart.com. Starting today, consumers can purchase a selection of meal kits without a subscription, from classic menu items to family favorite recipes.

·     CHWY +16%; posted a big 1Q EBITDA beat and a Full Year guidance that was not revised lower, helping a short squeeze after analysts expressed caution into the earnings print

·     ESTC +5%; reported slightly better Q4 results with most metrics and initial FY23 guidance just ahead of guidance and consensus

·     GNRC +3%; among top gainers in the S&P after UBS said has favorable risk/reward, calling it their Top Pick in Alternative Energy as reiterate Buy & $450 PT

·     MDB +13%; reported its fifth consecutive quarter of accelerating growth, this time to 57% (vs. ests. +47% y/y), which was driven by 82% Atlas growth vs. consensus of 72.8% y/y, and operating margin of 6.1% vs. consensus of (-1.1%) while Enterprise Advanced grew 30.0% y/y

·     PSTG +18%; reported a strong quarter even after excluding the $60m of revenue pull-in from 2H and raised its full year revenue and operating profit outlook

·     RPTX +30%; after announced a worldwide license and collaboration agreement with Roche (RHHBY) for its leading cancer candidate RP-3500

Stock LAGGARDS

·     AI -14%; as Q4 revs rose 38% Y/Y to $72.3M vs. est. $71.3M, but guides Q1 revs $65M-$67M below consensus est. $74.4M; Q4 subscription revenue was $56.3 million

·     CIEN -4%; posted Q2 EPS and revs miss (50c/$949M vs. est. 54c/$950.8M) and guided Q3 revs $870M-$930M, below $1.08B estimate

·     HPE 5%; reported F2Q results and F3Q guidance slightly below Street estimates in the context of a tough supply chain environment that impacted unit shipments during the quarter

·     HRL -5%; Q2 EPS $0.48 vs. est. $0.47; Q2 revs rose 19% to $3.1B vs. est. $3.07B; Q2 organic sales rose 10% but cut top end of FY EPS range by 6c and called it narrowing

·     IMUX -42%; after saying its lead drug IMU-838 failed to meet the main goal of a mid-stage trial testing it in ulcerative colitis patients; drug failed to help patients achieve clinical remission compared with a placebo; no longer plans further development activities w/o a partner

·     MRNA -7% after saying it will delay delivery of some vaccine doses to the EU that were planned for Q2, as part of an amended agreement with the European Commission

·     MSFT -1%; lowered 4q operating income view to $20.60B-$21.30B from prior $20.90B-$21.60B view, sees Q4 revs $51.94B-$52.74B below prior $52.40B-$53.20B and lowered Q4 EPS outlook to reflect additional FX impact

·     PARA -5%; downgraded to Underperform from Outperform at Wolfe with a price target of $24, down from $49, saying is late to streaming with a broad-based DTC service, is “playing catch-up” to gain share in an increasingly competitive landscape