Mid-Morning Look

Wednesday, May 18, 2022

Stocks in the U.S. giving up most of yesterday’s hard-fought gains, coming under pressure amid fears of slowing consumer spending after a second warning shot was fired in the retail space in as many days. Earnings results from retailing giants WMT and TGT the last two-days raising real concerns for consumer spending trends as both widely missed earnings estimates, margins, and weak comp sales along with cautious outlooks. Wal-Mart yesterday cut its year outlook on soft margins while today Target said Q1 freight and transportation costs came in hundreds of millions of dollars higher than our already elevated expectations and said fuel and freight costs will be $1 billion higher this year than it had expected, with little sign of their easing throughout 2022. Both companies warned that food inflation is causing dollars to shift to staples and away from general merchandise. The commentary is pressuring shares of consumer discretionary/retail names (XRT) as mall companies, travel, lodging, etc. – all of which had been rallying on hopes for pent up demand out of Covid – is now being impacted by the hit consumers are feeling on surging food, gasoline, and other costs that could curtail spending habits. Yesterday, it was Walmart that had its largest one-day decline since the 1987 Crash, today its Target down over 20% (also biggest since 1987). Other factors impacting stock markets, 40-year high inflation in the UK as well last night with CPI +9%, while China appears to be emerging out of Covid lockdowns, and Fed rising rate hike trajectory remains on course after several Fed speakers, including Fed Chair Powell as outlined case for aggressive hikes. Stocks under pressure as Treasury yields fall from early highs.

Economic Data

·     April Housing Starts fell -0.2% to 1.724M annual rate, below March 1.728M units and below consensus ests for 1.765M; single-family starts -7.3% to 1.100 mln unit rate; multifamily +15.3% to 624,000-unit rate. Building Permits fell -3.2% to 1.819M vs March +1.2% 1.879M

Sector Movers Today

·     Retailers; TGT reported a wide Q1 earnings miss on lower operating margins (sending shares down over 20%), similar results to Wal-Mart (WMT) saying that food inflation is causing dollars to shift to staples and away from general merchandise; LVLU posted in-line Q1 EPS and better sales of $111.9M while raises year revs view to $490M-$500M or about 30%-33% growth vs. est. $486.9M; TJX Q1 adj EPS $0.68 vs. est. $0.60; Q1 revs $11.41B vs. est. $11.59B; sees Q2 U.S. Comp sales to be down 1% to 3% after Q1 comps rose 3%; guides Q2 EPS $0.65-$0.69, below the $0.75 estimate and sees year EPS $3.13-$3.20 vs. est. $3.15; RL FY23E EPS lowered at Credit Suisse to $8.50 from $9.75 prior (Street: $8.72), due to unfavorable FX headwinds lately; slower China trends in F1H; and checks that—after very strong trends this spring—US trends have slowed slightly relative to plan in recent weeks; WRBY downgraded to Neutral from Buy at Goldman Sachs following their 1Q22 earnings report; RL, LEVI, PVH tgts cut at Bank America

·     Aerospace & Defense; BDRDF upgraded to Buy at UBS saying business jet strength is elevating BBD financials quickly ahead and we think the market should take note; MRCY upgraded to Outperform from Sector Perform at RBC Capital and up tgt to $72 saying the company is well positioned to return to at least mid-single-digit organic growth and free cash flow improvement, while the activist presence provides a floor; VSEC downgraded to Sector Perform at RBC and cut tgt to $48 from $65 saying the near-term outlook for margin upside is limited, and business mix headwinds have limited investor willingness to pay for the aviation upside; RBC Capital also upgraded AVAV to Outperform with $100 tgt as believe the acceleration in demand for the company’s Switchblade represents a positive inflection that should be sustained; TGI Q4 EPS miss on lights revs ($386.7M vs. est. $405.2M) amid declines in commercial widebody jet production

·     Software movers; KEYS with beat and raise quarter as analysts note the magnitude of the +4% beat on sales and +9% EPS beat was even more impressive considering KEYS stopped selling to Russia and overcame much of the widespread supply chain challenges; CRM was upgraded to Buy from Neutral at Roth Capital with $242 tgt; Mizuho lowered several price tgts in software names (ADSK, CRWD, MDB, OKTA, PANW, CRM, SNOW, SPLK, VMW, ZS) after the IGV is down ~20% since the end of March, and ahead of earnings in the group this and newt week; SAP CFO says we are “absolutely not” satisfied with current share price, see significant potential for growth in profitability, free cash-flow in coming years – Reuters

Stock GAINERS

·     ADI ; Q2 adj EPS $2.40 topped ests $2.11 on revs of $2.97B, above est. $2.84B as adj gross margins 74.2% and operating margin 50.3% both topping consensus views

·     DLO +25%; shares rose as Q1 revs doubled along with a beat on Ebitda

·     DT +5%; posted a top and bottom-line quarterly beat with year ests just above consensus

·     MX +13%; following report that South Korea’s LX Group and private equity firm Carlyle (CG) jointed submitted a letter of intent for the chipmaker https://bit.ly/3Nh5hz6

·     PENN +1%; upgraded to Buy with $49 tgt at Jefferies saying recent weakness has reduced the shares to a level that comfortably reflects the stable cash generation of the land-based casino business while assigning “de minimis value” for the company’s digital prospects

·     TCS +9%; posts Q4 adj EPS beat of $0.46 vs. est. $0.26 on better Q4 revs $305.5M vs. est. $279.82M; guides Q1 EPS $0.15-$0.20 vs. est. $0.20

·     TJX +8%; Q1 adj EPS $0.68 vs. est. $0.60; Q1 revs $11.41B vs. est. $11.59B; sees Q2 U.S. Comp sales to be down 1% to 3% after Q1 comps rose 3%; guides Q2 EPS $0.65-$0.69, below the $0.75 estimate

Stock LAGGARDS

·     CPB -5%; weakness in consumer staples on rising inflation fears – SJM, CAG, HRL, GIS lower

·     DOCS -9%; as weaker Q1 guidance (sees Q1 revenue $88.6M-$89.6M vs. est. $96.78M), offset a Q4 beat EPS $0.21 vs. est. $0.15; Q1 revs $93.7M vs. est. $90.11M

·     JBHT -8%; weakness in transports, truckers on fears of slowing consumer spending, impacting freight and delivery; FDX, UPS others

·     LOW -3%; reported a drop in Q1 same-store sales, down (-3.8%) vs. est. (-2.5%) in a sign the retailer may struggle to keep pace with its main rival HD (which reported better results yesterday), while reiterated its outlook for the year

·     TGI 17%; reports Q4 EPS miss on lights revs ($386.7M vs. est. $405.2M) amid declines in commercial widebody jet production

·     TGT -24%; reported a wide Q1 earnings miss on lower operating margins (sending shares down over 20%), similar results to Wal-Mart (WMT) saying that food inflation is causing dollars to shift to staples and away from general merchandise (drags COST, BBY, DLTR, DG, KSS lower)