Mid-Morning Look

Tuesday, October 17, 2023

U.S. stocks opened sharply lower as a double edge sword weighed on markets initially, specifically the tech heavy Nasdaq which fell over 1.3%. Stronger than expected monthly Retail Sales data and Industrial Production raise prospects of further Fed intervention at the November or future meetings (keeping interest rates higher for longer), which boosted Treasury yields across the board (15-bps spike for the 10-yr to 4.85%). Also weighing on semiconductors (NVDA, AMD, INTC), the White House is tightening restrictions on China’s ability to buy advanced semiconductors, as the Commerce Department said it would significantly constrict exports of artificial-intelligence chips. Stock selling took a breather around 10:00 AM (and has continued to pare losses) after weaker housing data and mixed business inventory data. Treasury yields surged as the 10-yr rose 15-bps to 4.858% before paring gains. Gold prices rise despite a bounce in the buck and yields. Earnings results from banks BAC, GS, BK this morning as well as Pharma giant JNJ. One big, proposed M&A deal in the lodging sector between WH and CHH (details below). Dow Transports outperform ahead of earnings from UAL in airlines and JBHT in truckers tonight.

Economic Data

·     Retail Sales for September rose +0.7% M/M vs. +0.3% expected and +0.8% in August (revised from +0.6%) while core Retail Sales rose +0.2% M/M, in line with expected and vs. +0.9% in August (revised from +0.6%). Ex-Auto & Gas: +0.6% M/M vs. +0.1% expected and +0.3% prior.

·     Industrial output rose +0.3% vs. est. unchanged and vs. Aug unchanged (vs. previous +0.4%) as Sept capacity use rate 79.7% (consensus 79.6%) vs Sug 79.5%.

·     NAHB Housing market index for October reported at 40 (below consensus 44) and below the revised 44 in September; index of home sales over next six months 44 versus 49 in September and index of prospective buyers 26 versus 30 in September.

·     Business Inventories for August rose +0.4% to $2,548.7B vs. +0.3% expected and +0.1% in July (revised from 0.0%) and Business sales +1.3% vs July +0.8% (prev +0.6%); the Aug inventory/sales ratio 1.37 months’ worth vs July 1.39 months.

Sector Movers Today

·     Semiconductors pressured early (NVDA, AMD, INTC, etc.): after the White House is tightening restrictions on China’s ability to buy advanced semiconductors, as the Commerce Department said it would significantly constrict exports of artificial-intelligence chips, making it tougher for U.S. companies Nvidia and INTC to sell existing products in China — or to introduce new chips to circumvent the rules.

·     In Banks: 1) BAC bank posts Q3 EPS $0.90 topping $0.81 est. as investment banking/trading fared better than expected, while higher borrowing costs boosted its NII; reported unrealized losses of $131.6B on securities held until maturity in Q3, growing from nearly $106B in paper losses in Q2; 2) Dow component GS reported Q3 EPS $5.47 topping consensus $5.31 on better revs $11.82B vs. est. $11.19B; posts Q3 FICC net revenue $3.38B, down 6% y/y; 3) CFB EPS better than expected with an EPS beat, a PPNR beat, an in-line NIM, low-single-digit core loan and deposit growth, and low NCOs; 4) SFBS Q3 EPS $0.98 vs est. $0.95 on NII $99.698Mm vs est. $102.55Mm, loss provision $4.282Mm; Loans grew 3%, while total deposits came in at $13.1B.

·     In Solar sector: Two analysts out with several changes: 1) NOVA was upgraded from Neutral to Buy at Citigroup but lower tgt to $14 as change based entirely on valuation (-55% since 7/19), while they downgraded SPWR from Neutral to Sell with $4.50 tgt from $10 as believes forward estimates need to come down, strategic initiatives will take longer to implement. 2) Morgan Stanley with changes as well, upgrading ARRY from Underweight to Equal Weight as expects to benefit from strong growth in the utility-scale solar market, which so far, is proving to be a more resilient sub-sector of clean tech. They also downgraded SPWR from Equal Weight to Underweight with $5 tgt on several near-term dynamics. HASI was upgraded to OW from EW as believes the sell-off is overdone and incongruous with business fundamentals. Lastly, MSCO said FSLR, ARRY, SHLS favorable near-term setups while SEDG, ENPH skew negatively.

Stock GAINERS

·     DLTR +3%; was upgraded from Neutral to Buy at Goldman as it sees strong earnings growth potential supported by continued market share gains, lower freight costs and the multi-year turnaround efforts.

·     OLK +67%; TMO said it will acquire Sweden based OLK for $26.00 per common share in cash, representing $26.00 per ADRs in cash in a deal valued at ~$3.1B, including a net cash of ~$143M, a 74% premium to yesterday close. https://tinyurl.com/yaxx6xhx

·     VFC +11%; after The Wall Street Journal reported that activist investor Engaged Capital has built a “big” stake in the parent of retail brands including Vans and The North Face https://tinyurl.com/2kuds85h

·     VSAT +4%; upgraded from Neutral to Overweight at JP Morgan noting last week the company provided an update on its plans for the VS-3 F1 Satellite and confirmed that the company does not plan to construct a replacement.

·     WH +11%; as CHH proposes to buy WH for $90.00 per share in cash-and-stock transaction, which would be a 30% premium to latest closing price, in a total deal valued at about $7.8B (would pay $49.50 cash and 0.324 shares) – https://tinyurl.com/33rftmsc

Stock LAGGARDS

·     ADTN -5%; said sees prelim Q3 revenue $272.3M vs. est. $288.2M; said believes that customers will manage their inventories conservatively and adjust their capital expenditure budgets in Q4.

·     EVLO -55%; said it is reviewing strategic alternatives after its Phase 2 clinical trial of EDP2939 for the treatment of moderate psoriasis failed to meet its primary endpoint.

·     LCID -5%; produced 32% less vehicles in Q3 than a year ago – produced 1,550 vehicles and delivered 1,457 units in the quarter, compared with the 2,173 vehicles it made and 1,404 delivered in the three months to June.

·     NTCT -20%; as cuts FY24 EPS view to $2.00-$2.20 from $2.20-$2.32 (est. $2.26) and lowered FY24 revenue view to $840M-$860M from $915M-$945M (est. $926.3M) after guiding Q3 revs $195M-$197M vs. est. $223.6M.

·     NUVL -3%; as 5.36M share Spot Secondary priced at $56.00.

·     NVDA -5%; after the White House is tightening restrictions on China’s ability to buy advanced semiconductors, as the Commerce Department said it would significantly constrict exports of artificial-intelligence chips, making it tougher for U.S. companies to sell existing products in China.

·     VMW -7%; amid a report about China’s review of the firm’s more than $60 billion sale to AVGO. The timing of the China antitrust regulator’s deal approval appears to now depend on the macro environment, https://tinyurl.com/287aaazm