Mid-Morning Look

Friday, October 20, 2023

U.S. stock selling pressure continues for a 3^rd day, with the S&P (SPX) roughly 15-points from its 200-day moving average support of 4,233 as the combo of higher Treasury yields, conflict in the Middle East, soaring oil prices and mixed results for the start of earnings season weighing. Oil and gold prices climbed while stocks retreated as investors responded to the threat of a weekend escalation that could spread the conflict between Israel and Hamas to the wider Middle East region. Earnings season has had a handful of bright spots so far – but plenty of reasons to worry as well. Solar names tumble as SEDG slashed guidance overnight, airlines have been weak post earnings thus far (ALK, AAL, UAL), regional banks drop today on lower NII with RF, CMA falling; TSLA shares extend losses after its top/bottom miss yesterday hitting electric vehicles. Markets are still fearful about consumer sending/leisure demand given the spike in rates over the last few weeks, which could impact housing as well. The CBOE Volatility index (VIX) closed above 20 for the first time since March yesterday and extends gains this morning.

There are fresh market concerns that the war between Israel and Hamas may evolve into a wider conflict in the Middle East following reports that US military bases in Iraq and Syria are coming under increased attacks. Also, Israel’s military said it struck Hamas targets in Gaza overnight and hit Hezbollah assets in response to fire from Lebanon, where the Iran-backed group is based.

Bets easing on additional rate hikes. Traders see a reduced likelihood that the Fed will hike by December or January, as Fed funds futures now see the chance of a 25-basis-point hike by December at 20.5%, down from 29.9% a day ago, and by January at 27.8%, down from 34.8% on Thursday. Instead, traders now see a 79.2% and 69.4% likelihood, respectively. They also see a 98.5% chance of a pause on Nov. 1.

Yesterday, Federal Reserve Chair Jerome Powell suggested the US central bank is inclined to hold interest rates steady again at its next meeting while leaving open the possibility of a future hike if policymakers see further signs of resilient economic growth. The comments effectively affirm market expectations for the Fed to skip a rate increase for a second straight meeting when officials gather on Oct. 31 and Nov. 1. The Fed chief also said a recent run-up in long-term Treasury yields, if they persist, could lessen the need for further hikes “at the margin,”

Sector Movers Today

·     Regional banks pressured on results: CMA shares slid as EPS $1.84 tops $1.68 estimate though net income down -28% y/y as net interest income (NII) dropped to $601M from $707M, total loans rose to $53.99 B from $51.1B y/y but total deposits dropped to $65.9B from just under $74B. HBAN Q3 EPS of $0.36 beat by 4c on better revs at $1.89B and said sees Q4 net interest income down 4%-5%, Q4 noninterest income flat and Q4 expense up 4%-5%. RF shares dropped as Q3 EPS $0.49 missed the $0.58 estimate and said expects net income interest (NII) in Q4 to decline ~5% sequentially, as banks pay more to retain deposits.

·     Transports active with CSX 3Q EPS falling a penny short of consensus but operating income was $3M better than expected with the miss entirely driven by the tax rate – CSX now anticipates a ~$325M full-year decline in supplemental revenues versus ~$300M previously. Truckers/freight get a boost after KNX posted Q3 adjusted EPS of $0.41 topping the $0.36 estimate and issued guidance for the year that was above consensus (was upgraded at JP Morgan). UNP was upgraded to Buy from Hold with $235 tgt at Deutsche Bank after earnings.

·     In Agricultural/Industrial: Oppenheimer said they are bullish on inputs and ingredients as commodity prices retreat, driving lower-cost working capital, and sustaining healthy pricing power. The firm upgraded CTVA to Outperform on ahead-of-schedule execution against 2025 targets. Said while equipment sentiment remains hampered by cycle dynamics, below-peak valuation implies a favorable risk/reward for AGCO and DE, while CNHI remains a show-me story, which they cut to Perform. Last, they downgrade AQB on cost of capital/pricing pressures.

·     In Solar: SEDG weighed on the whole solar industry after cutting Q3 revenue view to $720M-$730M from $880M-$920M (est. $909.0M) and cuts Q3 gross margin view to 20.1%-21.1% from 28%-31% saying experienced substantial unexpected cancellations and pushouts of existing backlog from our European distributors; installation rates for the third quarter were much slower at the end of the summer (solar names ENPH, FSLR, ARRY, SPWR tumble on guidance). Several Wall Street analysts downgraded SEDG in reaction – but have been expressing caution this week.

Stock GAINERS

·     ALV +5%; raised its annual sales guidance after meeting Q3 profit expectations saying it would increase its 2023 sales guidance to about 17% organic growth from 15%, citing development of light vehicle production (LVP), to which it is highly exposed.

·     BOWL +8%; announced the completion of a sale-leaseback with VICI for $433M, with Oppenheimer saying the proceeds are slightly above their $300M-$400M estimate and the deal greatly accelerates the company’s capital deployment plan and could fund a large buyback.

·     COIN +2%; as Bitcoin prices jumped above $30K for first time since July ($30,022), taking gains for the week past 10%, against a backdrop of volatile trading across cryptocurrencies; shares of Bitcoin miners, investors moved in reaction (COIN, HUT, MARA, RIOT, MSTR).

·     DY +2%; was upgraded to Strong Buy at Raymond James from Outperform ahead of 3Q results following a positive read-through from AT&T’s (T) 3Q23 print that underscores management’s commentary regarding the outlook for the business over the next 12 months.

·     JAZZ +2%; said to explore options including sale according to reports saying the company speaking with advisers to gauge potential interest https://tinyurl.com/yssajdj4 

·     KNX +10%; posted Q3 adjusted EPS of $0.41 topping the $0.36 estimate and issued guidance for the year that was above consensus (was upgraded at JP Morgan).

·     T +3%; among top gainers in the S&P after better results yesterday lifted shares.

Stock LAGGARDS

·     ARQT -23%; announces $100M common stock offering and said sees preliminary total revenues of about $38.1M for quarter ended September 30, 2023, and expects to report about $228.1M of cash, cash equivalents.

·     AXP -4%; Q3 EPS of $3.30, ahead of consensus $2.94 while revenue climbs by 13% to $15.38B vs. est. $15.36B, boosted by travel-and-entertainment spending; but the company provisioned $1.2 billion for credit losses, up from $778 million a year ago.

·     HPE -5%; provided FY24 guidance that was below consensus, including EPS of $1.92 at mid-point (consensus $2.14), FCF of ~$2B (consensus ~$2.4B), and constant currency rev growth of ~3%.

·     ISRG -5%; mixed Q3 as EPS topped views, but sales fell short ($1.74B vs. $1.77B est.); systems revenue missed estimates due to a higher mix of operating leases versus capital purchases; delivered healthy Q3 procedure growth (+19% WW; +17% U.S.; modestly lowered GM guidance.

·     RF -15%; Q3 EPS $0.49 missed the $0.58 estimate and said expects net income interest (NII) in Q4 to decline ~5% sequentially, as banks pay more to retain deposits; said set aside $145M as provisions for credit losses in Q3, compared with $135M a year ago.

·     SEDG -27%; crushes solar sector after lower guidance; cut Q3 revenue view to $720M-$730M from $880M-$920M (est. $909.0M) and cuts Q3 gross margin view to 20.1%-21.1% from 28%-31% saying experienced substantial unexpected cancellations and pushouts of existing backlog.

·     SLB -4%; Q3 adj EPS $0.78 vs. est. $0.77; Q3 revs rose 11.1% y/y to $8.31B vs. est. $8.33B; Q3 cash flow from operations $1.68B; free cash flow $1.04B; Compared to the same quarter a year ago, international revenue grew 12%, outpacing North America.