Mid-Morning Look

Thursday, September 01, 2022

U.S. stocks open lower following a barrage of negative market related headlines overnight, pressuring technology stocks, retailers, staples, and energy. The Nasdaq remains on track for its 5^th straight day of losses – hasn’t fallen 5-straight days since the Feb 16-23 timeframe. The S&P also on track for a 5^th straight day of losses after major averages failed at key technical support levels this week (50-day moving averages). Investors dealing with lots of news today including: 1) semiconductor weakness (SOX down over 3%), led by weakness in AMD and NVDA amid new China chip restrictions instituted by the U.S., 2) weaker PMI data out of China last night (showed contraction) hurting commodity prices (oil and gold slide); 3) Chengdu population of 21 million locked down in China; 4) Treasury yields spiking (2-yr back to 14-yr highs 3.5% and 10-yr hits high 3.26%); 5) dollar moves to 24-year high vs. the yen; 6) weak earnings/guidance results in food space (HRL/CPB); 7) a handful of weakness in retail, as companies continue to lower the outlook for upcoming year (FIVE, OLLI, DLTH, SIG, LE all lower) citing all sorts of concerns (higher costs, inflation, macro uncertainty). Today’s drop follows a recent slump in stocks as investors fret over the Federal Reserve’s aggressive monetary policy tightening path. Over the last 2-weeks, no bid for major averages going from “overbought” to “oversold” quickly. Lastly, economic data this morning mostly better-than-expected…but that hurting stocks as market sees good news as bad news for mkt as it keeps the Fed on the gas pedal for higher rates to cool economy. U.S. Dollar index hits new 20-year high, last up 0.63% at 109.55.

Economic Data

·     Weekly Jobless Claims fell to 232K in latest week, down from 237K last week (revised) and vs. est. 248K; the 4-week moving average fell to 241,500 in latest week from 245,500 prior; continued claims rose to 1.438M from 1.412M prior (est. 1.438M) and the U.S. insured unemployment rate unchanged at 1.0%

·     Nonfarm productivity for Q2 revised to -4.1% from (-4.65) prior and vs. consensus (-4.5%); U.S. Q2 non-farm unit labor costs revised down to +10.2% from 10.8% prior and vs. consensus +10.7%

·     S&P Global U.S. Manufacturing sector final PMI for August at 51.5 vs flash reading 51.3 and final July 52.2; final output index for August at 49.2 vs flash reading 49.3 and final July 49.5; final output prices index for August at 62.9 vs flash 63.0 and final July 66.7

·     August ISM Manufacturing PMI reported at 52.8 vs. 52.0 expected and 52.8 prior; prices paid index 52.5 in August vs 60.0 in July (lowest since June 2020); new orders index 51.3 in August vs 48.0 in July; employment index 54.2 in August vs 49.9 in July (highest since March)

·     July Construction Spending fell (-0.4%) to $1,777.3B, in-line with consensus and -0.5% in June (revised up from -1.1%); construction spending climbed 8.5% Y/Y in July

Sector Movers Today

·     Retailers: in discount retail, FIVE posted Q2 EPS/sales miss and lower guidance while Q2 comp decline of 5.8% was somewhat better than the down 6-7% – said it plans to convert majority of its chains to the higher-priced concept; COST reported total and U.S. core August comp growth of 8.7% and 7.6%, respectively, compared to consensus of 7.7% and 7.0%. Sales growth remains strong, with the 2-year comp CAGR accelerating ~170bps after decelerating starting in May through July; OLLI cuts its FY sales and profit forecasts after missing Q2 results estimates on slower-than-expected demand, higher costs; DLTH lowers both its year profit and sales outlook citing macro uncertainty and inflationary pressures impacting discretionary spending; FLWS declines following results; GCO mixed Q2 results, while cuts year EPS/sales view; SIG posts better Q2 and reaffirms FY23 revenue and operating income guidance but slashes 2023 profit between $10.98 and $11.57, down from prior forecast of $12.72-$13.47; LE another retailer to cut sales and profit outlook for year amid steep discounts and higher costs

·     Semiconductors; huge news in sector as NVDA revealed that the U.S. moved to restrict its data-center sales in China and Russia, stating that forecast for the current quarter includes an expected $400 million in data-center sales to China that could be affected by the move; NVDA later said the U.S. gov’t has allowed exports and in-country transfers needed to complete the development of the company’s H100 artificial intelligence chip; AMD also said it had received new license requirements that will stop its MI250 artificial intelligence chips from being exported to China, but it believes its MI100 chips will not be affected; SMTC provided Q2 results largely in-line, but October quarter guidance was significantly below expectations as sees revenue guidance of $175M at midpoint, compared to consensus of $215.6M (downgraded at Cowen)

·     Metals & Materials; RIO agrees to buy the rest of TRQ for C$43 a share cash, almost six months after its initial offer, moving to gain more control of a giant copper mine in Mongolia; in chemicals, SMG lowers year free cash flow to range from negative $275 million to negative $325 million compared to its previous guidance of negative $150 million; reaffirmed the other aspects of its earnings guidance; industrial and precious metals fall on weaker China data, slowing global economic growth fears amid rising rates – hitting shares of FCX, NEM, AA, X and others; GEF reported F3Q22 adj. EPS of $2.35, above consensus of $2.00, with its adj. EBITDA of $251M above consensus of $230M

·     Auto sector: in Chinese EV space, LI reported vehicle deliveries for August of 4,571 units vs. 9,433 y/y; vehicle deliveries 4,571 units, -52% y/y; total stores 265 vs. 114 y/y; NIO reported deliveries for August of 10,677 vs. 10,052 m/m; deliveries 10,677, +6.2% m/m; premium smart electric SUVs 7,551, -0.4% m/m; premium smart electric sedans 3,126, +26% m/m; XPEV saw a 33% Y/Y growth in August 2022 vehicle deliveries as delivered 9,578 Smart EVs in the month; MULN signed partnership with Israeli company Watergen to launch water-from-air solutions for EVs; HMC U.S. July car sales down 46.9%, us truck sales down 32.6%

Stock GAINERS

·     COO +1%; reported FQ3 revenue of $843M/+9% organic that beat Street’s $830M, with top-line upside coming from across-the-board strength in CVI and CSI, while FX headwinds did hit margins and EPS in FQ3, offsetting the top-line beat

·     FIVE +5%; posted Q2 EPS/sales miss and lower guidance while Q2 comp decline of 5.8% was somewhat better than the down 6-7% – said it plans to convert majority of its chains to the higher-priced concept

·     FMTX +47%; to be acquired by NVO for $20 per share in cash; deal valued at $1.1B https://bit.ly/3TyOziY

·     NTNX +29%; after quarter and outlook were much better than expected following last quarter’s challenges around the supply chain and sales attrition – Q4 results beat and guides FY revs $1.77B-$1.78B vs. est. $1.67B

·     PSTG ; reported stronger than expected Q2, guided F3Q23 above estimates and raised full year expectations as stated pipeline generation, close rates and overall demand remain healthy

·     TRQ +13%; as RIO agrees to buy the rest of Turquoise Hill for C$43 a share cash, almost six months after its initial offer, moving to gain more control of a giant copper mine in Mongolia

Stock LAGGARDS

·     AI -19%; reported 1Q revenue slightly below consensus and slashed its FY23 revenue growth guide from ~23% y/y down to ~4% at the midpoint, citing an uncertain macro driving longer sales cycles and budget cuts

·     CPB -6%; reported in-line Q4 EPS and sales ($0.56/$1.99B) on better organic sales view (4%-6% vs. est. 3%), but weaker 2023 profit outlook (flat to up 4% vs. est. 2.7%)

·     FCX -6%; Copper has lost -7% since 8/25 with copper miners losing much more since highs on 8/26: FCX -30% TECK -14% SCCO -13% as weak Chinese economic #’s continue & new Covid outbreaks & lockdowns are announced

·     HRL -4%; Q3 EPS of $0.40 missed ests of $0.41 on better sales $3.03B vs. est. $2.98B; also cuts FY22 EPS $1.78-$1.85 from $1.87-$1.97 (est. $1.88) but boosts FY22 revenue view

·     MDB -14%; as revenue of $304M (+53% Y/Y) beat consensus by $19M, as Atlas revenue grew 73% Y/Y to $193M, but co issued lower EPS guidance for Q3 as sees adj EPS loss (19c)-(16c) vs. est. loss (14c) and lower year EPS

·     NVDA -8%, AMD -5%; both disclosed that the US has informed the companies that certain AI products will require a license for export to both China and Russia. Affected products for NVDA include its A100 and H100 processors, while AMD believes the new requirements will impact its ability to ship its MI250 product

·     OKTA -30%; downgraded by a couple Wall Street analysts after a mixed FQ2’23 print with in-line billings, a slight beat on current RPO, and better than expected operating losses/EPS, but reduced its FY23 billings guidance by just over 6%

·     SMG -6%; lowers year free cash flow to range from negative $275 million to negative $325 million compared to its previous guidance of negative $150 million

·     SMTC -34%; provided Q2 results largely in-line, but October quarter guidance was significantly below expectations

·     VEEV -14%; mixed results with some F2Q upside offset by a reduction in FY23 outlook as Commercial Cloud was the primary source of weakness