Mid-Morning Look

Thursday, September 05, 2024

U.S. stocks strong action to start the day, particularly in large cap tech following a handful of mixed economic data reports (weaker ADP payrolls, in-line ISM Services), but tomorrow’s Nonfarm payroll report likely the deciding factor on stock market outlook ahead of the Fed policy rate meeting in 2-weeks. The Nasdaq Comp outperforms early, rising over 1% as large cap tech (AAPL, AMZN, TSLA, NVDA, GOOGL, MSFT) among biggest gainers, while Healthcare, Industrials, and Financials lagging. Nonfarm payrolls likely increased by 160,000 jobs last month after rising by 114,000 in July, according to economist estimates and the unemployment rate is forecast to slip to 4.2% from nearly a three-year high of 4.3% in July. Stock market expectations remain a toss up for either a 25 or 50-bps interest rate cut by the Fed at its upcoming meeting as inflation has decelerated and the economy continues to show signs of weakness. The 10-year Treasury yield hit lows around 3.72% this morning while the 2-yr yield hit 15-month lows around 3.72% after the ADP report. The FDIC reported that U.S. bank profits increase 11.4% to $71.5B in Q2 2024, driven by decline in noninterest expenses and gains on sales of securities. The FDIC also reported that credit card net charge-off rate climbs to 4.82%, highest rate since Q3 2011 (not a positive sign). Smallcaps lagging early, as the mega cap names again seeing a rebound with early NYSE breadth 1.5:1 advancers leading. Oil prices are moving higher along with gold as the dollar and yields slip.

• Weekly Jobless Claims fell to 227,000 in the latest week vs. consensus 230,000 and down from 232,000 prior week; the 4-week moving average fell to 230,000 from 231,750 prior week and continued claims fell to 1.838M from 1.860M prior week; the U.S. insured unemployment rate unchanged at 1.2%.
• U.S. Q2 non-farm productivity revised to +2.5%, in-line with consensus and vs. previous +2.3%, while U.S. Q2 non-farm unit labor costs revised to +0.4%, below consensus +0.8% and prior +0.9%.
• ISM report on U.S. non-manufacturing sector shows PMI 51.5 in August vs. consensus 51.1 and vs. 51.4 in July; segment breakdown showed business activity index 53.3 in August vs 54.5 in July, ISM non-manufacturing prices paid index 57.3 in August vs 57.0 in July, ISM non-manufacturing new orders index 53.0 in August vs 52.4 in July, and ISM non-manufacturing employment index 50.2 in August vs 51.1 in July.
• S&P Global Aug. Services PMI at 55.7 vs 55 last month and S&P Global Aug. Composite PMI at 54.6 vs 54.3 prior.

• In Autos Research: Wolfe research made several changes in the auto space, assuming coverage in GM with a Peer Perform rating (down from Outperform) as sees 2025 earnings for the Detroit 3 automaker’s down versus this year, as downgraded STLA as well to Peer Perform (Ford remains PP as well). In auto suppliers, GT was assumed lower with Peer Perform (from OP) along with MBLY and MGA while TEL was upgraded to Outperform with $187 tgt. XPEV was upgraded to OW from Neutral at JP Morgan on the expectation that its upcoming new models in Q424 – Mona M03 and P7 plus (both sedans) – should increase quarterly delivery from ~45k units in Q324 (guidance 40- 45k) to ~80k in Q424.
• In Homebuilders: BZH was upgraded to Outperform from Neutral at Wedbush and raised tgt to $45 from $41 saying they do not see a catalyst for the shares to trade below its FY25 tangible book value (TBV) estimate of $41.09 at current levels especially considering recent home price appreciation trends nationally. KBH was downgraded to Underperform from Sector Perform at RBC Capital with an unchanged price target of $70 as sees a more negative near-term risk/reward skew for the shares following the 20% rally over the past two months.
• In REITs: Mizuho upgraded EGP to Outperform (PT to $200 from $175) and downgrade TRNO to Underperform (PT $62) while remain at Outperform on FR and Neutral on PLD and REXR saying the Industrial REIT narrative has recently turned net positive, as many investors believe the worst is behind us. Mizuho however said the numbers, however, tell us a different story – core growth will keep slowing. Commercial Real Estate: STWD, KREF, NMRK all upgraded to Outperform from Market Perform at KBW Inc in commercial real estate sector saying the market is nearing a bottom on key indicators like prices, volumes, loss reserves, and the Federal Reserve signaling interest rate cuts, the backdrop will improve in Q4.

• FTV +2%; announced plans to split the company in 2 and focus at least 75% of FCF to buybacks until the split is done in late 2025; as part of deal, both the CEO and CFO will be retiring – CFO in early 2025 and CEO when deal is concluded.
• JBLU +6%; on improved Q3 revenue outlook as sees Q3 revs -2.5% to +1%, above prior view of -1.5% to -5.5% as notes operational performance over summer improved y/y; still forecasts Q3 CAPEX about $365M, vs. est. $362.2M
• MODG +3%; announced it’s settled on pursuing a spin. This news comes on the heels of MODG announcing its intention to pursue either organic or inorganic strategic alternatives last month.
• ROKU +5%; was upgraded to Equal Weight from Underweight and raised tgt to $72 from $50 saying the Roku Channel will contribute to stronger growth as Roku improves monetization through third parties service providers.
• TSLA +3%; plans to launch Full Self Driving technology in China and Europe in Q1’25, pending regulatory approvals, according to reports as per Bloomberg.
• YEXT +12%; Needham upgraded to Buy following Q2 results saying it gave them greater clarity on the fundamental trajectory of the business following the recent Hearsay acquisition.

• ASTS -14%; shares fell after the company said it may offer, sell shares of Class A common stock of up to $400M from time to time (follows recent surge in share price).
• BASE -13%; delivered a mixed Q2 with in-line revenue/EPS but soft Q3/FY25 ARR guidance as the company saw an uptick in churn/downsells in Q2, impacting NNARR; also guided below Q3 ARR estimates.
• CHPT -18%; shares weak after larger Q2 loss on weaker revs and guides Q3 revenue $85M-$95M, vs. consensus $136.81M while announcing a restructuring.
• CPRT -6%; as 4Q EPS came in light at $0.33 vs. consensus $0.37; Q4 revenue $1.07B was in line with consensus while operating income worse at $359.5M vs. consensus $411.8M.
• CXM -6%; shares dropped as quarterly subscription revenue missed consensus estimates, and the full-year expectation is coming down, while total and current bookings fell significantly to -39.7% and -9.7%, respectively.
• FYBR -8%; after VZ agreed to buy the company for an enterprise value of $20B, as investors will get $38.50 a share in cash (confirming prior day report in WSJ which sent shares up 28% on Wednesday).
• HPE -6%; earnings were mixed with in-line F3Q24 results and a downgrade on F2024 EBIT guidance (low-end of 0-2% growth vs. 0-2% prior) due to gross margins pressure from AI systems; HPE expects F2024E Server margins to be at the low-end of its 11-13% target range with margin improvements over time.
• MOV -10%; lowered its FY25 EPS guidance to $0.90-$1.00 from prior $1.20-$1.30 and lowered year sales view to $665M-$675M, from about $700M-$710M on lower op income view $23M-$26M, from $32M-$35M.
• TTC -9%; after results and lower guidance; Q3 earnings missed expectations and lowered its full-year EPS guidance range to $4.15-$4.20 from $4.25-$4.35 citing slowing demand from homeowners and dealers as the summer progressed; Q3 sales grew 6.9% to $1.16B but missed ests of $1.26B.
• VRNT -12%; missed Q2 total revenue and EPS as an unbundled SaaS deal was pushed out, but management did reaffirm the FY25 targets for revenue and EPS and affirmed that the results were not impacted by macro or AI disruption.