Mid-Morning Look

Friday, September 24, 2021

U.S. stocks are mixed/lower as worries persist about the spillover from debt-laden China Evergrande (hitting US listed Chinese stocks hard today), while Nike tumbled after cutting its sales forecast. U.S. Treasury yields rose in the wake of the Federal Reserve’s decision this week to soon begin tapering its massive bond purchases, a move that could lead to higher interest rates next year. The yield on 10-year Treasury note rose about 5 bps to 1.45% (closed 1.3% on Wednesday). Meanwhile, Cleveland Federal Reserve Bank President Loretta Mester said this morning the Fed should start to reduce its support for the economy in November and could start raising rates by the end of 2022 if labor markets continue to improve. The lone piece of economic data a positive as New Home Sales for August rise +1.5% MoM to 740K vs. 708K expected and 729K prior (revised from 708K). In vaccine news, last night, the head of the CDC overruled a recommendation of advisors and endorsed the use of the PFE/BNTX booster shot for front-line medical workers. A CDC panel had recommended boosters for Americans aged 65 and older and some people with underlying medical conditions but didn’t recommend it for teachers or people with high-risk jobs. The late-night change precedes President Biden speech this morning about boosters. Markets ignoring a weaker outlook from Dow component Nike (NKE) as shares tumble, China related weakness as Evergrande, the Chinese property giant, was due to pay foreign bondholders $83.5 million Thursday as the semi-annual interest payment on its $2 billion bond due next year…it didn’t. Crypto prices/stocks falling (but off morning lows) after People’s Bank of China said all crypto-related transactions are illegal, and financial institutions are not allowed to provide services for crypto.

Sector Movers Today

·     Restaurants; Jefferies upgraded shares of BJRI, CHUY, CAKE, PLAY and RRGB as they are incrementally more positive on the full service category following delta/inflation selloff and cons forecasts being reigned in. With independents and small chains losing $72B sales during ’20, they see oppty for top public chains to see above-trend SSS and unit growth acceleration; CMG tgt raised to $2,200 from $2,110 and maintain Buy as they think that Chipotle has a healthy balance sheet ($1.7 billion in liquidity in 2Q21) along with robust mobile ordering and delivery platforms; Truist said the read-through from DRI results are largely positive for our full-service coverage as reiterate Buy on DIN ($118 PT, 38% implied upside), TXRH ($130 PT, 39% upside) and PLAY ($56 PT, 41% upside), and view DIN as particularly well set-up.

·     Industrial & Machinery; HXL downgrade from Buy to Neutral at Seaport Global saying they think shares are close to fully valued and while they don’t see major negatives ahead, think their investment thesis has played out; PWR tgt raised to $139 from $122 at UBS to reflect the announced acquisition of Blattner Holding Company and reiterate positive view on the expected electric grid investment cycle; BA cautious at Wells Fargo as they lower tgt to $238 from $258 as expect BA’s delivery outlook to slip to the right given low recent 737 MAX/787 deliveries; Housing & Building Products; Cleveland Research lower 2H numbers for FBHS, MAS to reflect weaker cabinet and plumbing demand in near-term and pressure on margins. Now at low-end of guide and below consensus for 3Q/4Q; INVH 12.5M share Spot Secondary priced at $40.00

·     Internet; U.S.-listed Chinese U.S.-listed Chinese stocks slide (BABA, JD, NTES, BIDU) after China Evergrande gave no signs of meeting a Thursday deadline for an $83.5 million coupon payment and as Beijing’s sweeping crackdown extended to cryptocurrencies; BIDU slips after Reuters reports China’s antitrust regulator is unlikely to approve BIDU’s $3.6 bln acquisition of JOYY Inc’s (YY) video-based domestic live streaming business YY Live; GOOGL is seeking to negotiate search deals for TikTok and Instagram (FB) videos, The Information reported; BABA is responding to Chinese government divestment pressure with a plan to dispose of its minority holding in Mango Excellent Media, a unit of state-run Hunan TV.

·     Hardware, Components & Services; DOCN tgt raised from $70 to $100 at Oppenheimer citing accelerating metrics such as retention and ARPU; valuation and capex spending trends versus competitors and short-term catalyst of the lock-up expiration; NET downgraded to Perform from OP at Oppenheimer saying competition is slowly increasing as the FAANGs (MSFT), also build out edge; and think Street estimates are too high due to CDN price competition; CAMP slips on mixed Q2 (EPS slight beat, sales slight miss) as co notes persistent component shortages in supply chain have limited ability to fully ship against backlog (didn’t give outlook for Q3)

Stock GAINERS

·     AEHR +30%; after lifting its annual sales forecast by 80% and as Q1 sales more than doubles to $5.7M on a smaller-than-expected loss of (-$0.02) saying they are confident on growth based on record bookings, semiconductor test and burn-in solutions

·     CCL +2%; after co posts Q3 update, says cruise bookings for h2 2022 were ahead of pre-pandemic levels; giving a boost to reopen stocks early

·     COST +2%; 4Q GAAP EPS was $3.76, above consensus of $3.58 and operating income, which includes $84M, ($0.14 per share), of a write-off of certain IT assets increased 18% to $2,275M, above $2,168 consensus

·     ICLK +3%; received a preliminary non-binding indicative proposal from PAG Pegasus Fund LP and Oasis Management Company Ltd. for $6.75 per ADS in cash https://bit.ly/3AFUclx

·     MDP +29%; after the WSJ reported that IAC is in advanced talks to acquire the company, which is expected to be valued at more than $2.5B https://on.wsj.com/3u8ClB0

·     PRGS +11%; reported 3Q revenue and EPS ($153M/$1.18) ahead of consensus ($131M/$0.82) as ARR came in at $444M (25% Y/Y, cc), driven by an improvement in net retention to 101.4% from 100.2% in 2Q and raised FY21 top- and bottom-line outlook

·     VNO +2%; SLG and VNO upgraded to Neutral from Underperform at Bank America as sees a more balanced risk-reward profile for the two office REITs

Stock LAGGARDS

·     BABA -4%; U.S.-listed Chinese U.S.-listed Chinese stocks slide (JD, NTES, BIDU) after China Evergrande gave no signs of meeting a Thursday deadline for an $83.5 million coupon payment and as Beijing’s sweeping crackdown extended to cryptocurrencies

·     CAMP -6%; mixed Q2 (EPS slight beat, sales slight miss) as notes persistent component shortages in supply chain have limited ability to fully ship against backlog (didn’t give outlook for Q3)

·     COIN -2%; broad based weakness in crypto, with Bitcoin, Ethereum, Litecoin and others tumbling after the People’s Bank of China said all crypto-related transactions are illegal, and financial institutions are not allowed to provide services for crypto (RIOT, MARA, MSTR decline)

·     MU -1%; tgt and ests lowered at JPMorgan, KeyBanc, and Mizuho ahead of earnings next week as they expected in-line to beat for current quarter, but say the Dec/FebQ could see possible headwinds, with slowing consumer/WFH demand driving weaker memory

·     NKE -5%; 1Q EPS of $1.16 came in ahead of est. $1.09 but top line +12% cc missed expectations (+14%) driven by weaker growth in N America due to supply chain issues and co cut F22 revenue guidance (from +LDD) to +MSD growth YoY

·     ROKU -4%; downgraded to Equal weight from Overweight at Wells Fargo and cuts tgt to $350 from $488 saying combined with a pick-up in competition and high penetration of CTV (Connected TV), they see limited multiple market expansion

·     YY -4%; Reuters reports China’s antitrust regulator is unlikely to approve BIDU’s $3.6 bln acquisition of JOYY Inc’s (YY) video-based domestic live streaming business YY Live

Syndicate:

·     America First Multifamily Investors (ATAX) 4.75M share Secondary priced at $6.10

·     Clearwater Analytics (CWAN) 30M share IPO priced at $18.00

·     Cue Health (HLTH) 12.5M share IPO priced at $16.00

·     Invitation Homes (INVH) 12.5M share Spot Secondary priced at $40.00

·     Magnolia Oil & Gas (MGY) 7.5M share Spot Secondary priced at $16.55

·     Onconova (ONTX) 5M share Spot Secondary priced at $4.20

·     Telus International (TIXT) 12M share Secondary priced at $34.00