Closing Recap

Monday, July 22, 2024

U.S. stocks post big gains across the board to kick off the trading week, ending just off the highs of the day and snapping the 3-day losing streaks for the S&P 500 and Nasdaq Composite led by a near 4% rally in semiconductors (SOX) after it paced the tech decline last week, as investors prepare for a busy week of earnings. The big news this weekend came out of D.C. where President Joe Biden ended his reelection campaign and endorsed Vice President Kamala Harris to battle Donald Trump in November. Outside of that, today was just a typical “buy the dip” move after soft action last week for broader markets. No major economic data today; none until Thursday with GDP and then important June PCE inflation data on Friday (which could impact next week’s FOMC meeting). Market strength broad based with breadth positive by about 3:1 margin after weakness last week, paced by more than 2.3% gain for Technology (XLK) and 1.1% for Consumer Discretionary (XLY) and interest rate sensitive sectors Utilities (XLU) and REITs (XLRE) higher. Smallcap Russell 2000 rebounds from early weakness, climbing more than 1% late day. In Central Bank news this weekend, the People’s Bank of China (PBoC) cut its 1Y and 5Y LPRs 10bps each to 3.35% and 3.85% respectively; also cut 7day Reverse Repo rate 10 bps to 1.7%; lowered collateral for MLF facilities from July; strengthening counter-cyclical adjustment to better support the real economy. Reminder Treasury yields edged higher ahead of the Treasury selling $183B in new 2-, 5-, and 7-year notes this week. A quiet day with lots of buying to start the week!

• In Auto Suppliers: JP Morgan lowered ests to below consensus for many suppliers (ADNT, AXL, APTV, BWA, DAN, GNTX, THRM, LEA, MGA, VC) by negatively revising its estimates in the case of every firm still to report, on account of lower than expected global light vehicle production in comparison to expectations at the start of the quarter when management teams were guiding and given negative customer and — especially — vehicle segment mix.
• EVGO was initiated at Neutral and $4 tgt at UBS saying EVGO is a top 3 U.S. DCFC (direct current fast charging) network provider set to benefit from the ongoing electrification of transportation trend by consumers and commercial fleets…but see these positive attributes balanced by several near/medium term risks.
• GT said it signed a definitive agreement to sell its off-the-road tire business to Yokohama Rubber Company for $905 million in cash; Goodyear will retain its business providing off-road tires for U.S. military and defense applications, it said; the transaction is expected to close by early 2025.
• ON announced it has signed a multi-year deal with Volkswagen Group (VWAGY) to be the primary supplier of a complete power box solution as part of its next-generation traction inverter for its Scalable Systems Platform.
• XPEV and VWAGY signed a master agreement for their previously announced technical collaboration on electrical/electronic architecture for locally produced vehicles based on Volkswagen’s China main platform and modular electric drive matrix platform.

• In Sports Retail: Stifel previews quarter saying BIRK, ONON, SKX, and LULU favored names in sports/lifestyle brand retail and see risk to the team sports category for DKS The firm notes analysis assesses the influence of U.S. population projections and population cohort spending behaviors on multi-year growth prospects for Sports & Lifestyle Brands.
• In Toy retailer: MAT shares spiked after Reuters reported late morning that L Catterton, the private equity firm backed by luxury goods giant LVMH, has approached U.S. toy maker Mattel with an acquisition offer. https://tinyurl.com/4nf4b4kk
• In Sporting Goods Retail: VSTO said Czechoslovak Group raised the base purchase price for a fourth time for the proposed acquisition of its ammunition business, Kinetic Group, by $50M to $2.15B; CSG also raises the cash consideration payable to Vista’s shareholders by $3 per share; Vista stockholders would receive $24 per share in cash and one common stock of Revelyst, the company’s performance gear business, upon deal closing.
• In Beauty and Consumer Products: EL was downgraded to Market Perform from Strong Buy at Raymond James as a slower recovery in China and travel retail and heavy competition in the U.S. dampen its prior expectations for a more significant rebound in FY25. In Q2 earnings preview, Stifel upgraded IFF to Buy, raised price tgt on CL to $105 from $95 in consumer products while saying they continues to be cautious on the group as volume growth is likely to remain muted reflecting the cumulative impact of price increases and heightened global macroeconomic uncertainty pressuring consumer spending.
• In Business Services: RTO was upgraded to market Perform from underperform at Bernstein as the analyst noted a front-page article in The Sunday Times business section, reporting that Rentokil could be subject to a takeover bid will likely put a floor under valuation in the near term.

• In Banks: TFC Q2 EPS $0.91 vs. est. $0.82; Q2 tangible book value per share $42.71; announced up to $5 billion multi-year share repurchase authorization with buybacks expected to commence in 3q24; said Q2 Net interest income fell 2% to $3.58 billion and average loans and leases decreased 6% from same quarter last year.
• In Digital banking: NU downgraded to Neutral from Overweight at JP Morgan after an impressive rally, noting shares are up 62% YTD rally (81% in BRL) vs EWW and EWZ down 14- 20%; cuts rating due to: limited upside; concerns on worsening asset quality in Brazil; potential growth deceleration; and weaker FX in the region.
• In Financial Services: TASK was upgraded from Underperform to Neutral at Bank America and raise tgt to $18 from saying there are now increasing signs of revenue stabilization which should provide comfort for near-term estimates, and demand pressure in TASK’S end-markets seem to be.
• In FinTech: FI upgraded to Overweight at Morgan Stanley and raise tgt to $175 from $154 saying they think Fiserv will continue to drive strong merchant growth, especially with share-gaining asset Clover, to drive consistent earnings outperformance in an easing competitive landscape. Meanwhile the firm downgraded FIS to equal weight to overweight with the current trading price of $77 near its PT of $79 saying the current valuation of ~14x adequately reflects FIS earnings potential going forward, with its expectation for improvement in both Banking segment revs and WorldPay.

• Cannabis stocks stronger all day (ACB, CGC, TLRY, GRWG); Cannabis investors have been focused on regulatory reform, specifically rescheduling; The U.S. Justice Department moved to make marijuana use a less serious federal crime in April; President Biden and Vice President Harris have publicly expressed support for this change.
• In Medical Research/CRO: IQV forecasts FY revs $15.43B-$15.53B, above prior forecast $15.33B-$15.58B, narrows FY adj. EBITDA to $3.71B-$3.77B from prior $3.70B-$3.80B and boosts FY adj EPS to $11.10-$11.30 from $10.95-$11.25.
• In Life Sciences: TXG was upgraded to Buy from Hold at Jefferies with an unchanged price target of $24 citing conviction in single cell recovery for the upgrade. Agilent (A) announced it has signed a definitive agreement to acquire BIOVECTRA, a leading specialized contract development and manufacturing organization, for $925M.

• In Industrials: TEX signed a definitive agreement to acquire Environmental Solutions Group from DOV in a $2.0B all-cash transaction. When adjusted for the present value of expected tax benefits of approximately $275M, the purchase price is $1.725B. In batteries, ENVX was initiated Buy and $25 tgt at Benchmark saying believes Enovix is positioned in the $12B smartphone lithium-ion battery market with superior battery technology providing increased energy density.
• In Paper Sector: CLW signed a deal to sell its tissue business to Italian multinational tissue-paper maker Sofidel for $1.06B. Clearwater said the planned sale concludes its review of strategic options for the business and supports its transformation to become an independent supplier of paperboard to North American converters.

• Japan Airlines has ordered 10 Boeing 787-9 aircraft and agreed options for 10 more, the companies said.
• Pratt & Whitney (RTX) is set to announce on Tuesday that aircraft leasing company Avolon will select its GTF engines to power 80 Airbus A320neo aircraft, an industry source familiar with the matter told Reuters.
• Turkish Airlines won’t announce a plane order at this week’s Farnborough Airshow, with a deal for narrowbody jets still held up by negotiations over engines, Chairman Ahmet Bolat told reporters at the show on Monday – Reuters.
• U.S. cargo carrier National Airlines said it had agreed to buy four Boeing 777 Freighters to expand its delivery operations.
• Airbus is nearing a deal to sell about 30 A330neo jets to Saudi budget carrier Flynas, industry sources said on Sunday.
• Virgin Atlantic is close to placing a top-up order for an unspecified number of Airbus A330neo jets, industry sources told Reuters on Sunday.

• In Advertising: IPG was downgraded to Underweight at Morgan Stanley saying without material adj. EBITA growth, the firm sees a negative risk/reward skew for shares with risk to ’25 estimates and limited potential for multiple expansion. The firm’s $23 bear case reflects flattish organic rev growth ’24 and ’25 from added account losses, softer macro. CRTO and TTD shares jumped after GOOGL’s Privacy Sandbox said in a blog post earlier that it is proposing an updated approach to privacy on the web "that elevates user choice."
• In Security Software: shares of CRWD downgraded by several Wall Street firms and price tgts lowered as analysts note concerns related to resistance to new deals with the cybersecurity company after last week’s global outage. SentinelOne (S) shares extended Friday 7.8% advance, seen as possible beneficiary, along with other cyber security companies, after CRWD software update on Friday impacted several companies with tech outages.
• In Semiconductors: The index (SOX) rebounds after tumbling last week on ASML guidance, profit taking, and geopolitical concerns about trade/tariffs; NVDA shares rebounded after earlier reports the company is preparing version of new flagship AI chip for Chinese market; SMCI entered a $500M term loan facility credit agreement. NXPI, TXN, SLAB will kick off 2Q semiconductor earnings season this week. KeyBanc said they expect broad-based end-demand trends to remain muted, except for AI, as the signs of green shoots they saw in 1Q have not yet blossomed in 2Q; more broadly, we expect analog companies to guide sub-seasonally into 3Q.