Closing Recap

Tuesday, July 27, 2021

Equity Market Recap

·     Stocks finish lower on the day (but well-off session lows) as the regulatory crackdown in China getting lots of attention and spilling into U.S. markets as tighter restrictions in Beijing broadens out from tech across various industries including education, healthcare, real estate, and foods (and hitting other sectors such as EV’s, casinos, semiconductors which have exposure overseas). Cash rotating to defensive and cyclical sectors and away from growth for now as China’s crackdown on its companies unsettles tech (shares of BABA, BIDU, JD, DIDI, NTES, PDD, TCEHY, EDU, TAL have been crushed). Major averages also not liking news CDC guidelines this afternoon, as the agency recommends full vaccinated individuals wear masks in public indoor settings to help prevent spread of delta as well as universal indoor masking for teachers, students at k-12 schools regardless of vaccination status. The recommendation is a sharp turnabout from the agency’s position since May that vaccinated people do not need to wear masks in most indoor spaces. The news sunk shares of reopen stock sectors such as restaurants, retailers, casinos, leisure, and travel. Growth areas such as cannabis, solar, biotech and electric vehicles continue to slide. Also of note, the FOMC two-day meeting kicks off today with commentary and Powell press conference tomorrow afternoon (no rate change of bond buying changes expected – but watchful eyes on inflation comments. With today’s declines, major averages snapped a 5-day win streak. Markets sliding ahead of AAPL, MSFT, AMD, GOOGL earnings tonight and the FOMC meeting tomorrow. Transportation sector among the biggest decliners, falling over 2%, dragged down by UPS quarterly results as EPS/revs beat but margin forecast disappoints and JBLU loss.

·     China’s equity markets suffered outflows of $600 million on Tuesday after bleeding $2 billion on Monday, the Institute of International Finance (IIF) said. Hong Kong’s benchmark index and Chinese A-shares extended sharp losses to end at multi-month closing lows on Tuesday, as investors worried over the impact of tighter government regulations following a crackdown by Beijing on the tech and education sectors.

Economic Data:

·     U.S. June Durable Goods Orders rose +0.8%, below est. +2.2% (May revised to 3.2% from 2.3%); June Durable Goods Orders, Ex-Transportation, +0.3% vs. May +0.5% (from 0.3%); June durables ex-defense orders +1.0% vs. May +2.8%; June durables shipments +1.0% vs. May +0.4%

·     U.S. S&P Case Shiller home price index rose 2.1% to 262.7 for the 20-City gauge in May after increasing 2.2% to 257.4 (was 257.1) in April. This is another all-time peak continuing a record run to highs since February 2019. The annual pace accelerated to 17.0% y/y from 15.0% y/y

·     May FHFA House Price Index rose +1.7% vs. +1.8% consensus and +1.8% prior; and on a year-over-year basis, up +18% vs. +15.7% prior

·     Richmond Fed manufacturing shipments index +21 in July vs +15 in June; Richmond fed composite manufacturing index +27 in July vs +26 in June

·     Consumer Confidence for July 129.1 reading, above consensus 123.9 and vs. June revised 128.9 (previous 127.3); the consumer present situation index 160.3 in July vs June revised 159.6 (previous 157.7) and the expectations index 108.4 in July vs June revised 108.4 (previous 107.0)

Commodities, Currencies & Treasuries

·     Oil prices finish lower as WTI crude dips -$0.26 or 0.36% to settle at $71.65 per barrel ahead of weekly API inventory data tonight and EIA tomorrow morning. Gold prices finish little changed, edging higher $0.60 to settle at $1,799.80 an ounce as investor await tomorrow FOMC meeting results (fails to rally on dollar slide).

·     Treasury yields tight range again as the 10-year stayed depressed under the 1.25% level ahead of tomorrow’s FOMC meeting. U.S. Treasury sold $61B in 5-year notes at a yield of 0.71% in line with the when-issued prior, with the bid-to-cover (demand) at 2.36 as indirect bidders awarded 58.07% and directs awarded 17.75%.

·     The U.S. dollar was generally weaker vs. rival currencies as Sterling hits highest in over a week against the dollar, now up 0.5% on day at $1.389 while the dollar/yen falls -0.5% to 109.83 as investors held off from making big bets ahead of the outcome of this week’s two-day Federal Reserve policy meeting. The dollar index (DYX) pulling back after recently hitting its 3-1/2-month highs of 93.19 hit on July 21. The Fed begins its two-day meeting on Tuesday, to be followed by a press conference by Chair Jerome Powell on Wednesday, where investors will be listening closely for any taper-related comments.

Sector News Breakdown

Consumer

·     Auto sector; TSLA Q2 earnings beat and increased delivery outlook was well received by investors as shares edged higher (Q2 non-GAAP EPS $1.45 vs. est. $0.96; Q2 revs $11.96B vs. est. $11.3B; said produced and delivered over 200,000 vehicles, achieved an operating margin of 11.0% and exceeded $1B of GAAP net income); ABG posted Q2 adj EPS $7.78 vs est. $5.09 on revs $2.58B vs est. $2.36B; Raymond James upgraded AAP to Strong Buy from Outperform as the stock is trading at slight historical discount despite their turnaround efforts gaining steam and are now at the cusp of the margin unlock, and downgraded AZO to OP from Strong Buy as current valuation does not offer sizable multiple re-rating potential and challenging comps due to their large DIY mix, and ORLY to MP from OP as significant improvements by their competitors (AAP, AZO) could limit upside; Evercore initiated EVGO at OP with an $18 price target; China’s crackdown on tech companies continues to pressures shares of DIDI, EV makers NIO, LI, XPEV; BTIG initiated ELMS at Buy with a $15 target as it looks to position itself as an early mover in the EV commercial delivery van market with production expected to ramp in Q4

·     Housing & Building Products; tool maker SWK said its Q2 profit rose as tools and storage, its largest business segment, posted higher sales and raised guidance for the year; PHM EPS inline, orders missed, but margins better (not as strong as DHI but qualitative commentary remains strong); PHM and INVH announced today the formation of an innovative strategic relationship

·     Consumer Staples; defensive food stocks seeing outperformance (CPB, K, MDLZ); TPB shares rise after big beat and raise quarter driven by accelerating growth at the core Zig-Zag business, which grew 72% following two quarters of 40%+ growth, as all three segments beat estimates; seeing general weakness in “reopen” sectors on talk of new mask mandates for vaccinated people indoors; LW reported Q4 adj EPS 44c vs est. 42c on sales $1.01B vs est. $923.8M and sees 2022 net sales above its long-term growth target; JJSF Q3 EPS $1.51 vs est. $0.78 on sales $324.3M vs est. $311M and says traffic and average tickets are improving

·     Retail; KeyBank believes they will see some of the strongest secular tailwinds in apparel over the next 12-18 months and raise estimates on RVLV due to a benign promotional environment and strong demand, JWN, TDUP, and SFIX as beneficiaries of returns to school and work, FTCH and REAL on supportive asset prices; AAN Q2 EPS $1.05 vs est. $0.66 on revs $467.5M vs est. $444.9M, same-store revs +11.2%, e-commerce revs +15.8%, and raised FY rev outlook to $1.78-1.8B from $1.73-1.78B and FY EBITDA to $215-225M from $190-205M; AAN Q2 EPS $1.05 vs est. $0.66 on revs $467.5M vs est. $444.9M, raised FY rev outlook to $1.78-1.8B from $1.73-1.78B and FY EBITDA to $215-225M from $190-205M

·     Casinos, Gaming, Lodging & Leisure sector; in gaming, MLCO posted a top and bottom line miss for Q2 though says its operating loss was $128.1M, compared with operating loss of $370.8M in last year’s quarter (casinos in general pressured on day – WYNN, LVS, MGM); in leisure products, PII reported Q2 adj EPS $2.70 that topped est. $2.23 on in-line sales $2.12B, and for the full-year sees sales $8.38-8.5B (est. $8.48B) and raised adj EPS view to $9.35-9.60 from $9-9.25; GCI said it struck an agreement with the U.S.-based subsidiary of Tipico Group of Cos., which will be the exclusive sports-betting provider for Gannett.

Energy

·     E&P and Majors; Raymond James upgraded RRC to MP from UP and AR to Strong Buy from OP due to a bullish view on gas, NGL prices, and double-upgraded SWN to OP from UP given a favorable commodity outlook; Wells initiated OVV at OW with a $38 PT as their diversified asset portfolio and peer-leading well costs and efficiencies should support sustained cash return to shareholders and shares are still trading a discount to peers on FCF/EV and EV/EBITDA metrics even after its YTD outperformance (+97% vs large-cap peers +66%, XOP +45%)

·     Pipelines: Credit Suisse upgraded HFC to OP (albeit with a lowered PT of $45 from $42) as they believe the company will grow earnings and restore their suspended dividend from added renewable diesel capacity with feedstock flexibility along with their acquisition of Puget Sound refinery and downgraded PBF to UP since they continue to operate a number of assets that are FCF-negative, which could threaten liquidity issues mid-late 2022; Wells lowered their price target on HFC to $28 from $30 due to a lower multiple from a narrower Brent/WTI differential and PBF by approximately $5 on estimated costs of compliance following the recent decision by the air quality board in northern California

·     Coal, Utilities & Solar; WEC agrees to acquire a 90% ownership interest in the Sapphire Sky Wind Energy Center in Illinois for $412M; ARCH reported Q2 EPS $1.66 vs est. $1.06 on revs $450.4M vs est. $370M, adj EBITDA $66.5M vs est. $57.6M, and raised full-year forecasts for sales volume to 62.4-67.2M tons from 57.4-62.2M tons and capex to $210-230M from $200-220M; DTE Q2 EPS $1.70 vs est. $1.32 and raised FY21 EPS guidance to $5.62-5.92 from $5.36-5.66

Financials

·     Bitcoin, FinTech & Payments; seeing names leveraged to Bitcoin (SI, RIOT, MARA, NCTY, MSTR, COIN) give back some of Monday gains after AMZN overnight denied a media report saying the e-commerce giant was looking to accept bitcoin payments by the end of the year. The report from London’s City A.M. newspaper sent Bitcoin prices surging above $40K before it trimmed gains to last trade around $37,500; MA launches new start path cryptocurrency and blockchain program for startups; FISV boosts its full-year guidance for adjusted EPS to $5.50-5.60, up from $5.35-$5.50 previously, representing growth of 24%-27%; and said it expects internal revenue growth of 10%-12% vs. 9%-12%

·     Asset managers & Fin Services; IVZ Q2 earnings per share grew on higher operating income, higher net market gains, and a lower effective tax rate, with adjusted EPS $0.78 exceeding the $0.70 consensus and up from $0.68 in Q1 and $0.35 in the year-ago quarter, and Q2 net long-term inflows of $31.1B vs. $24.5B in Q1; TRU Q2 adj EPS 96c vs est. 91c on revs $774.2M vs est. $749.6M, sees Q3 adj EPS 91-93c (est. 88c) on revs $766-777M (est. $750.5M) and raised FY guidance for adj EPS to $3.63-3.70 from $3.45-3.58 and revs to $3.03-3.06B from $2.95-2.99B; MSCI 2Q adj EPS $2.45 vs est. $2.30 on revs $498.2M vs est. $486Mm and guides FY FCF $840-890Mm vs prior $825-875Mm; AMP posted Q2 adj EPS $5.27 vs est. $5.23 on revs $3.42B (+26%) vs est. $3.39B and AUM $1.2T (+28%)

Healthcare

·     Biotech movers; INFI issued data updates from two mid-stage trials for eganelisib, the company’s oral immuno-oncology candidate; Truist said Robust tau reduction reported by BIIB and IONS today is positive for ARVN’s degrader because BII080/IONIS-MAPT Rx is an antisense oligo (ASO) that reduces intracellular source of Tau, much like a degrader would; RARE said the U.S. FDA and the European Commission (EC) have granted Orphan Drug Designation for UX053 for the treatment of Glycogen Storage Disease Type III (GSDIII); ABBV extends collaboration with Calico with focus on age-related diseases; ACIU gets backing in the form of a $25 million private placement led by the family office of Germany’s billionaire Struengmann brothers; RGEN massive beat and they increased guidance by 10% at the midpoint; MRNA says co’s ex-U.S. manufacturing partners are facing delays due to laboratory testing operations that occurred in the past days

·     MedTech Equipment; BSX raised guidance after beat as 2Q adj EPS $0.40 vs est. $0.37 on sales $3.077B vs est. $2.94B; guides 3Q net sales about +12-14% vs est. +11.9%; BDX acquired Tepha, Inc., a leading developer and manufacturer of a proprietary resorbable polymer technology; RMD downgraded to Neutral from Overweight at JPMorgan ahead of earnings as expect management to caution investors that manufacturing and supply-chain constraints will limit the group’s capacity to take immediate full advantage of the competitor’s inability to supply the market.

·     Healthcare Services; ATIP shares downgraded by several analysts (Citi, Jefferies, benchmark) saying its first earnings report as a public company, fell short of expectations and reduced its financial guidance significantly; in managed care, CNC slips on mixed results as Q2 EPS of $1.25 missed the $1.39 estimate but revs of $31B above views; managed care membership of 25.4 mln, up 0.8 mln members, or 3%, compared to June 30, 2020 and raises year PES and rev outlook; in hospitals, UHS Q2 results beat consensus as revenue increases 17% YoY to $3.2B and raises its year forecast and boosts buybacks

·     Pharma sector; in specialty pharma, Raymond James says the sector remains an ode to low expectations and despite years of equity underperformance and depressed valuations, the group simply cannot seem to reach the necessary escape velocity to extricate itself from a multi-year tailspin which has seen the average equity fall over 60% from respective 3-year highs. 2Q21 results which kick off with TEVA‘s numbers on Wednesday are likely to deliver few meaningful upward surprises nor any substantial alterations in the current 2021 narrative

Industrials & Materials

·     Aerospace & Defense; RTX raised its forecast for full-year adj profit to $3.85-$4.00 from $3.50-$3.70 (est. $3.85) and raises FY21 revenue view to $64.4B-$65.4B from $63.9B-$65.4B on the back of an increased demand for its products and services as commercial air travel recovers; Dow component Boeing (BA) with earnings tomorrow morning.

·     Industrial & Machinery; Dow component MMM posted a top and bottom line beat as operating cash flow was $1.9B and boosted FY21 EPS view to $9.70-$10.10 from $9.20-$9.70 (est. $9.81) and boosts FY21 revenue view to up 7%-10% from up 5%-8%; GE posts slight Q2 EPS and sales beat but rises early as now sees 2021 free cash flow of $3.5 bln-$5.0 bln, vs prior forecast of $2.5 bln-$4.5 bln (reiterate year EPS view); ROK forecast adjusted EPS for the year that fell short of analysts’ estimates; CARR agreed to sell its Chubb fire and security business to APG for an enterprise value of $3.1B.

·     Transports; UPS Q2 results topped estimates, but setting guidance slightly below expectations as forecasts consolidated operating margin of approximately 12.7% vs 14% in Q2 and return on invested capital of approximately 28% (revenue was up 10.2% in the U.S. domestic segment driven by a 13.4% increase in revenue per piece); TFII reported better than anticipated Q2/21 results and raised the low end of its EPS guidance 18% to $4.50 and the high end 15% to $4.60; in airlines, AAL upgraded at Susquehanna to Neutral from Negative; JBLU leading airlines lower after posting a quarterly loss and new mask mandate concerns

·     Chemicals; AXTA reported 2Q21 EBITDA of $230M, in line with consensus of $230M as beat expectations in Performance Coatings, but fell well short of expectations in Mobility Coatings as a result of chip shortages; SHW Q2 EPS of $2.65 missed estimates by 2c on in-line sales of $5.38B while guides year EPS $9.15-$9.45, below the $9.45 est.; ECL with mostly in-line Q2 results ($1.22/$3.16B vs. est. $1.31/$3.12b) as sees strong YoY performance in 2H; RPM downgraded to Equal Weight at Wells as expect the ongoing margin pressure from raw materials and input shortages to weigh on near-term results, capping upside potential in the shares

·     Metals & Materials; Bloomberg reported that China is considering imposing more tariffs on steel exports as it seeks to cap domestic production and tame surging prices. Potential rates being discussed range from 10% to 25% and products include hot-rolled coil, according to two people familiar with the matter – Bloomberg (watch shares of X, STLD, RS, NUE); in paper products, WY upgraded to Buy at Bank America as believe valuations on normalized lumber pricing are attractive given the shares’ relative 14% underperformance YTD; ADM reported an almost 52% rise in Q2 profit, as strong crop export demand and oilseed crushing margins boosted the U.S. grains merchant’s core agricultural services business; PKG big 2q beat on ~10% box demand growth and ~24% packaging ebitda margins, and (resumed) 3q guidance well above consensus; The U.K’s Financial Conduct Authority is investigating Rio Tinto and its $6.65B Oyu Tolgoi mine in Mongolia’s Gobi Desert, the Financial Times reported.

Technology, Media & Telecom

·     Internet; GOOGL earnings tonight after the close; Chinese internet companies extend losses premarket as Beijing steps up its tech crackdown with shares of Alibaba (BABA), Baidu (BIDU), JD.com (JD), Pinduoduo (PDD) NetEase (NTES) plunging again along with ride-hailing firm Didi (DIDI) and EV makers Li Auto Inc (LI) and Nio Inc (NIO) as Chinese regulators have vowed to strengthen the oversight of its big tech firms

·     Semiconductors; AMD earnings tonight to start a busy week of semi earnings; AMKR Q2 sales rise 20% YoY, while gross margin improved from 16.4% last year to 19.4% and operating income margin increased from 7.4% to 11% and ups capex to $775M from $700M prior; INTC at the "Intel Accelerated" presentation, mgmt announced the company’s product and packaging roadmap through 2025. The street is mixed on the news as the plans while bold are aggressive and will require a lot of capital; MU shares active after SK Hynix reported a solid 2Q and gave a bullish outlook for the rest of the year, with strong demand expected to continue through the rest of the year and into 2022; ENTG reported better than expected results ($571M and $0.85 vs. Street at $538M and $0.79) and better than expected Q2 guidance ($575M-$590M and $0.84-$0.89 vs. Street at $561M and $0.83).

·     Software movers; Dow component and giant MSFT out with earnings after the close tonight; WDAY slides as AMZN reportedly halted a planned company-wide adoption of Workday’s human-resources software three years after the deal was announced https://bit.ly/3y3kqgp (WDAY later confirmed the report saying it was mutual decision to discontinue); ATVI shares fell following reports that many employees disagree to the company response to a California lawsuit alleging sexual discrimination and harassment at the videogame publisher.

·     Hardware, Components & Services; AAPL earnings tonight; CALX reported June Q2 upside plus guided Sept Q3 to 15c over (+25% EPS upside) and $20M over on revs (5% upside) with conservative guidance; INOV rises on Bloomberg report that Nordic Capital in talks to buy the health tech firm; CDNS reported strong 2Q results that exceeded management expectations across all key financial metrics, noting that the Company is continuing to see strong design activity with deepened relationships with a global customer base; FFIV posts fiscal Q3 sales and profit above consensus, saying customers traditional applications are generating more revenue and more engagement than ever before and offers midpoints of co’s Q4 rev and profit forecast both above Street estimates; GLW Q2 results topped analyst estimates driven by strength in display technologies and optical communications as revs rise 35% topping ests

·     Media & Telecom movers; AT downgraded to Hold at Argus in anticipation of a dividend cut as the company sheds assets acquired over the last few years; SIRI reports Q2 earnings of $0.10, beating estimates by 3c and increases its full-year 2021 outlook for self-pay net subscriber additions, revenue, adjusted EBITDA and cash flows (revs $8.55B vs. est. $8.42B)