Closing Recap

Tuesday, June 07, 2022

Equity Market Recap

·     Turnaround Tuesday saw U.S. stocks rally from overnight declines, settling at their highs in another “choppy” session. Stocks were pressured early on following lower margin guidance from retailing giant Target (TGT) as well as a larger-than-expected Reserve Bank of Australia rate hike of 50 bps vs. 25bps expected (raising anxiety ahead of the ECB policy meeting Thursday and the CPI inflation report in the U.S. Friday), but prices rebounded sharply after holding the recent trading range on the S&P 500 (roughly 4,080 lows to 4,180 highs). Treasury yields backed down slightly with the 10-year slipping below 3% while the dollar eased, boosting gold. Meanwhile inflation concerns and rising interest rates from The Fed to contain it remain an obstacle for investors to hurdle, as well as the impact on supply chains, rising costs to corporations. The World Bank on Tuesday slashed its global growth forecast by 1.2% to 2.9% for 2022 from 4.1% in January forecast, warning that Russia’s invasion of Ukraine has compounded the damage from the COVID-19 pandemic. The CBOE Volatility index (VIX) traded to 6-week lows.

Economic Data:

·     International Trade in Goods and Services for April narrowed to deficit of (-$87.1B) vs. -$90.2B consensus and -$107.7B in March (revised from -$109.8B) as exports were $252.6B, up 3.5% or $8.5B from March, while imports declined -3.4% or $12.1B to $339.7B. The April decrease in the goods and services deficit reflected a decrease in the goods deficit by $19.1B to $107.7B and an increase in the services surplus of $1.5B to $20.7B.

Commodities

·     Oil prices rise as WTI crude settles at $119.41 per barrel, up $0.91 or 0.77% in seesaw trading but crude finishes near 13-week highs on supply concerns and the prospect of higher demand after China relaxes lockdowns to control the pandemic. Investors also unconcerned about rising global oil supplies despite last week’s OPEC+ decision to bring forward production increases. Refining margins globally suggest that petrol and diesel remain in heavy demand, as logjam in refined products has been backstopping crude prices, according to one report. Gold prices rise $8.70 or 0.5% to settle at $1,852.10 an ounce (highs $1,856.20 and lows $1,838.50 an ounce) as investors position themselves ahead of Friday’s CPI report.

Currencies & Treasuries

·     Treasury yields declined (10-year moved back below 3% after settling above Monday for just the 4^th time in last 3 ½ years), as investors rotated back into bonds and stocks, while the dollar was mixed. The Japanese Yen extends slump to a fresh 20-year low as BOJ’s Kuroda continues to emphasize persistent easing commitment. The U.S. Treasury sold $44B in 5-year notes at a yield of 2.927% vs. 2.917% when issued prior as the bid to cover was 2.45 vs. 2.59 prior and indirect bidders awarded 51.51%, directs 23.57%. The lone piece of U.S. economic data showed international trade deficit narrow from record highs. All eyes on inflation data Friday with May consumer prices (CPI) and ECB meeting results Thursday. Bitcoin prices rebounded off lows around the $29,100 to trade back near the $30,000 level, but down on day.

Sector News Breakdown

Consumer

·     Retailers; TGT tumbled as much as 9% initially after slashing its quarterly margin forecast to about 2% from prior view 5.3% issued just weeks earlier, and said it would have to offer deeper discounts and cut back on stocking discretionary items…but rebounded sharply with broader markets – shares of big box retail WMT, COST, BJ pressured as well early as BBBY, WSM, W, TJX following cautious home category comments and electronics retailers BBY, GME, WHR also active on the guidance – but all showed resilience early morning

·     Other retail news: KSS confirms entry into three-week exclusive negotiation with FRG over $60.00/share acquisition proposal. Confirm comes after the WSJ reported last night KSS is in exclusive advanced talks with Franchise Group (FRG) to be sold to the retail holding company in a deal that could value the department store chain at about $8B https://on.wsj.com/3GTnmS4 ; CHS raises its 2022 EPS forecast to 64-74 cents from 40-50 cents, now expects revenue of $2.130 bln-$2.160 bln from earlier estimates of $2.085 bln-$2.115 bln after better Q1 results; GIII boosted its Q2 and 202 sales and profit forecasts after posting better Q1; REAL founder Julie Wainwright to step down as CEO, chairperson of RealReal

·     Auto sector; LEA upgraded to overweight at Wells Fargo and raise tgt to $180 on compelling valuation, strong EPS growth and EV tailwinds & optionality and believe BWA remains the best positioned in e-powertrain, though MGA and LEA also benefit (auto suppliers); in rental cars, Morgan Stanley lowers price targets of HTZ (to $23 from $25, maintains Equal-Weight) and CAR (to $156 from $168, maintains Underweight) – says the rental car market is in the latter stages of a post-COVID economic boom as both HTZ and CAR through-cycle margins are double historic averages but wait for negative revisions before wading in; CZOO said it plans to reduce its employee headcount by roughly 15% and take other actions to slow expansion and focus on profitability, citing tougher macroeconomic conditions

·     Housing & Building Products; TSCO pre-announced above-Street Q2 results, including +8% total sales growth (vs. est. +7.4%), +5% comps (vs. est. +4.5%) and EPS of at least $3.48 (vs. Street $3.46) saying as moved through April and the weather has normalized, experienced strong sales of our seasonal products" and that "we believe we are well positioned to have a strong Q2"; for building products, Jefferies said post checks with the largest wallboard & ceiling manufacturers & distributors, they now have more conviction EXP’s results are biased to the upside this year, and the stock screens cheap w/ our downside scenario for 2023 looking conservative. As for AWI demand has remained choppy, but pricing & shipments should continue to build.

·     Consumer Staples; UNFI Q3 adj EPS $1.10 vs. est. $0.97; Q3 sales rise 9.4% y/y to $7.24B vs. est. $7.08B; raises adjusted FY EPS to $4.65-$4.90, from $3.90-$4.20 (estimate $4.17); SJM Q4 adj EPS $2.23 vs. est. $1.85 on better sales of $2.03B vs. est. $1.98B but guides year EPS $7.85-$8.25 well below the $8.82 estimate on weaker margins; BYND reiterate Underweight with $12 tgt at Piper citing weak core growth saying early success at retail for its jerky is masking greater sales declines for the rest of its portfolio

·     Restaurants: CBRL posted Q3 adj EPS $1.29, missing the $1.33 estimate as revs rose 11& y/y to $790.2M, also just below consensus of $793M as adj op income of $33.6M misses the $38.7M est. and guides Q4 revenue up 8% y/y, consensus $854.84M as sees 4q operating margins adversely impacted; PLAY Q1 revs rose 24% y/y to $451.1M above est. $440.6M and comp store sales rose 10.9% from Q1 2019 while EBITDA up ~45% vs. same period in 2019; UBS said it views MCD as well positioned vs. peers if spending is pressured

Energy

·     E&P and Majors; CPE updated its capital spending guidance for FY22 with inflation now suggested at ~20% y/y versus the company’s prior, early in the year assumption of ~10%. 2Q production & capex expectations were unchanged; REPYY is in early talks with U.S. fund EIG Global Energy Partners to sell up to 25% of its upstream business, Reuters reports

·     Energy research calls: XOM upgraded from In Line to Outperform and raise tgt to $120 from $88 at Evercore/ISI noting it trades at a 7.2% total shareholder yield and current valuation is at a >20% discount to historical levels (2011-14 average) – notes earnings driven by rising oil and gas prices in addition to record refining margins as has most exposure to downstream amongst the Big Oils; Evercore/ISI downgraded both OXY and DVN from Outperform to In Line

·     Refiners: group has been surging over the last few months (DK ); Reuters reported today LYB is planning to shut its Houston oil refinery by the end of next year, but that closure could come more quickly if an equipment failure hits major units; Credit Suisse adjusted ests (2022 earnings estimates by an average +71% and 2023 estimates by an average +43%) and price targets (increasing our price targets by an average +20%) saying we are in a unique situation as the world is simultaneously short crude, refined products and natural gas. The setup is bullish for Energy and refiners are generally considered higher beta within the Energy universe

·     Utilities & Solar; NRG was downgraded to Underperform from Neutral (on valuation) at Bank America after the latest rally in shares from a recent low of $36 up to ~$46 today, and relatively in line with peers VST despite few changes to the long-term story and minimal upside exposure to power rally; Mizuho lowered ests for FE to reflect FirstEnergy’s exposure to rising costs including operating and maintenance costs, pension expenses and interest expenses; PPL remains one of the top names at Guggenheim to own heading into an unusually busy analyst day season (i.e., of the four events over the next two weeks including ETR, NEE, PCG) – Wells Fargo said PPL has the most at stake given the event will serve as the long-awaited intro of the "new PPL" following the ’21 exit from the U.K. utility operations.

Financials

·     Bank movers; HOOD and VIRT shares dropped late yesterday into today after the WSJ reported late Monday that the SEC is preparing to propose major changes to the stock market’s plumbing as soon as this fall, and one idea that has gained traction is to require brokerages to send most individual investors’ orders to be routed into auctions where trading firms compete to execute them; for ICE Bloomberg reported the SEC considers directing retail stock orders to auctions; XP upgraded to Buy at UBS (lower tgt to $31 from $37) noting shares have fallen ~20% YTD, clearly underperforming the Brazilian index and BTG Pactual

·     Bitcoin, FinTech, & Payments; crypto assets under pressure, giving back much of yesterday gains as Bitcoin moved back below $30K; PYPL positive mention by Mizuho saying their proprietary survey of Venmo & Apple Pay users shows strong appetite to tap-to-pay with Venmo if Apple opened its NFC to Venmo. They estimate that tap-to-pay with Venmo could present ~10% TPV and 15-20% top line upside; MQ initiated Buy and $14 tgt at UBS saying shares are not fully pricing in Marqeta’s ability to generate a 3-year 30%+ gross profit CAGR, in their view

·     Commercial real estate is showing the first signs of cooling in more than a year, disrupted by rising interest rates. Property sales were $39.4 billion in April, which was down 16% compared with the same month a year ago, according to MSCI Real Assets. The decline followed 13 consecutive months of increases. https://on.wsj.com/3NXEFUl

Healthcare

·     Pharma movers; BLUE said its blood disorder therapy seen effective according to FDA staff reviewers; VERU submitted application with U.S. FDA for the emergency use authorization of its experimental COVID-19 drug for treating moderate-to-severe hospitalized patients at high risk for developing acute respiratory distress syndrome; ALVR phase II posoleucel study shows BK viral load decline in kidney transplant patients; NVAX COVID vaccine headed to U.S. FDA advisory committee as the advisors will consider whether to recommend its COVID-19 vaccine for adults; MRTX jumps after analysts were upbeat about data on its experimental drug adagrasib in combination with MRK’s Keytruda, when compared to AMGN’s rival drug Lumakras

·     Healthcare Services: ABC and MCK were both upgraded to Buy from Hold at Deutsche Bank with $178 tgt and $378 tgt respectively saying they are increasingly concerned about recessionary risks in the US and look for defensive equity positioning; HQY quarterly revenue and EBITDA came in above estimates and management raised their full-year guidance; EHC lowers FY operating revs to $5.33B-$5.42B from $5.38B-$5.50B and lowers FY adj Ebitda view as well

Industrials & Materials

·     Industrial, Aerospace, & Defense; BAH ($95 tgt) and LDOS ($105 tgt) both downgraded to Equal Weight from Overweight at Barclays as sees limited upside to Street estimates and downgraded the shares as a part of a government services sector update post the Q1 reports; REVG tumbles after posting a top and bottom line miss for Q2 and lowers FY22 revenue view $2.25B-$2.4B from $2.3B-$2.55B and FY22 adjusted EBITDA $100M-$120M from $125M-$155M while cuts FY22 adjusted net income to $43M-$62M from $64M-$89M

·     Transports: railroad UNP reaffirmed that co expects to achieve full year FY22 operating ratio improvement y/y but warns increased pressure from fuel prices, inflation, higher network costs will pressure incremental margins below original FY forecast; trucker shares fell initially (ARCB ) as a profit warning from retailer Target fueled renewed concerns about the health of the American consumer.

·     Metals & Materials; Jefferies upgraded several metals and coal names, raising Anglo, RIO, BHP, VALE, ARCH, BTU, HCC and METC from Hold to Buy saying they had expected a demand soft patch to lead to a period of lower commodity prices, with a shift in policy needed to spark a gradual recovery in Chinese demand. Says while macro risks are clearly elevated and mining shares should be volatile, the sector is undervalued and poised to outperform as China recovers; fertilizer stocks weak (NTR ) amid Bloomberg reports fertilizers piling up at Brazil ports signal further price drop – stocks at Paranagua and Santos are full after record imports; uranium stocks bounced (UUUU, EUC, CCJ) after reports the Biden administration seeks $4.3B for domestic enriched uranium.

Technology, Media & Telecom

·     Internet, Media, & Telecom: SHOP holders approve 10-1 stock split; BTIG said despite easier comps, their tracking shows ANGI Service Request (SR) volume down in May vs. expectations for a return-to-growth; DIS attendance trends have been stronger over the last month, following a seasonally weak part of the quarter according to Deutsch Bank saying attendance was up 13% and 16% week/week at Disney World and Universal Orlando, respectively; LBTYA upgraded from Hold to Buy with $30 tgt at Berenberg; AT has dropped HBO Max from the list of enticements that come with the AT&T Unlimited Premium plan. That plan now offers 5G access, “unlimited talk, text and high-speed data,” 50GB of Hotspot data per line per month

·     Hardware & Software movers; COUP reported better-than-expected F1Q23 results, with non-GAAP EPS of $0.08 (consensus ($0.05)) on revenue of $196M, growth of 18% (consensus 14%) flat with last quarter and calculated billings growth of 26%, better than the consensus of 18%; TYL upgraded to Overweight at Wells Fargo given ~5% of a $30b public sector market that is shifting towards cloud, balance profile of profitable growth and consistent EPS/FCF expansion; NEWR rises after announces new board members late last night