Closing Recap

Wednesday, September 06, 2023

Index	Up/Down	%	Last
DJ Industrials	-197.59	0.57%	34,444
S&P 500	-31.22	0.69%	4,465
Nasdaq	-148.48	1.06%	13,872
Russell 2000	-6.17	0.33%	1,874

 

 

 

 

 

 

 

 

 

U.S. stocks finished broadly lower as Treasury yields extended gains along with the US dollar while oil prices climbed again renewing inflation/higher rate concerns. The U.S. dollar hit its highest in six months after stronger-than-expected U.S. ISM services sector data suggested inflation pressures remain as new orders firmed, and businesses paid higher prices for inputs. Weakness was broad based with NYSE market breadth giving the edge to decliners over advancers as eight of the eleven S&P sectors closed in the “red” (utilities, energy rose) with more than 1% declines for Technology (XLK) and Consumer Discretionary (XLY) as growth sectors fell on higher rate fears. Mohamed A. El-Erian tweeted that today marked a “third straight market day of higher yields on US government bonds. This wasn’t supposed to happen after Friday’s Goldilocks jobs report. It has occurred due to a heavy supply of bonds, particularly investment grade corporates: Strong economic data; and, of course, higher oil prices”. Shares of Apple (AAPL) weighed on the Nasdaq after the WSJ reported overnight that China had banned officials at central government agencies from using iPhones and other foreign-branded devices for work. The Fed Beige Book report showed contacts from most districts indicated economic growth was modest during July and August. The release said most districts reported price growth slowed overall, decelerating faster in manufacturing and consumer-goods sectors. Report job growth was subdued across the nation and some Fed districts saw consumers exhausting savings and turning to debt. Another potential storm to keep an eye on along the East Coast as Tropical Storm Lee is expected to become a major hurricane in the coming days, which would make it the fourth hurricane in the Atlantic Ocean this year. Forecasters are urging people on the U.S. East Coast to keep an eye on its movement. Lee could be the most intense hurricane so far this year as it travels from the northern Caribbean to a spot next week several hundred miles off the Carolinas, then up the East Coast.

 

Economic Data

·     ISM U.S. non-manufacturing sector shows PMI 54.5 in August above consensus 52.5 and vs 52.7 in July as non-manufacturing business activity index 57.3 in August vs 57.1 in July, prices paid index 58.9 in August vs 56.8 in July, new orders index 57.5 in August vs 55.0 in July and the employment index 54.7 in August vs 50.7 in July,

·     The U.S. international trade deficit widened -2% in July to $65B, the Commerce Department said vs. expected deficit would widen to a seasonally adjusted $68 billion from the initial estimate of a deficit of $65.5 billion in June. The trade gap in June was revised down to $63.7 billion.

·     U.S. July exports +1.6% vs June 0.0%, imports +1.7% vs June -1.0%; U.S. July exports $251.66 bln vs June $247.74 bln, imports $316.68 bln vs June $311.46 bln; U.S. July capital goods imports $71.68 bln vs June imports $69.45 bln.

·     U.S. S&P Global August final services PMI at 50.5 (vs flash 51.0) and U.S. S&P Global August final composite PMI at 50.2 (vs flash 50.4).

 

Commodities, Currencies & Treasuries

·     Oil prices extend gains as WTI crude prices rise $0.85 or 0.98% to settle at $87.54 per barrel while Brent settles at $90.60/bbl, up 56 cents, 0.62%. Oil prices were given another boost yesterday with Saudi Arabia extending its 1Mm barrels per day production cut until December. Riyadh first applied the 1Mm barrel per day reduction in July and has since extended it monthly. The cut adds to 1.66Mm barrels per day of other voluntary crude output declines that some members of OPEC have put in place until the end of 2024. Russia also pledged to voluntarily reduce exports by 500K barrels per day in August and by 300K barrels per day in September.

·     December gold falls -$8.40 or 0.4% to settle at $1,944.20 an ounce, falling a fifth day as yields climbed and bets for higher-for-longer U.S. interest rates and global growth concerns continued to drive safe-haven flows into the dollar. The US dollar held near a six-month peak (on track for 8^th straight weekly advance), while benchmark 10-year Treasury yields were near Aug. 23 highs above 4.3% for the 10-year. The Canadian dollar extends decline, touches its weakest since late March 28, Sterling falls to lowest since early June and the Euro hits three-month low.

 

 

Macro	Up/Down	Last
WTI Crude	0.85	87.54
Brent	0.56	90.60
Gold	-8.40	1,944.20
EUR/USD	0.0005	1.0725
JPY/USD	-0.04	147.68
10-Year Note	0.022	4.29%

 

 

Sector News Breakdown

Consumer

Retailers, Consumer Staples & Restaurants:

·     In Grocers: C&S Wholesale Grocers, with the backing of Softbank Group, nears deal to acquire stores that KR and ACI are looking to sell. Note both grocers are looking to sell stores to obtain regulatory approvals for their $25 billion merger https://tinyurl.com/28z75x56

·     In beverages: STZ was upgraded from Market Perform to Outperform at TD Cowen and raise tgt to $300 from $240 citing 1) accelerating beer growth in Nielsen-tracked channels which de-risks margins 2) the success of Modelo Oro in particular, 3) re-accelerating earnings growth on better beer growth and deleverage and 4) the potential for larger shareholder returns.

·     In Food: GIS said at Barclays conference that it continues to expect FY24 organic net sales to grow by 3% to 4% as it navigates a “resilient but increasingly cautious consumer” in the marketplace. Retail sales in Q1 for at-home food categories in the U.S. continue to grow above pre-pandemic rates in but have slowed down from double-digit growth rates in fiscal 2023.

·     In Staples: CL reaffirming guidance as they still expect organic sales to grow +5-7% and gross margins ‘up’ for the year and EPS growth at the high-end of the +MSD% range.

Leisure, Gaming & Lodging:

·     In cruise lines: shares of CCL, NCLH, RCL were weaker, dragged down by the fuel costs commentary in airlines guidance today as well as reports that a large hurricane forming in Caribbean maybe disruptive for cruise lines.

·     In Leisure: AMC shares tumbled after saying it may, through sales agents, offer and sell from time to time up to 40 mln shares of Class A common stock. HOG said to buy back up to an additional 10 million shares.

·     In Autos: @charliebilello tweeted: the average price of a used Tesla (TSLA) has declined 13 months in a row, moving from a record high of $67,900 in July 2022 to a record low of $41,574 in August 2023 (-39%).

 

Homebuilders, Building Products, Home Furnishing:

·     Homebuilders are off to a rough start on the week (BZH, DHI, LEN, KBH) as surging mortgage rates (highest since 2001) are crushing affordability, and in turn crushing demand. Mortgage purchase applications in the US fell to their lowest level since 1995 in August. The US MBA association reported weekly applications fell (-2.9%) to 183.6 in latest week, purchasing index fell (-2.1%) and the mortgage refinance index fell (-4.7%) with 30-year fixed at 7.21%.

·     In Furnishings: OSTK shares fall after saying that Bed Bath & Beyond sales have seen a mid-teen% drop so far in the third quarter, including a low double-digit percentage decline since the business’ new website was launched on Aug. 1. BSET said Q3 sales were approximately $87 million or 26% lower than the corresponding period in 2022, and that as a result, it expects to report an operating and net loss for the quarter.

 

Energy, Industrials and Materials

·     In Aerospace & Defense: AVAV shares jump after reporting a strong beat-and-raise with a large increase in backlog as Q1 adj EPS $1.00 vs est. $0.26, gross margin 43%, on revs $152.3Mm vs est. $128.5Mm, guides FY revs $645-675Mm vs est. $655.88Mm. AER agreed to settle an insurance claim over Russia’s refusal to return 17 jets aircraft and five spare engines leased to state-controlled airline Aeroflot and its subsidiary Rossiya (AER receives "cash insurance settlement proceeds" of $645M from insurance co). Airbus SE (EADSY) said August deliveries: 52 to 34 customers; Aug 2023 gross orders: 117 and 2023 deliveries to date: 433 to 77 customers. LMT shares weak after saying it expects to deliver only 97 F-35s this year, with the first of the refreshed TR-3 model not arriving until 2Q of 2024.

·     In Heavy Duty trucking (CMI, PCAR): Stephens noted ACT Research released preliminary August Class 8 net order figures of 19,000 units, decreasing -9% y/y, but increased 5% seq, and when adjusting for seasonality, August orders increased 7.1% seq. Separately, Daimler Truck Holding, Cummins (CMI) and Paccar (PCAR) are forming a joint venture to build a battery plant in the US to help accelerate production of electric trucks. The factory is expected to cost between $2 billion to $3 billion to supply 21 gigawatt hours of power.

·     In Solar and Alternative Power: FSLR was upgraded to equal weight from underweight at Morgan Stanley saying the current valuation premium appears somewhat overdone, without a clear and high-conviction catalyst to the downside. STEM was downgraded to equal weight from overweight at Morgan Stanley as sees an elevated likelihood of risk to the downside in a stock where there is uncertainty around the company’s path to profitability. Morgan said its top pick in group was BE; raised tgts for AMPS, ARRY and cut for ENPH, MAXN, SHLS, SEDG, SPWR, NOVA.

·     Oil E&P and Equipment: TELL and BKR announced an agreement to supply eight main refrigerant compression packages for Phase 1 of the Driftwood LNG project. The agreement secures a delivery schedule for the eight LM6000PF+ gas turbines, main refrigerant compressors, and control units required for Phase 1.

·     In Pipelines/MPLS: ENB shares fell after buying three separate natural gas distribution companies from Dominion (D) in deal comprised of $9.4B of cash consideration and $4.6B of assumed debt; Citigroup downgraded PAA and PAGP to Neutral from Buy following the stock’s YTD outperformance (>20% vs its Midstream coverage) saying the stock still offers a compelling FCF yield; however, a lack of obvious catalysts could limit further upside from here. CQP was downgraded to Neutral from Buy at UBS after the ~18% rally since mid-June bottom.

 

Financials

·     In FinTech: SQ downgraded to Neutral from Buy at UBS and cut its PT to $65 from $102 on expectations that Square GPV growth and Cash App gross profit growth will continue to slow.

·     In Exchanges: CME upgraded to Neutral from Underperform at Bank America.

·     In Lending: RDFN reported roughly one of every eight, or 12.3%, of homes that sold in San Francisco during the three months ending July 31 was purchased for less than the seller bought it for, up from 5% a year earlier, according to Redfin. That’s a higher share than any other major US metro and is quadruple the national rate of 3%. Next came Detroit at 6.9%, Chicago at 6.5%, New York at 5.9% and Cleveland at 5.8%.

 

Healthcare

Biotech & Pharma:

·     ASND and RPRX announced that Royalty Pharma has entered into a $150 million capped synthetic royalty funding agreement with Ascendis based on U.S. net Skytrofa revenue.

·     AZN said the U.S. FDA has requested modifications to improve its Ultomiris treatment’s risk evaluation and mitigation strategy.

·     BBIO announces positive feedback from the FDA and EMA on the regulatory path for a pivotal phase 3 trial of Infigratinib in children with achondroplasia.

·     DCGO shares fell after the New York City comptroller declined to approve a $432 million contract for migrant services due to “outstanding concerns” about the medical services company.

·     VKTX announces initiation of phase 2 VENTURE trial of dual GLP-1/GIP receptor agonist VK2735 in patients with obesity.

 

Healthcare Services & MedTech movers:

·     Healthcare Technology: HQY 2Q revenue and EBITDA came in 1.5% and 4.4% ahead of consensus, respectively, driven primarily by higher custodial revenue and mgmt raised the MPs of both its FY24 revenue and EBITDA guidance by $5M (or 0.5% and 1.4%). NXGN agreed to be acquired by private-equity firm Thoma Bravo in a deal that values the company at about $1.61B, with shareholders to receive $23.95 a share in cash https://tinyurl.com/5n6mefur

·     In Medical Devices/Supplies Sector: UBS lowered price tgts on PODD to $215 from $270, DXCM to $138 from $175, INSP to $322 from $405 as update view on higher-valuation SMID-Cap coverage universe given what it believes is likely to be a more persistent de-rating since multiples first came under pressure following the first of what will be several data readouts for the new class of obesity drugs/GLP-1s with Novo’s SELECT in early August.

·     In Diabetes Sector: DXCM shares rallied after Jefferies noted the company updated its investor deck showing CGM use increases in T2 diabetics with GLP-1 therapy initiation. Firm noted DXCM shares have sold off ~28% from highs in mid-July, largely due to worries that GLP-1 drugs could impact the obesity/diabetic growth curves. In general, Jeff disagrees with this and see little impact on the CGM oppty.

 

Transports

·     In Airlines sector: several major U.S. airlines warned of higher fuel costs in Q3 due to a jump in crude prices in monthly updates: 1) ALK tightens revenue growth guidance to 1% to 2%, from flat to 3% and cuts adjusted pre-tax margin forecast for the quarter to 10% to 12%, down from prior outlook of 14% to 16% on rising fuel cost per gallon; 2) UAL said it now expects fuel cost to be between $2.95 to $3.05 per gallon and expects capacity, operating revenue and cost per available seat mile, excluding fuel, in Q3 to be consistent with the earlier guidance; 3) LUV narrowed its Q3 outlook for revenue per available seat mile (RASM) downward, to fall by 5% to 7%, compared with previous guidance for a drop of 3% to 7% and raised fuel cost outlook.

·     In Trucking and Freight: SAIA provided LTL shipment and tonnage data for July and August 2023. In July 2023, compared to July 2022, LTL shipments per workday increased 6.0%, LTL tonnage per workday increased 3.4% and LTL weight per shipment declined 2.4% to 1,401 pounds. In August 2023, compared to August 2022, LTL shipments per workday increased 14.2%, LTL tonnage per workday increased 6.8% and LTL weight per shipment declined 6.4% to 1,339 pounds. XPO provided its mid-quarter update which included shipment and tonnage trends for August. In August, tonnage/day increased 3.1% y/y (vs. +4.2% y/y in July) driven by shipments/day increasing 8.1% and weight/shipment declining 4.6%.

 

Technology

Internet, Media & Telecom

·     In media: ROKU shares rise after announced a workforce reduction that is expected to impact approximately 10% of employees; said ex: restructuring and impairment charges which will impact total gross profit and net income, now expects total net revenue in the range of $835M-$875M vs. est. $829.2M, and adjusted EBITDA in the range of ($40M)-($20M).

 

Hardware & Software movers:

·     AAPL shares weaker early after the WSJ reported China ordered officials at central government agencies not to use Apple’s iPhones and other foreign-branded devices for work or bring them into the office, people familiar with the matter said – WSJ https://tinyurl.com/mt4jnbcc 

·     In Software: ASAN reported mixed quarter as revenue growth decelerated another ~600 bps and FY24 guidance was raised by less than Q2’s beat but made progress towards sustainable positive FCF generation by 2024 (raised year EPS, narrowed revs). GTLB reported a strong 2Q w/ rev growth of 38% above Street at 29%, and FY24 growth guide was raised from 28% to 31% as mgmt noted that customer spending activity appears to be stabilizing. TOST was upgraded to Buy from Neutral at UBS and raising its price target to $30 from $25 on improved potential for quarterly net new location adds and margin expansion. AYX shares spiked midday after Reuters reported the data analytics software company has been working with an investment bank to explore a potential sale after attracting takeover interest.

·     In Electronic Components/Hardware: DAKT shares jump after posting a big sales jump in the recently ended quarter ($235M vs. $171.9M y/y), citing rebounding demand from high schools ahead of football season as well as from the live-events industry.

·     In Internet Security: ZS reported strong 4Q23 results, with Billings growth of 38% y/y, exceeding guidance by 9% and FY24 Billings guidance was also strong at 25% Y/Y growth, while revs and operating margins also showed meaningful upside.

 

Semiconductors:

·     MTSI upgraded from Hold to Buy w/ $110 PT at Craig Hallum.

·     PLAB shares slid after Q3 results missed consensus; reported Q3 EPS $0.51/$224.2M below the consensus $0.52/$230M saying they experienced temporary demand slowdown in some end markets and guided Q4 revenue in the range of $222M-$232M vs. est. $231M.

·     SMTC was upgraded from Hold to Buy at Needham with $35 tgt, though it sees potentially greater upside to the shares over the long-term and believes Thursday’s earnings call presents an opportunity for incoming CEO, Paul Pickle, to present a new long-term operating model.