Mid-Morning Look

Tuesday, April 18, 2023

U.S. stocks open stronger after better earnings in the financial sector (BAC, BK) and from Dow component JNJ in healthcare (beat and raise), while GS shares slipped on its mixed results. However, so far, better results are failing to hold up as stock markets fade off highs. Comments from the Fed’s Bullard are not exactly market friendly saying, “because there hasn’t been much discernible progress on inflation, interest rates must continue to rise. He also said the risk of bank stress causing broad problems seems to have diminished, though policymakers monitoring situation closely; says Fed should avoid extensive forward guidance at next meeting, keep options open”. Dow component GS reported fixed income, currency, and commodities (FICC) sales & trading revenue for Q1 that missed estimates while net interest income and net revenue for the period also fell short of consensus expectations. Note it’s been 6 months since the S&P’s low with the S&P 500 +8% YTD, Nasdaq +16% YTD, the Dow and Russell 2000 both up over 2% YTD so far. Little pullback this morning as the VIX bounces off lowest level since November 2021 below the 17 level. Bitcoin rebounds back above $30K, the dollar slips and gold rises.

Economic Data

·     March Housing Starts fell (-0.8%) to 1.42M unit rate vs. estimate 1.4M and vs. Feb +7.3% at 1.432M units; single-family starts rose +2.7% to 861K unit rate; multifamily -5.9% to 559K; March housing permits fell -8.8% to 1.413M unit rate vs. consensus 1.450M and Feb 1.55M unit rate.

Sector Movers Today

·     More bank earnings today as large caps wrapping up: 1) Dow component GS posted lower Q1 profit as net earnings of $3.09B compared with $3.83B y/y while earnings of $8.79 topped $8.10 estimate; said investment bank revs $12.2B miss ests $12.79B while Q1 deposits of $375B compared with $387B a year earlier. BAC Q1 EPS of $0.94 topped $0.82 estimate as NII of $14.4B tops views $14.34B; Q1 Trading revenue excluding DVA $5.05 billion, vs. est. $4.46 billion; FICC trading revenue excluding DVA $3.43B vs. est. $2.62B; equities trading revenue excluding DVA $1.62B vs. est. $1.8B; Provision for credit losses $931M. CBSH Q1 EPS $0.95 vs. est. $0.92; Q1 revs $389.24M vs. est. $388.83M; Q1 net interest income was $251.6M, a $3M decrease q/q.

·     In Solar and Alt Energy: Keybanc upgraded RUN and downgraded FSLR, PLUG: for RUNupgraded to Overweight based on attractive valuation; encouraging data from CA; view that residential solar companies have sufficient pricing power to execute in the higher interest rate environment. Downgraded FSLR to Sector Weight following the recent outperformance as shares are up ~40% YTD and ~157% y/y (vs. the NEX down ~9% and ~24%, respectively) on the back of significant tailwinds created by the passage of the IRA. PLUG downgraded to Sector Weight given the series of headwinds the Company faces in the near term.

·     E&P and equipment: Morgan Stanley said the market is signaling downside shale market risk, while companies maintain that NT risks are limited. They shift their ratings more in favor of int’l > U.S. shale exposure as they upgrade NBR to Equal Weight and downgrade HP to Underweight & LBRT cut to Equal Weight. Tilt ratings in favor of more global OFSE companies, and score service companies on revisions, balance sheet quality, and valuation as highlight TS as Top Pick. HAL also screens well vs. peers and prefer ACDC and PTEN among SMID caps.

Stock GAINERS

·     BABA +2%; after Reuters reported that Chinese regulators are expected to cut a fine on Ant Group to $700 million from an initially planned amount of more than $1 billion.

·     BLU +98%; as GSK announced they are acquiring BLU for $14.75/share in cash representing a 103% premium over Monday’s $7.26 closing price; for an EV of $2B – validating not just the chronic cough space and P2X3 antagonism but the best-in-class status of BLU’s camlipixant.

·     LMT +3%; trades record highs after Q1 EPS beat $6.43 vs. est. $6.08 on higher sales while notes supply-chain issues stemming from the pandemic are still hurting F-35 production volumes.

·     NVDA +3%; another positive analyst call as HSBC upgraded to Buy from Reduce and tgt to $355 from $175 saying they are shocked by Nvidia’s pricing power on AI chips that they see driving earnings upside, higher valuation – meanwhile the Information reported MSFT is readying AI chip machine learning.

·     TYL +4%; Goldman Sachs upgraded TYL to Buy saying they favor exposure to government end-markets over the next 12 months.

Stock LAGGARDS

·     ERIC -6%; Q1 beats a low bar according to Bank America saying FCF was negative though; Networks was broadly in-line. Q2 guidance v cautious.

·     FRC -2%; weakness in the regional and midcap banks early in the S&P with declines in ZION, CMA, KEY, USB as earnings pick up for the group later this week.

·     GS -3%; posted lower Q1 profit as net earnings of $3.09B compared with $3.83B y/y while earnings of $8.79 topped $8.10 estimate; said investment bank revs $12.2B miss ests $12.79B while Q1 deposits of $375B compared with $387B a year earlier.

·     JBHT -2%; reported 1Q EPS ($1.89 vs. $2.00) and intermodal revenue that missed estimates as ICS and Truck were as bad as expected, if not somewhat worse according to Citigroup saying this is a negative read for CHRW and TL complex (KNW, WERN).

·     JNJ -2%; despite Q1 adj EPS $2.68 tops consensus $2.51; Q1 revenue $24.7B vs. est. $23.67B; raises FY23 adj EPS to $10.60-$10.70 from $10.45-$10.65 (est. $10.51) and boosts FY23 revenue view to $97.9B-$98.9B from $96.9B-$97.9B (est. $97.71B); also raises dividend.

·     PLOW-4%; reported a wider than expected Q1 loss as revs fall and narrows FY23 adj EPS view to $1.55-$2.00 from $1.55-$2.45 and FY23 revenue view to $620M-$650M from $620M-$680M.