Mid-Morning Look

Thursday, August 03, 2023

U.S. stocks slide as a combination of higher Treasury yields, mixed earnings results (EPS beats continue for Q2 but rev beats much lower) and better U.S. economic data (keeping additional rate hike possibility from Fed on table) all leading to lower stock markets – adding to biggest decline in 2-months Wednesday. The action in bond markets is getting the attention of the stock market the last few days, with the long-end of curve seeing yields rise to highest levels this year, as the 10-year tops 4.18% and the dollar rebounding, after recent strong eco data and US rating cut by Fitch yesterday. Two Wall Street powerhouses out in reaction with: 1) Warren Buffet said last night “Berkshire bought $10B in U.S. Treasury’s last Monday. We bought $10B in U.S. Treasury’s this Monday and the only question for next Monday is whether we will buy $10B in 3-month or 6-month” in his response to CNBC after the Fitch downgrade of U.S. yesterday. 2) On the other side, Bill Ackman said we’re shorting 30y UST’s; I’d be surprised if we don’t find ourselves with persistent global inflation of ~3% which would put the 30y rate of 5.5% and could happen soon; cited larger deficits and higher refinancing rates; also partially buying as a hedge against the impact of higher long rate rates on stocks https://tinyurl.com/2hj5dk9k . In central bank news, the Bank of England hiked rates for the 14th time, 25 bps increase to 5.25% – their highest rate since 2008. Earnings obviously are the other big story with another huge day of results (see below for highlights) while investors await results from Apple (AAPL) and Amazon (AMZN) tonight, ahead of the nonfarm payroll report tomorrow morning as well. Oil prices rise after reports from the Ministry of Energy that Saudi Arabia will extend the voluntary cut of one million barrels per day for another month to include September that can be extended or extended and deepened.

Economic Data

·     Weekly Jobless Claims rose to 227K from 221K in the latest week (est. 227K) as the 4-week moving average fell to 228,250 from 233,750 prior and continued claims rose to 1.700M from 1.679M prior (in-line with ests.) and the insured unemployment rate unchanged at 1.1%.

·     U.S. Q2 non-farm productivity rose +3.7%, topping consensus +2.0% and compared to Q1 (-1.2%) while Q2 non-farm unit labor costs rose +1.6% vs. consensus +2.6% and vs Q1 +3.3%.

·     S&P Global July composite PMI at 52 vs 53.2 prior; S&P Global July final services PMI at 52.3 (vs flash 52.4).

·     ISM non-manufacturing sector for July shows PMI 52.7 in July vs. consensus 53.0 and vs 53.9 in June as business activity index 57.1 in July vs 59.2 in June, prices paid index 56.8 in July vs 54.1 in June, new orders index 55.0 in July vs 55.5 in June and employment index 50.7 in July vs 53.1.

·     Factory orders rose +2.3%, in-line with consensus and best since June 2021 and way above May +0.4% but factory orders ex-defense +3.0% vs May +0.9%; June Durables orders final revised to +4.6% from +4.7% and June nondurables orders +0.1% vs May -1.1%.

Sector Movers Today

·     In Online Travel: EXPE shares tumble on mixed results as adj EPS of $2.89 tops consensus of $2.35 but revs grew 5.6% to $3.35B missing the $3.37B est., booked hotel room nights rose 8.7% to 89.7M but below consensus of 90.5M and gross bookings of $27.32B missed ests. $28.22B. TRIP slides after results last night in sector while SABR rises after results; BKNG reports tonight.

·     In Lodging: While PK delivered essentially in-line 2Q results (against a backdrop of reduced expectations), HST came in a bit light across the board as both companies made modest downward revisions to full year guidance on RevPAR, margins, and EBITDA. Hyatt (H) said it sees FY RevPAR +14% to +16%, vs. prior +12% to +16% after mixed Q2 (EPS miss/rev beat).

·     In heavy machinery: in class 8 trucks (CMI, PCAR), Stephens noted ACT Research released preliminary July Class 8 net order figures of 16,000 units, rising 45% y/y, but decreased 5% seq and says when adjusting for seasonality, July orders increased 5.5% seq. as July is traditionally the annual trough for monthly orders. CMI reported EPS beat and in-line sales for Q2, as shares tumbled with industrials weaker.

·     In Oil majors: mixed results as OXY Q2 adj EPS $0.68 missed the est. $0.71 on lower energy prices and crude oil volumes; COP Q2 profit and revenue missed expectations as prices tumbled, while production reached record levels and the full-year outlook was raised; APA a bright spot as Q2 adj EPS $0.85 and revs $1.96B top est. $0.75/$1.71B and said on track to deliver total adjusted oil production growth of more than 10% for the year; MRO Q2 profit and revs fell as expenses rose.

Stock GAINERS

·     CLX +10%; reported Q2 profit and sales above ests and called for higher earnings and revenue for the year as well citing a “favorable” price mix, which “more than offset” lower volumes.

·     COOK +38%; reported a top- and bottom-line beat as better revenue across all three segments flowed through at better GM (first YoY expansion since 3Q20).

·     CTSH +5%; reported Q2 results that beat expectations and raised its full-year forecast for EPS.

·     HAS +2%; cut its 2023 revenue forecast to a decline 3% to 6%, compared with its previous outlook of a low-single-digit decline, but said it would sell its eOne film and TV studio to Lionsgate Entertainment for about $500 million.

·     REGN +4%; reported Q2 revenue $3.16B (vs. est. $3.01B) and EYLEA U.S. net sales $1.5B as adj EPS of $10.24 beats $9.92 estimate.

·     RUN +16%; missed rev ests for Q2 but delivered a surprise profit of $0.25 vs. est. loss (-$0.26) saying they are seeing a tremendous acceleration in storage attachment rates on new sales.

·     UPWK +30%; increased its revenue and profit projections for the full year.

·     W +16%; big profit beat and 2Q revs ahead with total net revs -3.4% y/y with US -40bps and Int’l -18% ex-FX while say they have returned to positive y/y order growth.

Stock LAGGARDS

·     ARAV -69%; after its Phase 3 AXLerate-OC trial evaluating the safety and efficacy of Batiraxcept in platinum-resistant ovarian cancer did not meet its primary endpoint of progression-free survival.

·     CCRN -13%; Q2 results beat consensus, but Q3 guidance was well below expectations and full-year minimum guidance was reduced for the second quarter in a row.

·     DXC -26%; downgraded by several Wall Street analysts following its disappointing fiscal 1Q24 results saying visibility also appears to be a challenge in this uncertain macro with the outlook.

·     ETSY -10%; as deteriorating buyer metrics depressed growth and EBITDA margin.

·     EXPE -14%; tumble on mixed results as adj EPS of $2.89 tops consensus of $2.35 but revs grew 5.6% to $3.35B missing the $3.37B est., booked hotel room nights rose 8.7% to 89.7M but below consensus of 90.5M and gross bookings of $27.32B missed ests. $28.22B.

·     HOOD -8%; after mixed as results as company reported a surprise profit and rising revs ($486M vs. $318M y/y) but posted declining transaction sales and monthly active users.

·     HUBS -8%; delivered a beat-and-raise however, billings and net adds did not quite meet elevated expectations, leading shares lower.

·     MGM -6%; reported revenue of $3.9B, beating consensus by 3% as exceeded revenue across its three segments, highlighted by Macau 7% above expectations, and LV/regional +2%, but shares fell as margins declined 244 bps on a same-store basis.

·     PYPL -12%; reported earnings beat and in-line guidance, but shares slipped as reported an adjusted operating margin of 21.4% for the second quarter, below the 22% outlook prior.

·     QCOM -10%; after mixed Q2 results as EPS beat but sales missed and revenue at Qualcomm’s handset chip business fell 25% to $5.26B while warned that revenue growth will depend upon a recovery in handsets, or phone sales, and a recovery in China.

·     WCC -17%; guides full-year earnings of $15-$16 a share, below est. $17.24 and lowers full-year sales outlook to a forecast for growth of 5% to 7%, down from 6% to 9%.