Mid-Morning Look

Thursday, July 18, 2024

U.S. stocks with a muted opening, as markets look to rebound following one of the worst selloffs of the year for the Nasdaq and S&P 500 on Wednesday following a broad decline in technology stocks, namely semiconductors (SOX fell -6.75). An early modest bounce so far, but no conviction with only small bounces so far, though many S&P sectors are higher. Treasury yields remain depressed at multi-month lows, with a modest bounce in the dollar after the ECB meeting pushed the euro lower. As expected, the European Central Bank left interest rates unchanged at 4.25%, left the marginal lending facility unchanged at 4.50% and left the deposit facility unchanged at 3.75%.ECB noted they will continue to follow a data-dependent and meeting-by-meeting approach to determining appropriate level and duration of restriction. Bitcoin prices extend their weekly rally, approaching $65,000 after a monster 12% surge this week. In political news, President Biden cancelled campaign event after testing positive for Covid, while vice-presidential nominee JD Vance took stage at the RNC and Donald trump to speak tonight at RNC last night. In stock news, NFLX earnings tonight in tech, while AMZN announces record-breaking sales for 2024 Prime Day event, homebuilders at record highs after DHI results boost sentiment, CHUY agreed to be bought by DRI in restaurant sector, while DPZ shares slump in take-out on sales numbers. Semiconductors got a boost after TSM raised guidance overnight, welcome news for the chip sector after ASML guidance the day prior hurt the index. The Dow Jones Industrial Average rises to new record high 41,360, on track for 7th straight day of gains, while Smallcap Russell 2000 stays strong for July (+10% MTD).

• U.S. Philly Fed factory index for July reported at 13.9 above est. 2.9 with strong gains in employment at 15.2 vs -2.5 previous, and new orders at 20.7 vs -2.2 previous, while business conditions 38.7 vs 13.8 previous, while the prices paid dipped to 19.80 vs 22.50 previous.

• In Retailer rating changes on Wall Street: Morgan Stanley upgraded GPS to Overweight while downgraded both CURV and FL to Underweight. For GPS, ranks 2^nd in their proprietary scorecard and alongside room for positive EPS revisions in 2H (& possibly L-T), they upgraded shares. But notes CURV screens among the worst in their scorecard with risk of negative adj. EBITDA revisions both N-T & L-T, & room for valuation de-rating. For FL, sees to EPS L-T (I.E., negative EPS revision risk), which led to its downgrade to Underweight with an $18 PT. Citigroup upgraded VFC to Buy from Neutral saying the announcement of the sale of Supreme for $1.5B (more than CITI expected) has cleared the way for the company to repay both of their upcoming debt maturities and believes Vans is getting closer to bottoming out.
• In Banks: Wells Fargo upgraded Banks to a Buy predicated on: (1) valuation (significant discount); (2) technicals (oversold); and (3) macro picture (constructive from a rates/credit angle, catalyzed by an improving regulatory environment). Wells said what looked like a “pop” last week has indeed become a rotation, driven by Trump’s polling/ policies and the firm is confident regulatory pressure has crested. In Regional Banks: KEY reported a -5.2% drop in Q2 profit to $237M while forecasts 7%-8% drop in average loans in 2024, worse than the 5%-7% fall it had expected earlier; OZK posts the 7th consecutive qtr of record net income and EPS, and the 8th consecutive qtr of record NII according to Piper (NII was higher than expected as the NIM fell 3 bps q/q to 4.68%); PNFP downgraded to Neutral from OW at Piper saying near-term upside appears muted; SNV posts stronger NIM and lower credit costs drive Q2 beat.
• In FinTech: TOST upgraded to Outperform from Neutral at Mizuho and raise tgt to $33 from $21 saying with volumes approaching $200B by 2025, TOST would be the de facto fourth-largest retailer/merchant in the US by volume, following giants like WMT and AMZN. William Blair upgraded SQ to Outperform saying its bullish view reflects Square’s improving execution, marked by simpler merchant onboarding and new vertical solutions, such as in hospitality. William Blair downgraded PYPL to Market Perform as sees potential upside to 2024 and 2025 EPS estimates but says does not anticipate that the stock’s P/E will appreciably rise in the absence of accelerating TPV growth.

• DHI +11%; reported better results for Q3 at EPS $4.10 vs. est. $3.77; Q3 revs $10B vs. est. $9.77B; announced new $4B stock repurchase program; Homes closed increased 5% to 24,155 homes and 6% in value to $9.2B; net sales orders increased 1% to 23,001 homes but tightened its FY sales forecast.
• FTNT +2%; was upgraded to Buy from Hold with $75 tgt at TD Cowen based on solid channel checks suggesting a bottoming cycle for security appliances; said while keeping Q224 estimate intact, it envisions an improved 2H24 view based on easy y/y comps.
• INFY +9%; shares climbed after raises fy25 revenue growth guidance to 3%-4% after Q1 net income 63.7B rupees, est. 62.48B rupees.
• PWR +7%; said it closed a $1.54 billion acquisition of Cupertino Electric Inc. of San Jose, Calif., a specialist in data center infrastructure with 4,300 employees.
• PUBGY +4%; after boosting FY organic revenue to grow between 5% and 6%, compared to its previous guidance of 4% to 5% growth after Q2 results beat in ad space.
• TSM +2%; raised its full-year revenue forecast to growth of slight to above the mid-20% range in U.S. dollar terms, versus a previous prediction of an increase in the low to mid-20% range, citing surging demand for chips used in artificial intelligence, and rejected the idea of a joint venture factory in the United States.
• VLVLY +6%; reported a 28% increase in adjusted operating profit, revenue slipped 0.7% to SEK101.45B, and warned that potential EU tariffs on electric vehicles from China will hit sales.
• WBD +4%; on reports it is discussing plans to split up, including splitting its digital streaming and studio businesses from its legacy television networks, Financial Times reported.

• BYND -8%; shares fell on a WSJ report that it has joined up with bondholders to initiate talks about a balance-sheet restructuring. Lawyers for the company are beginning debt discussions with bondholders owed $1.1B, according to the report https://tinyurl.com/5dvp4ydt
• DPZ -11%; as Q2 EPS $4.03 vs. est. $3.65 and revs $1.098B, vs. consensus $1.103B; Q2 U.S. same-store sales growth of 4.8% in the quarter fell just short of expectations of growth of 4.91%; warned that it will fall short of its international store growth target for the year due to challenges being faced by franchisee Domino’s Pizza Enterprises.
• HXL -3%; reported top and bottom-line beat for Q2 but lowered its FY24 EPS view to $2.02-$2.18 from $2.10-$2.30 (vs. consensus $2.21) and guided FY24 revenue $1.90B vs. consensus $1.95B.
• KEY -2%; reported a -5.2% drop in Q2 profit to $237M while forecasts 7%-8% drop in average loans in 2024, worse than the 5%-7% fall it had expected earlier.
• LESL -22%; after guided prelim Q3 adj EPS $0.32-$0.33 below consensus $0.42 on revs $570M vs. consensus $615.41M and lowered its FY EPS, sales and adj Ebitda views – weighed on shares of comps POOL, SWIM, HAYW.
• TAP -1%; was downgraded to Underweight from Equal Weight in beer sector at Barclays and cut its tgt to $47 from $55 as believes a challenging industry backdrop will weigh on Molson’s results for some time.