Mid-Morning Look

Friday, June 03, 2022

U.S. stocks notably weaker, giving back much of yesterday’s gains as the U.S. economy added more jobs than expected in May but wages slowed. While the gain in payrolls will further ease concerns about a near-term recession, investors look worried that the labor market is still too hot for the Fed’s liking as two 50-bps hikes are widely anticipated in coming months (with uncertainty after that). Also, the second prominent CEO this week issued caution about the U.S. economy after Tesla’s Elon Musk overnight said he wants to cut 10% of its workforce, noting he had a “super bad feeling” about the economy. The comments follow JPMorgan CEO Jamie Dimon this week who Wednesday equated the economy to a “hurricane” and advised we “brace ourselves”, while also noting he expects price turmoil in commodities. The 10-year Treasury yield jumped to highs of 2.98% following the data, with the 2-year up 4 basis point to 2.67%. Oil prices again bucking the trend, outperforms again and on track for its 6^th straight weekly advance after OPEC+ meeting delivered only a modest increase in output.

Economic Data

·     Nonfarm Payrolls for May reported at +390K, above est. +325K – April revised to +436,000 from +428,000) and March +398,000 from +428,000; Private Payrolls for May reported at +300K vs. est. +325K; Manufacturing Payrolls for May rise +18K below est. +40K; Unemployment Rate for May reported at 3.6% vs. est. 3.5%; Average Hourly Earnings for May rises +0.3% vs. est. +0.4% (buy y/y rises 5.2%); labor force participation rate 62.3% in May vs. 62.2% in April

·     ISM Services PMI comes in weaker than expected in May as services industry growth slowed for a second straight month. The Institute for Supply Management said its non-manufacturing activity index fell to a reading of 55.9 last month from 57.1 in April (est. 56.4). Its services industry employment gauge also rebounded to 50.2 from a reading of 49.5 in April.

·     S&P global May final composite PMI at 53.6 (vs flash 53.8) and S&P global May final services PMI at 53.4 (vs flash 53.5)

Sector Movers Today

·     Airlines: AAL updates Q2 guidance as sees Q2 revenue up 11% to 13% vs 2019 level vs. prior view of up 6% to 8% saying increase driven by demand, pricing strength and sees Q2 capacity down -7%-8%, from prior view down -6%-8%/sees CASM ex-items 10% to 11%, from 8%-10% but fuel costs would increase in Q2, raising average fuel expenses to between $3.92 and $3.97 per gallon; ALK said sees Q2 passenger load factor about 87% to 88%, sees Q2 capacity (ASMS) down about 7% to 9% vs. 2019; sees Q2 revenue passengers % change versus 2019 to be down about 9% to 10%; ULCC announce amended merger which has been unanimously approved by the boards of directors of both companies, as Frontier would pay a reverse termination fee of $250M to Spirit in the unlikely event the combination is not consummated for antitrust reasons.

·     Housing & Building Products; RH results mixed as EPS handily beat and 1Q revs were ahead as worked through its backlog with gross margins rising 480bps on product margins, but lowered FY22 sales & margin outlook; NX 2Q adj EPS $0.80 vs est. $0.43 on net sales $322.9Mm vs est. $286Mm; guides FY net sales $1.18-1.2B vs est. $1.14B and adj EBITDA $150-155Mm vs est. $135.9Mm; MLM upgraded from Neutral to Overweight at JPMorgan aa have a positive perspective towards the 2H based on pricing acceleration, strong demand outlook coming from all end-use segments, and market tightness

·     Insurance: TRV was downgraded to Sell from Neutral at Goldman Sachs and cut tgt to $170 (saying has less upside to further margin improvement), while upgraded VOYA to Buy from Neutral saying Voya screens positive for strong cash conversion and ability to buy back stock, trades cheap on cash flow, earnings, and statutory book value and gets solid benefits from higher interest rates. Morgan Stanley downgraded mortgage brokers AON and MMC to Underweight saying brokers tend to underperform late in a P&C pricing cycle (as we’re in now) & key fundamentals (organic growth, margins) look less favorable near term

·     Software movers; ASAN reported the smallest beat-and-raise since the IPO, but posted better beat and guide where metrics were ahead but was offset by weaker margins, leading shares down; SNOW initiated new Outperform and $184 tgt at JPMorgan saying its differentiation in cloud data warehouse enables it to compete against cloud-agnostic and public cloud options; PD Q1 revenue/billings growth was ahead of expectations at +34%/+38% and strong customer metrics, while Q2/23 revenue/EPS guidance was largely in-line; HCP with 1Q subscription growth of 50% above Street of 39%, led by strength in its Self-Managed product and FY23 rev growth guide was raised from 32% to 35%

Stock GAINERS

·     AMLX +18%; after the FDA extended its the review period by three months to Sept 29^th (from June 29^th) for its ALS medicine AMX0035 to have more time to review additional analyses of data.

·     KSS +3%; after the WSJ reported private equity firm Sycamore Partners offered in the mid-$50s/share for Kohl’s, while Franchise Group (FRG) offered around $60/share, citing people familiar. https://on.wsj.com/396pqcX

·     NAPA +2%; posted a strong quarter with a ~7.7% topline beat, a ~13.8% EBITDA beat, and a ~30% EPS beat and said that depletions were up strong double digits

·     NX +9%; 2Q adj EPS $0.80 vs est. $0.43 on net sales $322.9Mm vs est. $286Mm; guides FY net sales $1.18-1.2B vs est. $1.14B and adj EBITDA $150-155Mm vs est. $135.9Mm

·     OKTA +11%; posted Q1 results that topped expectations and raised guidance for Q2 and rest of the year, as headline billings of $389MM / +28% y/y was only fractionally above the street, but CRPO growth of 57% was nicely above OKTA’s prior low- to mid-50s guidance

·     STNE +6%; Q1 adj EPS R$0.43 vs. R$0.60 last year and Q1 revenue R$2.07B vs. R$867.7M last year; accelerates growth, recovering profitability, and reports record revenue of BRL 2.07 billion in 1q22, with 138.6% increase year over year

·     TPTX +112%; BMY to acquire TPTX for $76.00 per share in deal valued at about $3.8B which represents a 122.5% premium to Thursday’s closing price of $34.16 https://bit.ly/3anePL5

·     XOM +1%; as energy stocks again leading broader markets; oil on track for 6^th weekly rise

Stock LAGGARDS

·     ASAN -7%; reported the smallest beat-and-raise since the IPO, but posted better beat and guide where metrics were ahead but was offset by weaker margins, leading shares down

·     JOAN -16%; downgraded to Neutral at Bank America following Q1 earnings results overnight (miss on top and bottom line) and ongoing challenges

·     MU -6%; downgraded to Underweight from Neutral at Piper and cut tgt to $70 from $90 citing the company’s oversized exposure to mobile, PCs, and other consumer end markets and the associated trends in the macroeconomy

·     NVAX -16%; the risk of myocarditis following NVAX covid vaccine could be higher than reported during post-authorization use of MRNA COVID-19 vaccines as per FDA briefing documents

·     TSLA -6%; as Elon Musk told execs that TSLA needs to cut its workforce by about 10% and pause all hiring worldwide, Reuters reported, citing an internal email