Mid-Morning Look

Thursday, June 23, 2022

U.S. stocks with a solid start to the day, seeing general strength across the board (mostly defensive sectors) despite weaker economic data and aggressive rate hike expectations, getting a boost as Treasury yields tumble and commodity prices slide. Inflation fears have eased the last few days given the sharp decline in commodity prices – not just energy (oil and natural gas off elevated levels), but also in the grains, lumber, and industrial metals space. That has provided a slight bid to U.S. markets as we battle with 40-year high consumer prices and as the Fed remains on an aggressive path of interest rate hikes (75 bps last quarter with expectations of another 75-bps in July). Weekly jobless claims rose to 5-month highs as layoffs accelerate, U.S. business activity slowed considerably in June and Q1 account deficit increases to $291.42 billion in another round of “softer” economic data. Treasury rally pushes drop in 3-year yields past 20-bps on day, the 2-yr well below 3% and the 10-year now down nearly 50-bps since just last week! Bespoke Investment noted just days after its largest 5-day increase in over 5 years, the 10-year yield has now seen its largest 5-day decline since the COVID crash (falling 45-bps off highs of 3.5% last week). NYSE breadth 2-1 advancer leading decliners – top sectors again more defensive in nature led by healthcare, REITs, Utilities and Staples.

Economic Data

·     Weekly Jobless Claims fell to 229,000 in latest week from 231,000 prior week and above estimates of 227,000; the 4-week moving average rose to 223,500 from 219,000 prior; continued claims rose to 1.315M from 1.310M prior week (est. 1.315M) and the U.S. insured unemployment rate unchanged at 0.9%

·     U.S. business activity slowed considerably in June as high inflation and declining consumer confidence dampened demand across the board; S&P Global said its flash U.S. Composite PMI Output Index dropped to 51.2 this month from a final reading of 53.6 in May (slowest growth pace in five months), while flash composite orders index tumbled to 47.4, the first contraction since July 2020, from 54.9 in May. Order backlogs also declined for the first time in two years

·     S&P Manufacturing PMI Flash Actual 52.4 (Forecast 56, Previous 57.0); S&P Services PMI Flash Actual 51.6 (Forecast 53.3, Previous 53.4) and Composite PMI Flash Actual 51.2 (Forecast 52.9, Previous 53.6)

·     The U.S. current-account deficit widened by $66.6 billion, to $291.4 billion, in Q1 of 2022.

Sector Movers Today

·     Transports: in airlines, UAL to cut about 12% if its daily Newark flights, CNBC reports to address congestion and delays; in research, Raymond James said following the recent pullback, they are upgrading LUV from Outperform to Strong Buy and ULCC from Market Perform to Outperform, with the latter also predicated on our view that JetBlue is going to be successful in its bid for Spirit. Additionally, downgrades ALK from Strong Buy to Outperform due to potential earnings and operational volatility around exiting the A320 fleet by early 2023. Dow Jones reported Daily freight rates from China to the US West Coast are now nearly 3% below year-long contracts agreed between liners and big American importers, showing a continuous fall in demand.

·     Auto sector: Chinese autos get a boost (XPEV, LI, NIO) after Bloomberg reported, citing Chinese state television, that the gov’t may extend tax exemptions on electric-car purchases; LI announced the launch of its new, second-ever vehicle model called L9, a bigger sport utility vehicle than the company’s signature Li ONE model; Wedbush said they continue to see a mixed bag for KMX into F1Q earnings with expectations for strong unit sales offset by weaker profitability, while we do not see a positive catalyst for CVNA near-term; HYZN to collaborate w SLB in decarbonizing oil & gas field operations with high-power fuel cells; SEV initiated with an Overweight rating and a 12-month PT of $7 at Cantor saying SEV is developing a solar-powered, electric car for the mass market, and disruptive solar technology

·     Housing & Building Products; KBH Q2 EPS $2.32 vs. est. $2.02; Q2 revs rose 19% to $1.72B vs. est. $1.65B; narrows FY housing revs $7.3B-$7.5B vs. prior view $7.2B-$7.6B; qtrly homes delivered were essentially even at 3,469; says will remain strategic in our capital allocation decisions to maximize returns in this environment; qtrly ending backlog value up 43% to $6.12B; in building products, William Blair lowers ests on TREX, AZEK, SITE, POOL, LESL, HAYW, and SWIM amid rising rates and declining housing data, consumer spend and business confidence; APOG Q1 EPS $1.00 vs. est. 56c; Q1 revs $357M vs. est. $328.59M; boosts share repurchase by 1M shares; sees year EPS $3.50-$3.90 vs. est. $3.08

·     Industrial & Machinery; Goldman Sachs lower estimates across multi-industry coverage on slower GDP growth ahead and are now ~3%/3.5% below consensus for 2023/24 as favors HVAC stocks (JCI, CARR) on superior risk/reward as exposure to non-residential end markets is likely underappreciated; idiosyncratic stories (RRX); longer-cycle stores (EMR); likely oversold names (SWK, LII); WAB and AGCO downgraded to equal-weight at Morgan Stanley primarily driven by a reduction in exposure to the consumer complex, Europe, and a potentially peaking commodity backdrop and resumes coverage of CMI at equal-weight while trimming its PTs across industry; AYI downgraded to Market Perform at William Blair given increased uncertainty and lack of confidence in 2023 estimates, though still expect the co to beat street F3Q estimates

Stock GAINERS

·     FNKO +8%; upgraded to Overweight at JPMorgan on expected upside to Street 2022 revenue estimates (and the roll to 2023), the margin outlook flipping to positive from negative over the balance of the year, and the toy category’s resilience in recessionary periods

·     FSTX +57%; after Sino Biopharmaceutical’s unit invoX Pharma will buy the company for $7.12 per share, a 78% premium to yesterday close in a deal valued at $161M

·     KBH +8%; Q2 EPS $2.32 vs. est. $2.02; Q2 revs rose 19% to $1.72B vs. est. $1.65B; narrows FY housing revs $7.3B-$7.5B vs. prior view $7.2B-$7.6B

·     LI +6%; Chinese autos get a boost (XPEV, LI, NIO) after Bloomberg reported, citing Chinese state television, that the gov’t may extend tax exemptions on electric-car purchases; LI announced the launch of its new, second-ever vehicle model called L9

·     OXY +3%; after Warren Buffett’s Berkshire Hathaway disclosed buying 9.6 mln more shares in the oil company; purchases were made over the past week and cost about $529 mln, Berkshire says, which raises its stake to over 16%

·     RAD +7%; raised its FY23 revenue outlook to $23.6B-$24B, above est. $22.9B citing increased utilization of higher-cost drugs at its pharmacy benefits business and guides smaller FY loss

·     RDUS +12%; being acquired by two investment firms – Gurnet Point and Patient Square – in a deal valued at up to $890M (including debt and a CVR), with holders to receive $10 per share https://bit.ly/3OCtKzC

·     SNOW +9%; upgraded from Neutral to Overweight at JPMorgan with $165 tgt saying at its core, is a massively scalable, highly elastic, cloud-native data warehouse solution that has begun to disrupt the cloud data management space

Stock LAGGARDS

·     ACN -3%; better quarter/tepid guidance as Q3 EPS $2.79 vs est. $2.72; Q3 revs $16.2B vs. est. $15.23B; narrows FY22 EPS view to $10.61-$10.70 from $10.61-$10.81 (est. $10.28) and boosts FY22 revenue growth to 25.5%-26.5% from 24%-26%

·     AYI 4%; downgraded to Market Perform at William Blair given increased uncertainty and lack of confidence in 2023 estimates, though still expect the co to beat street F3Q estimates

·     EBAY -2%; was assumed with an Underweight and street-low PT of $36 at Morgan Stanley as sees eBay continuing to loss mkt share as new entrants enter space/also included on a list published by Goldman as a co they feel will have to revise earnings estimates lower in the future

·     MOS -5%; after saying a compressed North American planting season and ongoing rail delays are impacting sales volumes (comments impacting ferts CF, NTR as well)

·     OMC -1%; downgraded along with IPG, PUB and WPP at Macquarie in advertising sector saying economic pressures are building, and ad spending follows GDP – they cut estimates unilaterally, with ’22e organic revenue growth now ~1% lower for agencies at +5% on average