Mid-Morning Look

Thursday, May 25, 2023

U.S. stocks buoyed higher by strength in technology, semiconductors/AI specifically, as NVDA reported a strong quarterly beat and monstrous upside Q2 revenue guidance pushing shares up as much as 30% and lifting the broader Nasdaq/technology (XLK +2.5%). Outside of that strength, data points today mixed as oil prices fall/energy stocks slip (XLE -25) after Russia Deputy Prime Minister Alexander Novak downplayed possible OPEC+ production cuts. Meanwhile defensive Consumer Staples, Utilities, and Healthcare are all down over 1% early. Debt ceiling talk headlines this morning were positive with McCarthy saying deal could get done, while Fitch places US AAA on rating watch negative reflecting increased political partisanship that is hindering resolution to raise or suspend debt limit.

No signs of a slowing economy with GDP data coming in above consensus views and jobless claims falling, as the job market remains very strong/resilient, further fueling bets that the Fed may continue to raise interest rates to further cool the economy. Gold prices dropped amid a bounce in the U.S. dollar and Treasury yields following the bullish economic data and higher rates bets. After today’s positive economic data there are now no (net) rate cuts seen this year (big drop from the 2-3 that were forecasted by markets just 3 weeks ago). Now must wait until Jan 31, 2024, to see a 4.75%-5% target range as per fed fund futures! Germany officially in recession after 2^nd straight quarter of negative GDP. Despite the change in interest rate outlook, U.S. major averages holding strong as tech carrying the market on its back yet again (XLC +26% YTD and XLK +27% YTD).

Economic Data

·     U.S. GDP growth above views, down from Q4: U.S. GDP annualized Q1 (2^nd estimate) rose +1.3% up from 1.1% in the advance estimate published a month ago and down from the 2.6% growth rate in Q4 of 2022. U.S. Core PCE (Q/Q) Q1 +5.0% vs. est. and prior reading of +4.9%). Personal Consumption for Q1 +3.8% vs. est. 3.7%; GDP Price Index Q1 +4.2% vs. est. +4.0%.

·     Weekly Jobless Claims rose to 229K from downwardly revised 225K (from 242K) but above estimates of 245K; the 4-week moving avg unchanged at 231,750; continued claims fell to 1.794M in latest week from 1.799M prior.

·     April Pending Home sales index unchanged vs. consensus +1.0% and April Pending Home sales -20.3% from April 2022.

Sector Movers Today

·     In apparel retail: a day after ANF crushed results and shares soared, AEO shares fall as 1Q’s top-line and GM beat were offset by SG&A/Depreciation/tax, with management guiding 2Q below-Street and cutting FY guidance; GCO slashed its year forecasts after a weaker-than-expected Q1; RL reported a Q4 profit beat $0.90 vs. est. $0.61) and revenue that topped forecasts, as strength in Asia offset declines in North America and Europe; sees Q1 revenue flat to up slightly and sees FY24 revenue up low-single digits; GES smaller Q1 loss and better revs while raises FY24 EPS view to $2.60-$2.90 from $2.45-$2.80 and boosts FY24 rev growth view to 2%-4% from 1%-3%.

·     In discount/off pricing: BURL reported top and bottom-line Q1 miss ($0.84/$2.13B vs. est. $0.92/$2.17B) and guided Q2 and FY outlook below consensus; DLTR shares slide as cut FY forecast $5.73-$6.13 from $6.30-$6.80 prior as high inflation dampens demand for higher-margin items – said expect the elevated shrink and unfavorable sales mix to persist.

·     In leisure: In cruise lines: positive headlines (CCL, RCL, NCLH) as the WSJ reported crowds have returned to cruise ships to the point that some are oversold and even bumping passengers https://tinyurl.com/46hyrt6y ; CCL was upgraded from Neutral to Buy at Citigroup and raise price tgt to $14 from $10 citing recent cruise work (pricing, web traffic, virtual fireside chat, earnings read-throughs) and its belief that the balance sheet is at a turning point. In casinos & Gaming: CZR upgraded to Neutral from Negative at Susquehanna following its assessment of a more balanced risk/reward at current levels (LV vs regional/digital) and increased its price target to $39.

·     In Telco/Media: DISH shares pop after the WSJ reported the company is in talks to sell wireless plans for its nascent mobile phone service through AMZN https://tinyurl.com/2tscyrsw ; separately, DISH was downgraded to Neutral from Buy at Citigroup the substantial capital needs combined with the drop in market value of its securities have increased uncertainty and dilution-risk for DISH equity. Said DISH also needs to identify a clearer path to take revenue share as a wireless retailer, wholesaler, or both. The WSJ reported that DIS is in talks to buy CMCA’s minority stake in Hulu; Keybanc said it remains Overweight on DIS but cut price tgt to $107 from $120 driven by its lower estimates as it reset expectations for Disney+ subscriber growth (-) and ARPU (+), Domestic Parks OI (-), and International Parks OI (+).

Stock GAINERS

·     CCL +2%; upgraded from Neutral to Buy at Citigroup and raise price tgt to $14 from $10 citing recent cruise work (pricing, web traffic, virtual fireside chat, earnings read-throughs) and its belief that the balance sheet is at a turning point.

·     DISH +11%; after the WSJ reported the company is in talks to sell wireless plans for its nascent mobile phone service through AMZN https://tinyurl.com/2tscyrsw

·     ELF +14%; strong quarter with +20% revenue and +27% gross profit upside vs consensus in FQ4 as adjusted EBITDA upside was driven by strong sales and gross margin expansion.

·     MET +3%; after signed a $19.2 bln reinsurance deal, boosted stock buyback program.

·     NTNX +16%; following beat/raise F3Q as well as Nutanix concluding its Audit Committee investigation, which allowed the Company to file its delayed F2Q23 10Q; also reported ACV billings of $240M (consensus $221.8M).

·     NVDA +25%; posted solid Q1 results that easily topped views, led by data center strength while guides Q2 revenue $11.0B plus/minus 2% vs est. $7.15B.

·     SPLK +5%; as sees FY24 revenue to be at the top end of its prior forecast of $3.85B-$3.9B and guided Q2 revs $880M-$895M above consensus of $868.5M; Q/Q absolute Cloud revenue growth of $5.5M was the smallest it’s been since July 2018.

Stock LAGGARDS

·     AEO -16%; 1Q’s top-line and GM beat were offset by SG&A/Depreciation/tax, with management guiding 2Q below-Street and cutting FY guidance.

·     ANNX -53%; announces ARCHER trial endpoint did not reach statistical significance.

·     APPS -40%; Q4 net revenues of $140mn (-24% Y/Y) were in line with Street/Guide, but gross margin (44%, -530bps Y/Y) was well below Street (50%). Bank America said deterioration of the higher-margin AGP business surprised them and likely the Street.

·     DLTR -12%; cut FY forecast $5.73-$6.13 from $6.30-$6.80 prior as high inflation dampens demand for higher-margin items – said expect the elevated shrink and unfavorable sales mix to persist.

·     INTC -5%; one of biggest losers on competition fears after NVDA beat and raise.

·     MDT 5%; beat quarterly expectations and announced a $738 million buyout in the diabetes segment but slumped on its light earnings forecast.

·     MRTX -12%; reported sitravatinib’s Phase 3 SAPPHIRE study failed to meet the primary endpoint of overall survival in the final analysis. Although passing interim futility analysis increased some confidence in Ph3, it was not a complete surprise failure given modest Ph2 data said Barclays.

·     PATH -15%; reported healthy Q1 results w/ rev, ARR upside & raised FY guidance, but the lack of ARR upside disappoints said Bank America, modestly below their guidance.

·     SNOW -15%; as EPS and revs beat, but revs of $624M was up 48% y/y, a deceleration from 53% last quarter and remaining performance obligations (RPO) came in at $3.40B, up 31% y/y (missing the consensus of $3.60B), down from 38% growth last quarter.