Mid-Morning Look

Thursday, May 26, 2022

U.S. stocks are rebounding bigly, with the Dow on pace for a 5-day win streak, longest since March as investors are starting to take weaker earnings and softer outlooks from companies (specifically retailers and technology) in stride. After being punished for weeks on a quarterly miss or lower guide, some stocks have since been rallying post weak results, a sign that the Ukraine/Russia impact, supply chain issues and inflation are possibly being “baked-in” at this point. In retail alone, shares of BBY, DKS and today BURL have rallied after dismal reports, while some tech names also seeing a rebound/bounce. Also helping, economic data confirmed the U.S. economy contracted in Q1, quelling some worries about aggressive rate hikes as first-quarter GDP declined at a 1.5% annual pace, worse than expected. Initial jobless claims also declined, totaling 210,000, a drop of 8,000 from the previous week. The pullback in GDP represented the worst quarter since the Q2 pandemic of 2020. The Fed is widely expected to raise rates in the next 2-meetings, likely by 50-bps at each, but future hikes are in question given signs inflation could be peaking, as well as mid-term elections. Markets are firmly on track to snap their weekly losing streaks at this point (7-week streak for S&P and Nasdaq and 8-week for Dow). Stocks are broadly higher, with all 11-sectors in the S&P sharply higher.

Economic Data

·     GDP data out this morning as 1Q Prelim GDP (-1.5%) vs. (-1.3%) consensus and (-1.4%) initial estimate and +6.9% in Q4. Inflation readings show: PCE price index: +7.0% vs. +7.0% prior, core PCE prices +5.1% vs. +5.2% consensus and 5.2% prior; Q1 Prelim Real Final Sales (-0.4%) vs. advance (-0.6%); q1 exports (-5.4%) from (-5.9% prior), imports +18.3% vs. +17.7% prior

·     Weekly Jobless Claims fell to 210,000 in latest week from 218,000 prior and consensus 215,000; the 4-week moving average rose to 206,750 from 199,500 prior; continued claims rose to 1.346M in latest week from 1.315M and U.S. insured unemployment rate rose to 1.0% from 0.9%

·     Pending Home Sales (M/M) for April fell (-3.9%) vs. est. (-2.1%) and prior month (-1.6%); on a Y/Y basis, Pending Home Sales NSA (Y/Y) (-11.5%) vs. est. -7.6%)

Sector Movers Today

·     Retailers: Department store Macy’s (M) 1Q adj EPS $1.08 vs est. $0.82 on comps +12.8% owned (+12.4% owned & licensed), inventory +17% Y/Y (-10% vs 2019), gross margin 39.6% vs 38.6% (merch margin up on higher avg unit retail, lower promos); guides FY net sales $24.46-24.7B vs est. $24.5B and adj EPS $4.53-4.95 vs est. $4.34 and prior guide $4.13-4.52; off-price retailer BURL missed on both top and bottom lines with a sharp -18% drop in comp sales (vs. ests for decline of -14%) – follows better TJX results and weak ROST results in the space; LULU upgraded to OW at Morgan Stanley calling it a topline grower, supported by compelling secular tailwinds, a market share gain opportunity, & credible future revenue drivers; DXLG, GCO, GES, MOV, BKE among other retailers with earnings today; ELY announces new $100M stock repurchase program

·     Healthcare Services; Several changes in managed care at Bank America as they double downgraded MOH to Underperform from Buy saying the industry is going to have to manage through rapidly declining Medicaid membership, as well as the expiration of the expanded ACA subsidies, which not only would slow growth, but could cause a risk Pool shift in both the Medicaid and exchange businesses – Bofa also downgraded CNC to Neutral from Buy and trim tgt to $90 from $95 as sees greater medical loss ratio uncertainty into 2023 and cut OSCR to Neutral. The firm upgraded CI from Underperform to Neutral on what we see as a stronger than average growth outlook for commercial and PBMs and raised ALHC to Buy as sees an improving risk/reward profile with a “relatively strong setup” into 2023 for the company

·     Staffing & Services; BMO Capital with several downgrades, cutting ASGN to Market Perform calling it the best positioned in out-of-favor sector as believe it is relatively more insulated against economic cyclicality than its staffing peers. Firm also downgraded MAN to Market Perform from Outperform as part of our sector downgrade citing its sizable European exposure (about 65% of 2022E revenues), the stock had been lagging its US-based peers; cuts RHI to Market Perform noting slowing staffing-related indicators, negative investor sentiment and downgraded shares of TBI for four downgrades in staffing space

·     Transports rise: airlines with better monthly metrics as JBLU raised guidance after saying the demand environment continues to be strong with bookings exceeding its expectations – now sees Q2 revenue at or above high-end of previous guidance range of 11% to 16% growth vs. the 2019 level and expects flown capacity for Q2 to increase in a range between 2%-3% (from prior 0%-3%); LUV said sees q2 operating revenue compared with 2019 up 12% to 15%; continues to experience strong load factors and an acceleration in bookings for summer travel; says barring any unforeseen events and based on current trends, expects solid profits, operating margins, excluding special items, in Q2; rails UNP and CNI downgraded to in-line at Evercore/ISI

Stock GAINERS

·     BABA +9%; Q1 revenue rose 9% to 204.05 billion yuan ($30.35 billion) topping expectation of 199.25 billion yuan; BIDU rises 8% on its results as China stocks rebound post earnings

·     BURL +5%; despite missing top and bottom lines with a sharp -18% drop in comp sales (vs. ests for decline of -14%) – follows better TJX results and weak ROST results in off-price retail space

·     DLTR +17%, DG +12%; Dollar stores with earnings: and reacting well to them as DG Q1 EPS of $2.41 beats by 10c as sales rose 4.2% to $8.75B vs. est. $8.71B and DLTR Q1 EPS $2.37 vs. est. $2.00 as revs of $6.9B top $6.76B estimates, as Q1 comps rose 4.4% vs. est. +2.1%,

·     LULU +8%; upgraded to OW at Morgan Stanley calling it a topline grower, supported by compelling secular tailwinds (e.g., performance/athleisure focus), a market share gain opportunity, & credible future revenue drivers

·     M +11%; 1Q adj EPS $1.08 vs est. $0.82 on comps +12.8% owned (+12.4% owned & licensed), inventory +17% Y/Y (-10% vs 2019), gross margin 39.6% vs 38.6% (merch margin up on higher avg unit retail, lower promos); guides FY net sales $24.46-24.7B vs est. $24.5B and adj EPS $4.53-4.95 vs est. $4.34 and prior guide $4.13-4.52

·     NVDA +2%; rebounds after reported a solid quarter but offered a weaker outlook (guides Q2 revs $8.1B vs. est. $8.44B) and attributed it largely to Gaming demand/supply headwinds in China and Russia (Data Center grew 15% QoQ (83% YoY), ahead of our 10% growth estimate

·     TWTR +4%; Elon Musk dropped plans to partially fund his purchase of Twitter with a margin loan tied to his Tesla stake and increased the size of the deal’s equity component to $33.5 billion

·     WSM +13%; as Q1 EPS were $3.50 vs est. $2.90 on revs $1.89B vs est. $1.81B, comps +9.5% (incl pottery barn +14.6% and west elm +12.8%); reiterates FY and long-term outlook

Stock LAGGARDS

·     AVDL -44%; as FDA cites patent issue in sleep disorder drug FT218 filing; expects tentative approval in 2023

·     KHC -6%; downgraded to Sell at UBS saying if the company is not able to pass through pricing in 2H22, they believe this would serve as a negative catalyst to the shares

·     MDT -5%; reported Q4 results that missed expectations and fell short of guidance issued months ago (EPS $1.52/$8.09B vs. est. $1.56/$8.42B) while guides Q1 EPS $1.10-$1.14, consensus $1.40 and sees Q1 organic revenue down 4.5%-5.5% with lower FY outlook

·     NTNX -22%; on weaker Q4 revenue forecast as sees revs $340-360Mm vs est. $439.5Mm – said increased supply chain delays with hardware partners account for most of the impact

·     SNOW -9%; reported F1Q23 results that only modestly exceeded expectations, but the marginal revenue beat fell short of expectations as management highlighted some customers are consuming less than originally anticipated (also left guidance unchanged)