Mid-Morning Look

Tuesday, November 01, 2022

U.S. stocks rose initially as yields and the dollar fell with Federal Reserve officials kicking off their two-day meeting today, expected to raise the benchmark interest rate by its 4^th straight 75-bps hike Wednesday afternoon. Stocks were looking to build on strong gains in October where the S&P 500 posted a monthly gain of +8.0%, the Dow +14.0%, the Nasdaq +3.9% and the Russell 2000 +11%. But markets have quickly reversed, a sharp “about-face” following a mixed bag of economic data. JOLTs data strong (2^nd month in a row it has moved markets) which weighs on market sentiment (as investors looking for weak data for Fed to ease rate hike cycle), ISM services in-line just above expansion levels (mkts dismissing the positive drop in prices paid index to 46.6 from 51.7 prior) and construction spending above views for Sept. treasury yields spiked from a low of 3.92% to 4.04% after the data and the 2-yr hits overnight highs of 4.5%. Unconfirmed reports overnight about how China is formulating a plan to exit its zero covid policy helped boost Asian markets and lifted China stocks as well as commodity linked stocks. Bloomberg notes foreign Ministry spokesman Zhao Lijian said he’s not aware of any committee’s being formed to figure out how to exit. The Bloomberg Dollar Spot Index weakened for the first time in four days initially, but pared losses after economic reports. Australia’s Central bank raised interest rates by 25bps and signaled further tightening. Healthcare a focus as PFE rises on earnings/guidance (lifts vaccine stocks), LLY slides and MedTech active after JNJ $16B deal to buy ABMD.

Economic Data

·     JOLTs Job Openings for Sept reported at 10.717M vs. est. 9.75M and prior 10.28M

·     S&P Global October final manufacturing PMI at 50.4 (vs flash 49.9)

·     ISM U.S. Manufacturing activity index 50.2 in October vs. 50.9 in Sept (est. 50.0); prices paid index 46.6 in October down from 51.7 in September; new orders index 49.2 in October vs 47.1 prior; employment index 50.0 in October vs 48.7 prior

·     Construction spending for Sept +0.2% vs. est. (-0.5%) to $1.811 trln, vs. Aug (-0.6%) and private construction spending +0.4%, public spending (-0.4%)

Sector Movers Today

·     Auto sector: GT reported soft 3Q22 results with revenue/SOI both missing consensus expectations, largely driven by weaker than anticipated volumes, particularly out of Europe (Q3 adj EPS $0.40/$5.3B vs. est. $0.54/$5.3B); TM profit plunges 25% on chip shortages and surging costs; CVNA rises after JPMorgan upgraded from Underweight to Neutral as believe Carvana’s approach to retailing used vehicles has given it a multi-year head start in the online-only space of a fragmented used vehicle industry, allowing it to expand at a rapid pace; Chinese EV stocks rise after deliveries data/China macro headlines: 1) NIO reported deliveries for October of 10,059 vs. 10,878 m/m, down -7.5% m/m; 2) XPEV reported vehicle deliveries for October of 5,101 units and YTD deliveries 103,654 units, a 56% increase y/y; 3) LI reported vehicle deliveries for October of 10,052 units up 31% y/y from 7,649 – to start delivery of Li L8 this month

·     Retailers: SHOO downgraded to Neutral from Outperform at Wedbush and cut tgt to $29 from $43 as see near-term risk into tomorrow’s EPS print due to the deteriorating macro environment, difficult compares, high exposure to the challenging U.S. wholesale channel; VSCO is paying $400 million to buy Adore Me, an online lingerie brand known for inclusive sizing and marketing; SKX downgraded to Hold from Buy at Argus saying the company is expected to face continued supply-chain disruptions and pressure related to COVID lockdowns in China and cuts ests.

·     Media, Internet: SONY said quarterly profit through September rose 24% on healthy demand for its music and movies and boosted its full-year operating profit forecast on Tuesday by 4.5% to 1.16 trillion yen; SIRI posted a drop in profit for Q3 after booking higher costs, but growth in the number of self-pay subscribers increased revenues – raised dividend; FOXA Q3 top and bottom line above ests ($1.21/$3.19B vs. est. $1.14/$3.17B) as top line growth was driven by an 8% jump in advertising revenue thanks to higher political advertising sales; shares in Chinese companies were rallying (BABA, BIDU, NTES, JD, PDD) amid renewed optimism that the country would loosen its strict Covid-19 measures which have dampened growth

·     Semiconductors: Deutsche Bank noted NXPI delivered its traditional beat, but for the first time this cycle guided cautiously (4Q revs guided ~4% below Street ests) as macro headwinds are beginning to impact a greater portion of the co’s overall business; RMBS delivered a solid beat-and-raise on strong Product sales and better supply chain execution but did suggest cautiousness among customers in taking on higher levels of inventory into 1H CY23; LSCC printed a clean 3Q beat and raise with GMs +40 bps Q/Q and guides 4Q revs $170-180Mm vs est. $169.5Mm

·     Healthcare Services: Truist noted CMS released the final 2023 home health reimbursement rule that was better than our expectations and the proposed rule, including a +0.7% rate increase vs. the proposed net (4.2%) decrease and their expectation of roughly flat – firm said AMED most directly impacted (AMED, AVAH, HUM, LHCG); CTLT Q1 EPS $0.34 misses the $0.56 estimate and revs slip -0.3% y/y to $1.02B below ests $1.09B; XRAY announces restatements of 3q 2021 and full year 2021 financials; ACHC Q3 adj EPS $0.86 vs. est. $0.79; Q3 revs rose 13.5% y/y to $666.7M vs. est. $657.5M; sees FY22 adjusted EPS $3.00-$3.10 (est. $3.08)

Stock GAINERS

·     ABMD +51%; to be acquired by JNJ for an upfront payment of $380.00 per share in cash, with an enterprise value of approximately $16.6B which includes cash acquired

·     BABA +6%; shares in Chinese company’s rally (BIDU, NTES, JD, PDD) amid renewed optimism that the country would loosen its strict Covid-19 measures which have dampened growth

·     CVNA 11%; after JPMorgan upgraded from Underweight to Neutral as believe Carvana’s approach to retailing used vehicles has given it a multi-year head start in the online-only space

·     HOLX +7%; F4Q sales +10%, EPS 19c ahead of Street on Covid-19 testing

·     PFE +3%; raises full-year estimates for sales of its COVID-19 vaccine by $2 billion to $34 billion, encouraged by demand for its new bivalent booster shots; Q3 EPS and sales top estimates

·     SOFI +13%; as Q3 EPS loss (-$0.09) vs. (-$0.10) and revs $419.3M vs $391 est. and Q3 adj Ebitda rises to $44.3M; raises FY22 revs to $1.517-1.522B above est. $1.50B, and adj EBITDA $115-120M; said total members over 4.7M, +61% y/y 

·     UBER +12%; after mixed results/better guidance as forecast Q4 adjusted EBITDA between $600M-$630M vs. est. $569.4M after better Q3 Ebitda and revs (EPS and bookings missed);

Stock LAGGARDS

·     CTLT -23%; Q1 EPS $0.34 miss the $0.56 est. and revs slip -0.3% y/y to $1.02B below ests $1.09B

·     FLS -2%; report Q3 miss driven by weakness in both segments with outlook also below consensus but mgmt. notes some of issues impacting 3Q not likely to persist into 4Q

·     GT -12%; reported soft 3Q22 results with revenue/SOI both missing consensus expectations, largely driven by weaker than anticipated volumes, particularly out of Europe

·     LLY -3%; eked out EPS/revs beat but now sees 2022 EPS in the range of $7.70-$7.85, down from range of $7.90-$8.05 after Q2 and below the $8.50-$8.65 guided at the beginning of the year

·     SYK -5%; as top line strong with 10% organic growth, but margin headwinds worse than expected and guides FY adj EPS $9.15-9.25 below prior $9.30-$9.50 and est. $9.36

·     TAP -4%; EPS missed and now expect to be at the low-end of the +HSD% range on cc underlying income/revenues beat on the quarter

·     VRNS -34%; Wedbush downgraded to Neutral saying delivered a disaster quarter and guidance along with a confusing conference call – also reported ARR of $447.8M, equating to 26% growth Y/Y and falling short of JMP estimate for $450M.

·     XRAY -3%; as restates 3q 2021 & full year 2021 financials