Mid-Morning Look

Wednesday, November 02, 2022

The day is finally here! After weeks of back and forth on Fed fund futures, rate outlooks, volatile swings in forex, Treasuries and stock markets, the Fed two-day November policy meeting wraps up this afternoon when a 75-basis-point rate hike is widely expected (would be 4^th straight 75-bps hike), with the focus on whether Fed Chair Jerome Powell signals a downshift in the pace of rate hikes ahead. So, will Powell remain relentlessly hawkish with no stopping as he has since Jackson Hole message late August? Will he be hawkish with a slowdown in cadence of hikes? Will he note hikes to this point have been effective and outlook will be more data dependent? If so, the last few payroll readings have been strong, heading into this week’s Nonfarm payrolls. Current Fed Fund futures have a 44.7% of a 50-bps hike in December and 49.2% of a 75. Either way, it will make for a volatile last two hours of trading. The SPX cash 50-day moving average comes in at 3829, followed by the psychological 3800 level. On the upside, the 100-day MA is roughly 3,900. Investors are looking (hoping) for a clear signal that the Fed plans to slow, or perhaps even pause. Note the Fed’s preferred measure of inflation, the core PCE price index, eased modestly last month, but is still running at a 4.9% annual clip. while the September JOLTS report suggest some 10.7 million positions remained unfilled, and today ADP was a beat.

In between all the macro is one of the busiest days of earnings for the quarter with a handful of disappointments sinking names in consumer (GOOS, TUP, LL, EL), transports (CHRW, AMKBY), TMT (PARA, ZI) with only a few notable positive standouts on earnings (CRL, MTCH, CZR, CVS). Also, China Covid lockdowns picking up steam and impacting some of biggest companies: China has ordered a 7-day lockdown of the area around Foxconn Technology main plant in Zhengzhou, a move that will severely curtail shipments in the world’s largest AAPL iPhone factory, while TSLA shut its flagship China showroom in Beijing last month, according to a person familiar with the matter, per Bloomberg.

Economic Data

·     ADP national employment report shows U.S. employment increased by 239,000 private sector jobs in October, above prior 208,000 and the estimate of 195,000 jobs – strongest gain since July, driven by leisure/hospitality (+210k); manufacturing sector lost 20k jobs

Sector Movers Today

·     Healthcare Services: WBA and CVS have agreed to pay more than $10 billion in a landmark settlement to resolve opioid-crisis lawsuits brought by states, cities, and other governments, the WSJ reported https://on.wsj.com/3sRU0NC ; separately, CVS raised adjusted eps guidance range to $8.55-$8.65 from $8.40-$8.60 and boosted cash flow from operations guidance range to $13.5B-$14.5B from $12.5B-$13.5B after better quarterly results; BFAM reported a slightly adjusted EPS beat, driven by revenue outperformance and lower share count while reduced the high-end of 2022 guidance, mainly due to higher f/x, interest, and taxes; HUM posts 10% rev increase amid rise in Medicare membership and premiums

·     Bank movers: WSJ reported broken deal triggered currency losses for BCS, DB and Citi (C) as the damage, around $100 million for Barclays, related to hedges the banks provided on Prosus’ failed deal for BillDesk https://on.wsj.com/3h7lix7 ; Moody’s cuts outlook for European banks, including Germany’s, on credit woes; WSJ reported Oak Hill Advisors LP, a subsidiary of TROW that manages $56B and is best known as a corporate-debt investor, said that it led a consortium to pay about $1.8B for 1.7 million acres of forest, one of the largest U.S. timberland purchases in years; in exchanges, NDAQ downgraded from Outperform to Neutral at Credit Suisse following robust stock outperformance relative to exchange peers (NDAQ +7% vs -18% avg for group) and the SP500 (-14%); CME reported Oct. Avg daily contract vol. +11% and Avg daily volume 22.7m

·     Chemicals: DD terminated its $5.2B buyout of ROG, after DuPont said the termination of the deal was agreed with Rogers as they have been unable to obtain timely clearance from all the required regulators. https://bit.ly/3Wmvr90 ; LTHM reported an in line Q3 but a slight FY guidance increase did not meet Street expectations and weighed on shares; FMC reported 3Q adj. EPS/EBITDA of $1.23 / $261mm, beating consensus $1.11 / $245mm and narrowed FY EPS/EBITDA guidance to $7.10-$7.60 (vs. $7.00-$7.70) and $1.37-$1.43bln (vs. $1.36-$1.44bln), respectively, implying a touch weaker 4Q; ENVX tumbles after Q3 rev miss, below expectations

·     Restaurants: CAKE 3Q results were short of expectations on all fronts, with an adj loss per share of 3c vs Street estimate +28c, a function of modestly weaker sales but also the lowest store margins since 2020; EAT a mixed Q3 as PES of $0.57 misses by 4c on better revs up 9% y/y to $955M (est. $933M) on better operating margins; DIN 3Q adj EPS $1.66 vs est. $1.30 on revs $233.2Mm vs est. $228.3Mm; IHOP comps +1.9%, Applebee’s comps +3.8%; DENN Q3 EPS $1.66 vs est. $1.30 and revenue $233.2M vs. est. $228.8M on better EBITDA $63.6M and guides FY EBITDA $243M-$248M vs prior $235M-$250M; YUMC and YUM also with quarterly results

Stock GAINERS

·     AMD +4%; reported Q3 revenue of $5.6 billion, which was in line with management’s revised guidance provided on October 6th

·     ARCT +31%; announced it entered a collaboration with CSL Seqirus (subsidiary of CSL Limited,) for the development and global commercialization of vaccines

·     BAND +41%; posted solid Q3/22 results ahead consensus expectations with total revenue of $148M ahead of $141M forecast and profitability was also better-than-expected

·     BNFT +47%; VOYA agreed to acquire the company, paying $10.50 per share in an all-cash transaction priced at around $570 million. https://bit.ly/3TX6L5x 

·     CHGG +22%; reported good results for the September quarter coming in ahead of muted expectations; the company narrowed its FY22 guidance range raising the midpoint to ~ $764M

·     CVS +3%; raised FY adj eps range to $8.55-$8.65 from $8.40-$8.60 and boosted cash flow from operations guidance range to $13.5B-$14.5B from $12.5B-$13.5B after better quarterly results

·     CZR +6%; reported an upside 3Q adj. EBITDA result of $1.01b vs. Street’s $929m. Las Vegas trends remain strong, with October a record month for CZR

·     MTCH +9%; reports better-than-expected Q3 revenue as users looking for matches and connections took paid subscriptions on dating app Tinder, though did guide Q4 revs $780M-$790M, below estimates of $809.2M

Stock LAGGARDS

·     ABNB -8%; gave a disappointing outlook for bookings in the fourth quarter; suggesting that consumer preferences are shifting away from higher cost rentals – offsetting a good Q3 report

·     CHRW -7%; after Q3 EPS miss of $1.78 vs. est. $2.17 and revs $6B vs. est. $6.34B as said Income from operations decreased 7.5% to $287.6 million – cites lower freight demand levels

·     EL -5%; posts better Q1, but Q2 guidance well below ests and cuts FY23 adjusted EPS view to $5.25-$5.40. from $7.39-7.54 (est. $7.39) and sales are forecasted to decrease between 8% and 6% versus the prior-year period

·     GOOS -2%; cuts FY23 EPS view to C$ 1.31-1.62 from C$ 1.60-1.90 and lowers FY22 revenue view to C$ 1.2B-1.3B from C$ 1.3B-1.4B

·     LL -18%; Q3 EPS loss ($0.14) vs. est. $0.26 and revs $238.8M below consensus $288.6M; comps (7.3%) vs consensus 0%; not providing financial guidance currently but does expect consumer spending headwinds to persist throughout the remainder of 2022

·     PARA -10%; reports Q3 EPS miss $0.39 vs. est. $0.46 on weaker revs $6.92B vs. est. $7.06B as DTC revs $1.23B vs. est. $1.26B/said advertising revs declined 2%, citing macroeconomic headwinds

·     ROG -43%; as DD terminated its $5.2B buyout of ROG as they have been unable to obtain timely clearance from all the required regulators

·     TUP -40%; as Q3 net sales declined 20% Y/Y to $302.8M, and says inability to maintain compliance with covenants in credit agreement raises substantial doubt about ability to continue as a going concern

·     TWLO -3%; double downgraded to Underperform at Bank America and slash tgt to $85 from $175 based on recent DevSecOps survey where 52% of respondents expect to spend the same or less with TWLO in 2023

·     ZI -26%; delivered revenue ahead of consensus, the miss on billings ($257M vs est. $284M) and commented about the worsening macro backdrop with weak Q4 guidance sent shares down