Mid-Morning Look

Thursday, October 01, 2020

After closing out the month of September with declines for all major averages (first monthly decline since March), U.S. stocks open higher to start October (and quarter), led by a further bounce in technology stocks as the Nasdaq Composite outperforms, while the energy sector leads the declines in the S&P (HAL, XOM, APA, NOV). Markets continue to make bets on more fiscal stimulus out of Washington, though the sides remain far apart after more meetings yesterday between Secretary Treasury Mnuchin and House speaker Pelosi. Economic data helped rally markets on Wednesday, but more of a mixed picture today as jobless claims improve (but remains stubbornly high) on in-line inflation readings while manufacturing data was mixed and construction spending higher. Mixed earnings/guidance in the consumer staples sector today with PEP, PEP and CAG all reporting views while BBBY a nice upside surprise in retail. Semiconductors outperform behind better revenue numbers out of STM as shares advance. Markets await the monthly nonfarm payroll report tomorrow morning.

Economic Data

·     US jobless claims fell to 837,000 in the latest 26 week vs. est. 850,000 while prior week revised to 873,000 from prior 870,000; US continued claims fell to 11.767M vs. est. 12.225M and prior week 12.747M; jobless claims 4-wk avg fell to 867,250 in latest week from 879,000 prior week; US insured unemployment rate fell to 8.1% from 8.7% prior week

·     U.S. overall and Core price indices both rose +0.3% in August vs July’s +0.4% while personal spending growth slowed to +1.0% from July +1.5% (est. 0.8%) and real consumer spending growth also slowed to +0.7% from July +1.1%; Personal savings rate also decreased in August to 14.1% from July 17.7%

·     IHS Markit September final manufacturing PMI at 53.2 (vs flash 53.5), sector final output index for September at 53.1 vs flash reading 53.3 and final august 52.7 and final new orders index for September at 53.6 vs flash reading 54.0 and final august 54.

·     ISM U.S. manufacturing activity index 55.4 in September below the consensus est. 56.3 as prices paid index 62.8 vs. est. 58.6 and 59.5 in august, New Orders falls to 60.2 in September from 67.6 in august and the employment index rises to 49.6 in September vs46.4 in august

·     Construction Spending for August rise +1.4% above the 0.8% estimate and above the 0.7% rise in July; Aug private construction spending +1.9%, public spending +0.1%

Sector Movers Today

·     Aerospace & Defense; BA shares rise after Federal Aviation Administration (FAA) chief Dickson conducted a 737 MAX test flight, a milestone for BA that is on quest to bring its aircraft back to service saying “I like what I saw on the flight” at a news conference following – but said that the process was not completed and he was not ready to give the jet a clean bill of health; TXT downgraded to Market Perform at Cowen and trim tgt from $39 to $38 as prefer GD amongst value, defense/biz jet hybrids with a better biz jet story; LHX upgraded to buy from neutral with $226 tgt at UBS as prior view was predicated on ambitious investor expectations, accounting post-merger that was less understood on an apples-to-apples basis with defense peers; RYCEY plans to raise £2B ($2.6B) by selling shares to existing investors and plans to raise at least £1B by selling bonds, and it may increase borrowing by up to £2B.

·     Consumer Staples: PEP reported results that beat estimates and grew since last year driven by strength in snacks. Q3 eps $1.66 on revs $18.09B vs $1.56 / $17.19B in Q3 2019 and guides FY organic rev growth to ~4% and core eps to $5.50, above the $5.37 consensus; STZ reported Q2 eps $2.76 on revs $2.26B vs. est. $2.51 / $2.19B and they do not provide FY21 guidance due to uncertainty surrounding the pandemic; CAG posts Q2 EPS 70c on $2.68B rev vs. est. 57c / $2.61B and ups its quarterly dividend to 27.5c from 21.25c as comp sales rose 15%, which was a decrease from last quarter’s 31.5% growth; AVO 8M share IPO priced at $12.00; SBH removed from the Midcap 400 and added to the S&P Smallcap 600 index

·     Leisure and Gaming; Macau gaming revenue down 90% in September, marking a sixth straight months of abysmal growth in the Macau sector due to the pandemic. Gaming revenue in Macau fell 90.0% in September to 2.21B patacas ($280M) as the pace of recovery was slower than anticipated (WYNN, MLCO, LVS, MGM) – YTD Macau GGR is down 82.5% to 38.61 patacas ($4.84B); DKNG was initiated outperform and $70 tgt at Needham; in theme parks, FUN guides Q3 revs $85M-$90M vs. rest. $119M (watch other theme parks SIX, SEAS)

·     Energy stock movers; VLO, HAL, HES, NOV, APA, MPC among top S&P decliners as energy continues to underperform; CPE shares rise after signing overriding royalty interest transaction with private investment vehicle managed by Kimmeridge Energy, generating $140 mln – has also issued $300 mln of principal value second lien secured notes to Kimmeridge; DVN was upgraded to buy at Truist given the upside they forecast as a standalone and materially more post-merger including one of the most consistent future shareholder return plans; CVE was downgraded to Underweight at JPMorgan; in refiners, VLO downgraded to Sell at Goldman Sachs citing concern about global refining fundamentals weighing on the company’s margins given capacity additions, unfavorable crude differentials and lower refining utilization rates.

Stock GAINERS

·     AEL +55%; shares surge after the WSJ reported ATH offered $36 a share in cash on Sept. 8, according to a letter sent to American Equity’s CEO that was viewed by The Wall Street Journal and would value it at more than $3 billion. https://on.wsj.com/2HEsRcC (later confirmed)

·     BBBY +26%; after swinging to a quarterly profit and posts first quarterly same-store sales growth in about 3 years of 6%, driven by ~89% growth from its digital channels (WSM, HOME comps)

·     CDNA +11%; announced the release of the final local coverage determination by Palmetto MolDx for AlloSure Heart

·     CPE +18%; after signing overriding royalty interest transaction with private investment vehicle managed by Kimmeridge Energy, generating $140 mln – has also issued $300 mln of principal value second lien secured notes to Kimmeridge

·     QDEL +4%; guided Q3 revenue $475M-$477M vs. est. $394.2M

·     SAIL +11%; will replace SBH in the S&P Midcap 400 index and was upgraded to overweight at Morgan Stanley with $50 tgt as see growing Cloud adoption driving accelerated share gains for SailPoint, with potential multiple expansion from higher mix of recurring SaaS revenue

·     SLDB +108%; surges after the FDA lifted clinical hold on co’s early-to-mid-stage trial of its experimental gene therapy for Duchenne muscular dystrophy (DMD

·     STM +7%; led semiconductors after posting prelim Q3 revs above the business outlook provided on July 23 as Q3 net revenues are $2.67B, up 27.8% sequentially (consensus: $2.47B) and vs. prior outlook was $2.45B

Stock LAGGARDS

·     CAG -2%; Q2 EPS 70c on $2.68B rev vs. est. 57c / $2.61B and ups its quarterly dividend to 27.5c from 21.25c as comp sales rose 15%, which was a decrease from last quarter’s 31.5% growth

·     CCL 2%; has cancelled cruises from all U.S. homeports except Miami & port Canaveral for November and December

·     GNW -6%; after Oceanwide takeover extended yet again

·     SELB -31%; following the release of the COMPARE Phase 2 trial data which failed to meet its primary endpoint of demonstrating superiority vs. competitor Krystexxa

·     VLO -5%; after being downgraded to Sell from Neutral at Goldman Sachs citing concern about global refining fundamentals weighing on the company’s margins

·     ZSAN -53%; slides after receiving a discipline review letter from the FDA in connection with the Qtrypta 505(b)(2) New Drug Application (NDA)

Syndicate:

·     Beam Therapeutics (BEAM) 5M share Secondary priced at $23.50

·     International Money Express (IMXI) 4.925M share Secondary priced at $13.50

·     Lithia Motors (LAD) 3.18M share Secondary priced at $220.00

·     Mission Produce (AVO) 8M share IPO priced at $12.00

·     Pulmonx (LUNG) 10M share IPO priced at $19.00

·     Par Technology (PAR) 3.35M share Secondary priced at $38.00

·     SPI Energy (SPI) 2.964M share registered direct offering priced at $5.40

·     Sun Communities (SUI) 8M share Secondary priced at $139.50