Mid-Morning Look

Monday, October 07, 2024

U.S. stocks are trading lower, a small pullback from last Friday’s big gains after the positive jobs report reduced recession fears, as investors now turn their attention to the start of earnings season and upcoming inflation reports (CPI Thursday and PPI Friday). The Dow, the S&P 500, and the Nasdaq eked out weekly gains after Friday’s rally while Treasury yields have pushed higher as the strong jobs report reduced expectations for another jumbo Fed interest rate cut. The 10-year Treasury yield topped 4% this morning (1^st time since Aug 8^th) and is up off lows around 3.60% just 2-weeks ago. Earnings get underway this week with banks JPM, WFC, BK among names reporting as well as DAL in airlines and PEP in consumer staples. More positive Wall Street commentary as Goldman Sachs made at least their third upgrade to S&P 500 forecasts this year as they now expect the S&P 500 to reach 6,000 in three months’ time, versus 5,600 previously, and 6,300 in 12 months’ time, versus 6,000 previously. Market concerns to start the week include Hurricane Milton which reaches Category 4 status and may weaken slightly prior to landfall but still expected to reach FL coast as a major hurricane Wednesday (at least Cat 3). Oil prices extended gains on Monday (after rising 10% last week), with Brent nearing $80 to build on last week’s steepest weekly jump since early 2023, driven by fears of a wider Middle East conflict and potential disruption to exports from the major oil-producing region. China markets reopen tomorrow after its week-long Golden Week holiday, but US listed China stocks continue to push higher after stimulus measures announced early last week. Goldman Sachs positive on space today.

• Homebuilder LEN downgraded to EW from OW and KBH to underweight from EW at Wells Fargo. For KBH, said sees better value elsewhere in homebuilding and believes KBH could lag its builder peers in the next phase of the cycle while for LEN, said it is favorably positioned in homebuilding, but its near-term setup is complicated by a few idiosyncratic dynamics that can no longer be ignored. Wells also upgraded MHK to Equal Weight from UW in flooring.
• In Industrial components: AME was downgraded to Sell from Hold at TD Cowen; GNRC was upgraded to Positive from Mixed view at OTR Global citing channel checks showing that U.S. residential standby generator dollar sales increased year-over-year in Q3 and that the 2024 outlook is for continued growth. Also, shares of GNRC, PWR, MTZ, HD, LOW remain active as Hurricane Milton is expected to intensify rapidly and impact the west coast of Florida as a major hurricane (currently projected landfall Wednesday near Tampa).
• In Chemicals: APD shares jumped as Activist investor Mantle Ridge has built a more than $1B stake in Air Products and plans to push for improvements at the industrial gas manufacturer, according to people familiar with the matter. https://tinyurl.com/5n7dh8wz (shares upgraded to Outperform at Evercore/ISI on news). DD was downgraded to Underweight at Barclays after recent bullishness has lifted shares to multi-year highs, and thinks the next few quarters offer more uncertainty and limited buyback support against full valuation, driving underperformance. Keybanc downgraded both SHW and CE to Sector Weight from Overweight in chemicals Q3 preview saying outlook mostly includes flat-to-down revisions, reflecting generally stagnant demand trends, and deceleration in the automotive end market – and expects an uninspiring 2H24 from an earnings perspective.

• APD +8%; after the Wall Street Journal reported activist investor Mantle Ridge has a more than $1 billion stake in the company, citing people familiar with the matter https://tinyurl.com/5n7dh8wz     
• B +2%; agreed to be acquired by private-equity firm APO in an all-cash transaction that values it at about $3.6 billion, with holders to receive $47.50 per share in cash, a 4.9% premium to the stock’s last close Reuters last week reported that Apollo was in talks to buy Barnes, citing people familiar with the matter.
• CVX +1%; agreed to sell its stakes in oil sands and shale assets to CNQ for $6.5 billion.
• GNRC +8%; was upgraded to Positive from Mixed view at OTR Global citing channel checks showing that U.S. residential standby generator dollar sales increased year-over-year in Q3 and that the 2024 outlook is for continued growth. Also seeing strength as Hurricane Milton is expected to intensify rapidly and impact the west coast of Florida.
• HIMS +10%; will replace VGR in the S&P SmallCap 600 effective prior to the opening of trading on Wednesday, October 9. JT Group is acquiring Vector Group in a deal expected to close soon pending final conditions.
• MSTR +7%; outperforming behind Bitcoin strength topping $64,000
• NAPA +101%; shares surged after agreeing to be acquired by private-equity firm Butterfly Equity in an all-cash deal valued at about $1.95 billion as Duckhorn shareholders will receive $11.10 a share in cash and following the completion of the transaction it will become a privately held company.
• PFE +4%; shares edged higher after activist investor Starboard Value has taken a roughly $1 billion stake in the drug maker and wants the struggling drugmaker to make changes to turn its performance around, according to people familiar with the matter. Pfizer had a market value of about $162 billion as of Friday, the WSJ reported.
• SRRK +300%; shares surged after reports Apitegromab meets primary endpoint in Phase 3 SAPPHIRE study in patients with Spinal Muscular Atrophy (BHVN rises after rival SRRK genetic disease drug meets main goal in late-stage trial).
• VSTO +9%; which split itself into ammunitions and outdoor goods businesses, agreed to sell both divisions for a total of about $3.4 billion. Vista will sell its outdoor goods unit Revelyst to Strategic Value Partners in an all-cash transaction at an enterprise value of about $1.13 billion
• WYNN +1%; LVS, MGM, MLCO shares rose initially on better-than-expected Macau gross gaming revenue for the Golden Week Holiday, which began Oct. 1. In addition, Wynn received a commercial gaming operator’s license in the United Arab Emirates.

• CIEN -3%; downgraded to Neutral at JP Morgan noting shares of Ciena have increased +49% YTD vs S&P 500 increasing +21%, as believes the EPS upside is more limited relative to the upside embedded in the shares at 27x NTM P/E
• EG -7%; insurance weak, led by reinsurers such as EG ahead of Hurricane Milton impact.
• GRMN -4%; downgraded to Underweight from Equal Weight at Morgan Stanley and cut tgt to $138 from $155 noting that shares are trading near all-time highs while the co’s revenue and gross profit set to decelerate nine points in 2025.
• HSY -2%; was downgraded at both UBS and Bernstein as believes a volume recovery may be more sluggish than previously expected due to weigh loss drug headwinds.
• MBLY -4%; downgraded to Underweight from Neutral at JP Morgan saying they expect the lower confidence in the volume ramp associated with SuperVision following replacement by an in-house solution at Zeekr.