Mid-Morning Look

Tuesday, October 31, 2023

U.S. stocks trade mixed after a stellar Monday (where the S&P closed higher for the 23^rd Monday out of last 25), though the market poised for its third consecutive monthly loss as investors wait for a Federal Reserve meeting to shed more light on the interest-rate outlook. Lots of macro events playing a role in today’s early move as: JPY/USD rises to fresh one-year high vs yen, up 1.3% above 151 after Bank of Japan actions overnight. Weaker manufacturing data in China not helping materials and industrials early as China PMIs fall short with manufacturing 49.5 (from 50.2 in Sep) and non-manufacturing at 50.6 (down from 51.7 in Sep). Inflation data in Eurozone improved in monthly data. Markets now await the FOMC interest rate policy meeting tomorrow (no change expected to rate but hawkish commentary is). In stock news, Dow component CAT posts quarterly beat but cautious guide and comments on China weigh on shares, while PFE and AMGN fall after their results. Ton of economic data (see below) ahead of key ADP jobs, JOLTS data tomorrow and nonfarm payroll on Friday.

Economic Data

·     Chicago PMI inched down to 44 in October from 44.1 in the prior month, and below consensus of 45.3, in contraction territory for a 14 straight month in October.

·     The Consumer Confidence index falls to 102.6 from Sept revised 104.3, but above the 100 est. as the present situation index 143.1 in Oct vs Sept revised 146.2 and the expectations index 75.6 in Oct vs Sept revised 76.4 (previous 73.7). US jobs hard-to-get index 13.1 in Oct vs Sept 14.2.

·     Q3 employment cost index +1.1% (consensus +1.0%) vs Q2 +1.0% (prev +1.0%); U.S. Q3 wages/salaries +1.2% vs Q2 +1.0% (prev +1.0%) and U.S. Q3 benefit costs +0.9% vs Q2 +0.9%. The index has been rising 1.0% or more for 9 consecutive quarters, with the 1.4% surge in Q1 2022 the historic high. Wages and benefits were up 1.2% versus 1.0% in Q2 and 1.2% in Q1.

·     The FHFA House Price Index for August rose +0.6% vs. +0.5% consensus and +0.8% in July and on a y/y basis, home prices rose 5.6%, outpacing the 4.6% climb in the prior month. For the nine census divisions, seasonally adjusted monthly price changes ranged from -0.2% in the South Atlantic division to +1.1% in the Pacific and East North Central divisions.

·     The S&P CoreLogic Case-Shiller Home Price Index showed that house prices continued their upward trend in August. The HPI composite for 20 cities, seasonally adjusted increased 1.0% M/M, exceeding the +0.7% expected and 0.9% rise in July.

Sector Movers Today

·     In REITs: BRX reported in-line 3Q23 FFO of $0.50/share and management raised guidance ~0.75% at the midpoint to be in line with consensus, results in the quarter were better than anticipated. KRG reported a $0.03/share high-quality beat in the quarter driven by a combination of higher minimum rent growth, favorable net tenant recovery income, higher overage rent, and lower bad debt expense in the quarter. Management increased its FY23 FFO guidance by 1.5% at midpoint. PSA 3Q beat (+$0.13/share vs. consensus) that drove a 0.7% increase in the FY23 FFO guidance midpoint. NOI growth continues to decelerate (1.9% y/y in 3Q, compared to 6.2% in 2Q23). RWT posted Q3 lower-than-expected earnings available for distribution (EAD), a slight decline in book value, yet a substantial sequential rise in residential mortgage banking lock volumes. SPG posts Q3 FFO/share beat, Q3 FFO/share of $3.20 tops est. $2.97, says mall/premium outlets occupancy was 95.2% at end-Sept compared to 94.5% in same period last year. WELL reported normalized FFO beat (+3%) and its fifth and largest increase to 2023 normalized FFO.

·     Mixed reaction in semiconductor earnings: 1) LSCC reported in-line 3Q results and guided 4Q lower, attributing weakness in its outlook to softening demand in comm infra, industrial, and automotive end markets (sees Q4 revs $166-186M below the est. $192.1Mm); 2) WOLF shares outperform, after the silicon-carbide company forecast a slimmer-than-expected loss for its next quarter, better than recent peers ON and TXN which guided lower; 3) MPWR shares moved higher on better results and slightly better guidance and a $640M stock repurchase program; 4) AMKR shares fall after Q4 guidance falls short of consensus (Q4 EPS 32c-49c and revs $1.625B-$1.725B, below consensus 63c/$1.87B respectively).

·     In Pharma: GSK will pay JNJ about $1 billion for exclusive rights to further develop and commercialize its hepatitis B therapy; JNJ-3989 was initially developed by ARWR and licensed to Janssen in 2018. LLY is buying rights from BEAM to develop and commercialize treatments for heart disease that make use of an experimental gene-editing technology; BEAM will receive a $200M upfront payment, $50M equity investment and eligible for up to $350M in milestone payments. PFE reports Q3 adjusted EPS loss (-$0.17) vs. est. loss (-$0.32); Q3 revs $13.23B vs. est. $13.34B; launched enterprise-wide cost realignment program and reaffirms full-year 2023 non-covid operational revenue growth expectation of 6% to 8% vs. 2022. Shares of rival covid-vaccine makers MRNA, BNTX, NVAX down after PFE swings to qtrly loss as demand of covid shots slump.

Stock GAINERS

·     ANET +9%; price tgt raised by several Wall Street analysts after Q3 results as revs rise 28% y/y to $1.51B topping vs. est. $1.48B and EPS beat while guided Q2 revs $1.5B-$1.55B above consensus of $1.47B. ANET upgraded to Overweight at Morgan Stanley.

·     BEAM +10%; LLY is buying rights from BEAM to develop and commercialize treatments for heart disease that make use of an experimental gene-editing technology; BEAM will receive a $200M upfront payment, $50M equity investment and eligible for up to $350M in milestone payments.

·     BUD +4%; slight beat and announced a $1B buyback; better-than-expected Q3 organic sales growth (+5% vs. est. +4.7%) though volumes worse than expected (fell -3.4% vs. est. -2.7% decline).

·     GPN +2%; boosted its FY23 EPS forecast to $10.39-$10.45 from prior $10.35-$10.44 after a Q3 EPS beat as Merchant solutions segment revenue in Q3 rises 19%; said customer spending remains resilient, backed by strong wage growth and a tight labor market.

·     LDOS +7%; among top gainers in the S&P after quarterly results top estimates.

·     PINS +14%; beats estimate for Q3 revenue and profit with EPS $0.28 topping $0.20 estimate and revs $763.2M beating $743.5M estimate as growth and margin exceeding expectations; has reported accelerating revenue growth for three consecutive quarters.

·     WOLF +22%; after the silicon-carbide company forecast a slimmer-than-expected loss for its next quarter, better than recent peers ON and TXN which guided lower.

Stock LAGGARDS

·     BP -4%; Q3 earnings were below consensus forecasts despite producing more oil and gas, seeing higher realized refining margins and strong oil sales, and couldn’t meet market expectations of $4.01 billion for underlying replacement cost profit.

·     CAT -5%; reported big beat for Q3 EPS and sales but shares reverse pre mkt gains after inventories up, backlog down; said falling order backlogs are being driven by shorter lead times for filling orders and not an indication of deteriorating demand for machinery; the company said won’t offer specific guidance for 2024 until early February.

·     FMC -8%; Q3 adj EPS $0.44 vs. est. $0.45; Q3 revs $982M vs. est. $1.11B; said in qtr results were significantly below prior year driven by volume headwinds; guides FY revs $4.48B-$4.72B vs. est. $4.69B and reduces FY free cash flow outlook.

·     JBLU -16%; forecast a wider-than-expected loss in the current quarter after Q3 missed expectations due to significant delays during the summer travel season (Q3 revs fell 8% to $2.35B missing the $2.38B est. and posted a loss of $153M vs. $57M profit y/y).

·     LSCC -18%; reported in-line 3Q results and guided 4Q lower, attributing weakness in its outlook to softening demand in comm infra, industrial, and automotive end markets (sees Q4 revs $166-186M below the est. $192.1Mm.

·     PETS -36%; after suspends dividend and reports net loss vs. net income $2.6M last qtr.

·     SRPT -44%; after saying results from its Embark Phase 3 study of Elevidys in patients with Duchenne muscular dystrophy between the ages of 4 through 7 years missed its main goal. Shares of CTLT, which does the manufacturing for SRPT’s gene therapy, also fell.

·     VFC -8%; posted softer-than-expected gross margin, which offset a top-line beat for a bottom-line miss while management withdrew FY guidance/reduced FCF guidance and cut its dividend 70%.

·     WDC %; after announces $1.3 bln convertible notes offering.