Closing Recap

Tuesday, February 13, 2024

U.S. stocks finished sharply lower (though rallied in final 30-minutes paring losses) as a “hot” CPI inflation report drove U.S. Treasury yields higher (10-yr +13 bps above 4.3%), pushing back market speculation for imminent interest rate cuts and sunk interest rate sensitive stocks. The small-cap Russell 2000 index fell the most, down almost 4% (narrowly avoided its first 4% daily decline since June 2022), while the Dow tumbled over 500 points after closing at an all-time high the day prior and the Nasdaq posted a near 2% decline. The S&P 500 avoided its first 2% closing decline since February 2023 but was broadly weaker with more than -1.5% declines for REITs (XLRE), Materials (XLB), Financials (XLF), Technology (XLK), Consumer Discretionary (XLY) and Utilities (XLU). The Consumer Price Index M/M rose +0.3% vs. est. +0.2% (vs. +0.3% prior) and rose +3.1% Y/Y vs. est. +2.9% (vs. prior month +3.4%). On a core basis, or ex food & energy, CPI M/M rose +0.4% vs. est. +0.3% (vs. Dec +0.3%) and Y/Y rose +3.9% vs. est. +3.7% (vs. Dec +3.9%). Does one data point (the CPI today) change the “soft landing” thesis for stock markets? Maybe not, but certainly took a big bite out of the Fed recent dovish tilt ahead of the producer price index (PPI) data later this week. Trader bets for an at least 25-basis-point rate reduction in May dropped to 38.7%, from about 58% before the data, while expectations for June stood at 78%, the CME FedWatch tool showed. Doubleline Capital’s Jeffrey Gundlach noted in a CNBC interview that it doesn’t look like the Fed will start cuts in May, likely June if at all and says if Fed cuts, should be 50 basis points.

Note the U.S. stock market has rallied 14 of the last 15-weeks (up 5 weeks in a row into this one) predicated on the belief that the Fed’s job is done on inflation and there will be no additional hikes/several rate cuts in 2024 and that there will be “no landing” for the US economy (hard or soft). The hawkish CPI data today, although only data point, certainly put a dent into the thesis of rate cuts by the Fed coming soon, leading to today’s stock market pullback. Treasury yields jumped and the dollar hit more than 3-month highs on the CPI results with interest rate sensitive Smallcaps, REITs, homebuilders, and dividend paying sectors seeing the biggest declines.

Earnings to this point of the season remains strong as UBS noted 77.7% of the S&P 500’s market cap has reported and Q4 expectations are for revenues to grow 3.4% and EPS by 9.1%. Earnings are beating estimates by 7.1% in aggregate, with 72% of companies topping projections. EPS is on pace for 10.7%, assuming the current beat rate for the rest of this season. Firms beating on both revenues and EPS are outperforming the market by 1.4% vs a historical average of 1.7%, while ones missing on both are underperforming by -4.3% vs. -3.1%.

In Washington, U.S. Senators approved a $95 billion aid package providing funds for Ukraine, Israel, and Taiwan, but its future remains uncertain as the bill passed by 70-29 votes in the Democrat-led legislature but must still be approved by the Republican-led House of Representatives.

• OPEC left 2024 world oil demand growth forecast unchanged at 2.25M bpd according to a monthly report and leaves 2025 world oil demand growth forecast unchanged at 1.85 mbpd. OPEC also raised the 2024 world economic growth forecast to 2.7% (previous 2.6%) and raises 2025 world economic growth forecast to 2.9% (previous 2.8%).

• In Retail: EXPR shares slide after the WSJ reported late Monday the retailer is preparing for a debt restructuring that could include filing for bankruptcy within weeks; in toy retailers, HAS shares fall as Q4 EPS misses ($0.38/$1.29B in sales vs. est. $0.66/$1.36B) on persistent demand weakness in toy industry and weaker forecasts. In apparel, PLCE was downgraded from Neutral to Sell at B Riley and cut tgt to $4 from $19 saying PLCE has run-rate EBITDA of ($3.5M), ~$265M of net debt, limited availability on its credit line, and a $50M-$75M imminent seasonal funding need. Late day, WSJ reported WMT is in talks to buy TV maker VZIO for more than $2B. http://tinyurl.com/y69b2nyb
• Online Retail: SHOP shares slid as posted Q4 EPS and revenue beat ($0.34/$2.14B vs. $0.31/$2.08B) as Gross Payments Volume grew to $45.1B, representing 60% of GMV processed in the quarter, versus $34.2B y/y, but higher expenses and margin concerns weigh as sees Q1 GM expected to increase approximately 150 basis points compared to Q4.
• In Restaurants: DNUT shares fall after forecasts annual revenue growth and adj. profit below ests citing increased operating and marketing expenses (guided FY rev growth 5%-7%, mid-point below est. 6.2%); QSR shares pressured after comp sales growth in QSR’s international business falls to 4.6% from 10.5% a year earlier.

• In Online Travel: TRIP said it formed a special committee to explore potential deals citing the recent LTRPA disclosure of its intent to evaluate potential alternatives involving LTRP (owns 21% stake) and Tripadvisor.
• In Cars: Auto Retailer AN posted Q4 earnings and revenue above Wall Street estimates as sales of new vehicles rose 7% y/y but used-vehicle revenue dropped 12% to $1.9B; in Tires, GT shares declined after posted a wider Q4 loss as tire volumes were down about -3.8%, while global replacement volumes fell 6.7% and expects global unit volumes to be down -2% in Q1; in car rental, CAR shares tumbled (weighed on transport index) after Q4 revs $2.76B was flat y/y and missed the $2.81B estimate while company noted they reduced costs in period.

• In FinTech: Benchmark initiated coverage of the Fintech sector with five Buys and one Hold. Buy were SQ ($89 tgt), CMPO ($7 PT), PAYO ($7 PT), RPAY ($10 PT), and FOUR ($95 PT) with PAR at Hold saying valuations of Fintech stocks continue to reflect investor skepticism about the sector.
• In Financial Services: EFX upgraded from In Line to Outperform at Evercore/ISI saying they see headwinds abating, underscored by a trough and potential rebound in mortgage inquiries as interest rates likely decline and the employment picture remains stable. MCO shares fall following earnings results as EPS $2.19/$1.48B in revs missed the $2.33/$1.49B estimate as performance of its credit ratings and assessment unit fell short of expectations. Recall on Feb 8th, competitor SPGI shares fell after guided FF24 EPS $13.75-$14.00 vs. est. $14.43.

• In U.S. Commercial Real Estate, almost 20% of outstanding debt on US commercial and multifamily real estate will mature this year and need refinancing or lead to property sales; banks hold largest share of maturing loans at $441B – Bloomberg reported http://tinyurl.com/5fufxyuf
• BRX Q4 results topped consensus by $0.01 per share and issued initial NAREIT FFO guidance of $2.06-$2.10, which is in line with consensus at the midpoint; FY24 budget includes an incremental credit reserve (in addition to property-level budgeting assumptions) that detracts 50-100 bps from forecasted SSNOI growth.

• BIIB shares slip after revenue and profit shrink on Aduhelm costs, slumping sales of MS therapies; BIIB recorded charges related to dropping its controversial Alzheimer’s drug Aduhelm and as said sales slumped in its multiple sclerosis therapies, the company’s biggest drug category.
• BRKR Q4 revs of $855M tops $807M est. with 15.9% organic growth, driven by Scientific Instruments; FY24 rev guidance of $3.23B-$3.29B above $3.1B est.
• EWTX said it won FDA fast-track designation for EDG-5506 for the treatment of Duchenne muscular dystrophy.
• GSK was upgraded from Neutral to Buy at Citigroup saying the compelling DREAMM-7 data with belantamab mafodotin in myeloma is the missing piece after the last seven years without a positive recommendation.
• GTHX said its lead cancer therapy in combination with chemotherapy failed to prolong survival of patients with an aggressive form of breast cancer.
• KALV said its oral, on-demand treatment for the swelling “attacks” commonly experienced by patients with a genetic condition called hereditary angioedema achieved the goals of a Phase 3 clinical trial.
• LIAN said it has completed a strategic review and plans to initiate the winding down of its operations, including the sale of drugs in development.
• MEDP reported 4Q results with inline revs + Backlog and EBITDA ahead of expectations with better SG&A execution and raised its prior EBITDA guidance to $400M-$430M from prior $390M-$415M.

• In Rails/Railcars: WAB and CSX signed a deal for over 200 locomotive modernizations featuring a suite of digital solutions, innovations, and services. The agreement will transform the remaining AC4400 locomotives in CSX’s fleet providing improved fuel efficiency, reliability, utilization, and tractive effort.
• In Industrials: TEX downgraded from Buy to Neutral at UBS saying the company’s primary exposure is the US non-residential construction market, which UBS believes has downshifted to a phase of slow growth. WM shares advanced in the waste sector following earnings results.
• In Airlines: JBLU shares rose after activist investor Carl Icahn reports a 9.91% stake in JBLU as of Feb. 1, a filing showed; in research, UAL downgraded from Buy to Neutral at Redburn saying its previous conviction was driven by rational long-haul capacity dynamics persisting through 2024, where United has the greatest exposure of the network airlines.
• In Homebuilders (BZH, DHI, LEN, TOL): the group weakened following the “hotter” CPI inflation report as it lowered expectations for near term rate cuts by the Fed and boosted Treasury yields, in turn mortgage rates.

• In Media: Super Bowl 58 was the most-watched television show ever with 123 million viewers; PARA said to cut 800 jobs days after ratings record for the Super Bowl.
• ANET slides after posting a beat on the Dec-Q, guiding in-line Mar-Q, and maintaining +10-12% 2024 sales outlook; strong Q423 driven by Enterprise and continued Cloud Titan growth.
• BLKB missed Q4 top-line but showed good efficiency and provided guidance largely in-line with expectations; maintained its Rule of 40 performance and guided for 40% on the metric in FY24.
• CDNS shares slipped as guided Q1 revs to fall about 2% to between $990M-$1.01B below the analysts’ average of $1.08B and Q1 adj EPS $1.10-1.14 vs est. $1.37 (followed Q4 beat top/bottom line).
• DDOG posted higher revs and in-line EPS for Q4 but guided full-year revenue of $2.56B-$2.58B, below consensus of $2.59B and EPS well below at $1.38-$1.44 vs. expectation of $1.83.
• TDC falls on outlook as guided Q1 EPS of $0.53-$0.57 (vs. consensus $0.74), FY24 non-GAAP EPS of $2.15-$2.31 (vs. consensus $2.40); public cloud ARR growth of 35%-41% y/y (vs. consensus 47%); total ARR growth of 4%-8% (vs. consensus 9%); and free cash flow of $340M-$380M (vs. consensus $394M); while said saw a handful of large public cloud deals push out, including one eight-figure deal and saw two large on-premise deals “erode”.
• ZI Q4 results were largely as expected with revenue and operating margin upside consistent with recent quarters, while guidance was below consensus at the midpoints; cRPO bookings growth of 0.3% YoY slightly below estimate though billings were slightly better.

• GFS reported Q4 EPS $0.64 above $0.58 (but below $1.44 y/y) on in-line revs $1.85B, but forecasts Q1 net revenue $1.50B-$1.54B below consensus est. $1.76B
• LSCC forecast Q1 revenue between $130M-$150M vs. est. $174.4M and in-line EPS of $0.45 while expects gross margins for Q1 to be 69%, compared with ests of 70.4% – still shares rallied early – analysts noted the results reflect weakening demand in Comms Infra, which is broadening out into Industrials and Automotive in Q1.
• Mizuho raised price tgts for several semi names AMD ($200 from $175), AVGO ($1450 from $1250), CRDO ($28 from $25), NVDA ($825 from $625) as believes: 1) Near-term demand outstrips supply on H100, 2) B100 sets up for strong 2024 guidance, and 3) Continued Hyperscaler CAPEX and CoWoS capacity improves positioning for upside in AI.