Closing Recap

Thursday, February 16, 2023

Index	Up/Down	%	Last
DJ Industrials	-431.66	1.26%	33,696
S&P 500	-57.09	1.38%	4,090
Nasdaq	-214.76	1.78%	11,855
Russell 2000	-18.75	0.96%	1,942

 

Equity Market Recap

·     A late day swoon erased a day of “buying the dip” as major averages wiped out what appeared to be another market bounce off lows while the S&P 500 closed just below the key 4,100 level, a battleground area for a few weeks now. Coming into the day, the S&P, in the last 19 trading days, 16 times we have closed higher than we opened – that did not continue today. For the first time in a while, stocks lost steam as Fed speakers (Bullard and Mester) both kept up the “hawkish” rhetoric on interest rates, with each saying they saw a compelling case for a 50-bps hike last meeting (when they upped by 25). Markets found footing early, climbing off lows just the first few minutes in, ignoring another round of unfriendly market data as January PPI (inflation) rose more than expected (following a “hotter” CPI earlier this week) and jobless claims slid, two factors the Fed is watching closely. At the same time housing starts and Philly Fed manufacturing was much weaker. The data pushed Treasury yields to the highest levels since December (10-yr 3.87%). Earnings season is coming to the tail end, and several stocks and sectors (see below) are reacting based on results, but the Fed, interest rates, and macro data are dominating the marketplace at this time. With monthly option expiration tomorrow, market activity could be interesting. @Bespokeinvest noted: The peak Fed Funds Rate has jumped to 5.267% for the July 2023 meeting. This was at 4.86% at the end of January. SPY is up 1.85% this month.

 

Economic Data:

·     Weekly Jobless Claims fell to 194K from 195K prior and est. 200K; the 4-week moving average rose to 189,500 from 189,000 prior; continued claims rose to 1.696M from 1.680M and the US insured unemployment rate unchanged at 1.2%.

·     January Producer Price Index “hotter” than expected, with headline PPI m/m rising +0.7% vs. +0.4% expected and vs. -0.2% in Dec (revised from -0.5%) and on a y/y basis, rose +6.0% vs. +5.5% expected and +5.5% prior (revised from +6.2%). Core PPI on a m/m basis rose +0.5% vs. +0.3% expected and +0.3% prior (revised from +0.1%) and on a y/y basis, rose +5.4% Y/Y vs. +5.0% expected and +5.5% prior (unchanged).

·     Housing starts for January fell -4.5% to 1.309M vs 1.36M consensus and worse than the Dec -3.4% and single-family starts -4.3% to 841,000-unit rate; multifamily -4.9% to 468,000-unit rate. Building permits for Jan rose +0.1% to 1.339M unit rate vs Dec -1.0%

·     Feb Philadelphia Fed Business Outlook reported with negative reading of -24.3 vs. est. -7.4 and previous -8.9 (now 6-straight months of negative readings – worst reading since May 2020). Segment breakdown: prices paid rose to 26.5 vs 24.5, new orders fell to -13.6 vs -10.9, employment fell to 5.1 vs 10.9, shipments fell to 8.7 vs 11.1 and inventories rose to 15.3 vs 0.9.

·     The sum of money owed by U.S. households mounted during the fourth quarter, climbing $394B to $16.90T. That’s the largest Q/Q increase in household debt in 20 years, taking balances $2.75T higher than at the end of 2019, before the pandemic, according to the Federal Reserve Bank of New York’s Household Debt and Credit Report published Thursday.

 

Fed speakers

·     Cleveland Fed President Loretta Mester said saw a compelling case for 50bps at last FOMC meeting and Fed has more work to do to control inflation. She said Fed will need to go above 5% and stay there for a while but how far Fed goes above 5% depends on data as upside risks to inflation remain in place. Noted January CPI data showed still more to do on cooling inflation.

·     St Louis Fed President James Bullard said continued rate increases would "lock in" slowing inflation and notes market-based expectations of inflation "now relatively low". Bullard said the economy is growing faster than previously thought, unemployment below long-run rate and output above potential.

·     U.S. crude oil futures settle at $78.49/bbl, down 10 cents, 0.13%; NYMEX natural gas march futures settle at $2.3890/MMBtu.

 

Commodities, Currencies & Treasuries

·     US Treasury 10-year yield rises to highs of 3.87%, its best levels since December while shorter term yields climb as well given higher inflation readings (PPI), though pared gains late day in quiet trading. The US dollar opened higher on the data and reversed as investors bailed on safe asset classes for riskier ones. Bitcoin surged to 6-month highs as risk assets continue to be bid up; prices hit highs above $25,00 with no news in the space to account for recent spike. Oil prices slip a dime, falling to $78.49 per barrel; NYMEX natural gas march futures settle at $2.3890/MMBtu, falling -3.3%, hitting 26-month lows. Brent crude futures settle at $85.14/bbl, down 24c, 0.28%.

 

 

Macro	Up/Down	Last
WTI Crude	-0.10	78.49
Brent	-0.24	85.14
Gold	6.50	1,851.80
EUR/USD	-0.0018	1.0671
JPY/USD	-0.19	133.91
10-Year Note	0.023	3.83%

 

 

Sector News Breakdown

Consumer Staples & Restaurants:

·     In dining: QSR upgraded to OW and establishing a one-year PT of $76 at Keybanc noting since the start of the pandemic, QSR stock has underperformed fast-food peers by 19%, but believe RBI’s growth prospects have improved significantly since 1H22. BLMN shares hit nearly 2-year highs after mixed Q4 (EPS beat revs miss) but issues upside year EPS guidance to $2.91-$3.00 vs. est. $2.70 and comps up 2%-4% vs. est. 2.3%; SHAK slips as revs in-line and quarterly loss widened to $10.7M while 4q comp sales +5.1%, est. +5.16%.

·     In beverages: SAM shares drop after weak earnings, downgraded to underperform at Bernstein as analysts say growth at Twisted Tea still can’t offset the declines and uncertainty around hard seltzer Truly, which has been terrible for many quarters (FY23 EPS $6.00-10.00 vs est. $11.02).

Retailers:

·     CROX Q4 EPS and revs topped, with the latter rising 61% y/y to $945M while forecasts FY profit above Wall Street estimates on stronger demand for Crocs and Heydude brands as sees EPS $11.00-$11.31 vs. est. $10.86. in toys, HAS Q4 adj EPS $1.31 misses est. $1.37 on weaker revs $1.68B (vs. est. $1.75B) and guides year below views $4.45-$4.55 vs. est. $4.92; watch maker FOSL said is implementing a restructuring and growth initiative, "transform and grow" and sees full year adj op margin to be approximately 0.4% compared to previous guidance of 2% to 3%; REAL said it will cut about 230 jobs and reduce its real estate as part of a cost savings plan intended to reduce operating expenses; expects to incur about $1.7M to $2.2M charges in 1Q.

·     In beauty: Cowen raises price tgts for BBWI $52 (Prior $45) ELF $70 (Prior $36) SBH $19 (Prior $14) SKIN $15 (Prior $20) ULTA $570 (Prior $503) saying Tough Compares at ULTA & Asia May Drive NT Downside at SKIN; Expect In-Line Guidance at BBWI . Beauty was strong during the holidays; but China remains uncertain, which makes us n-t cautious on SKIN. For ULTA, we think the n-t set-up is tough with full valuation, and guidance will likely be conservative, given tough compares. We are more positive for BBWI & OLPX.

 

Leisure, Gaming & Lodging:

·     In lodging, Hyatt (H), HST and WH all report results: HST Q4 FFO $0.44 vs. est. $0.42; Q4 revs $1.26B vs. est. $1.25B; but sees FY adj FFO $1.60-$1.82 below est. $1.87; WH Q4 adj EPS $0.72 vs. est. $0.62; Q4 revs $334M v. est. $323.43M; sees FY23 revenue $1.38B-$1.41B below est. $1.48B; Hyatt (H) also slipped after results/weakness in group.

·     In food delivery: UBER, DASH awaiting incremental details on the minimum pay proposal for food delivery workers in NYC. Bernstein noted that there has been a slight change in the language from the DCWP — the proposal is now expected by "February" and not "February 15th", which likely implies a slight delay. Nonetheless, it is imminent, and we should learn more soon.

·     In leisure/theme parks: PLNT downgraded to neutral at Davidson noting shares have outperformed in the last five months (up ~50% vs. S&P 500 +12%) despite no improvement in two key fundamental negatives. FUN Q4 revenue $365.99M tops consensus $345.76M and said attendance totaled 5.3M guests in Q4 while in-park per capita spending was $63.33.

·     In electric vehicles (EV) space: QS slides after reports wider Q4 loss of (25c) vs. (16c) y/y and wider Q4 negative adj EBITDA of -$64.8M vs. -$47.4M year ago and sees FY23 capex in range of $100-$150 mln (keep in mind stock jumped 32% the day prior into earnings). TSLA said it would recall 362,000 U.S. vehicles to update its Full Self-Driving Beta software after U.S. regulators said on Thursday the driver assistance system did not adequately adhere to traffic safety laws.

 

Homebuilders, Building Products, Home Furnishing:

·     ZG reported strong 4Q22 results, with revenue beating by ~$20 million and over half of that flowing through to EBITDA upside but the 1Q EBITDA guide was below the Street

·     In home improvement: Keybanc said their 1Q Home Improvement Contractor Survey points to a continued slowdown in near-term growth for home improvement professionals. From a supplier perspective, HD remained the preferred supplier (by the highest margin we have seen), though Pros who prefer HD cited a less favorable outlook for the near term and for next year (compared to those that prefer LOW).

 

Energy

·     Oil majors and equipment: BP to acquire TA for $86.00 per share, or approximately $1.3B, represents a 74% premium; MRO was upgraded to Buy at Benchmark after co reported adj EPS/EBITDA of $0.88/$1.0B, topping consensus while EG equity income of $144mm was in-line with guidance of $140mm. CVE said COO Jon McKenzie to become President and CEO, effective April 26 and outgoing CEO Alex Pourbaix will become executive chair; Q4 upstream production dropped to 806,900 barrels of oil equivalent per day (boepd), from 825,300 boepd a year-ago. In natural gas players, EQT reports better results; in services, BKR upgraded to overweight at Piper as they give credit for the improving visibility w/in IET; AR Q4 adj EPS/EBITDA of $1.04/$533mm compared to consensus of $0.92/$607mm and equivalent realizations missed consensus by 11% mainly on gas/Capex was $30-$35mm heavier than expected, entirely due to land spend.

·     In Utilities; handful of earnings results today in space with ETR, SO, NRG all reporting. In Coal: HCC reported 4Q adjusted EBITDA of $148M, missing consensus of $200M as continued shipping delays led to a ~300k ton sales shortfall, while margin/ton was nearly $14 lower than modeled – but delivered record full-year adjusted EBITDA and FCF. ARCH another mover following earnings results in coal space. In solar, SPWR shares outperform on top and bottom-line beat.

 

Financials

REITs:

·     Recap of earnings: IRT 4Q22 results largely in line with expectations but initial 2023 FFO guidance missed consensus by nearly 2% at the midpoint; INVH reported better than expected 4Q22 results, which were at the high end of management’s expectations but initial 2023 core FFO guidance missed consensus by less than 2% at the midpoint driven by lower SSNOI growth guidance; ROIC Q4 in-line and issued initial FY23 FFO guidance that fell $0.01 below consensus at the midpoint (-0.9%); RPT reported in-line 4Q results alongside initial FY23 FFO that fell ~2% below consensus at the midpoint; SITE downgraded to Hold at Jefferies after co reported 4Q results yesterday and guided ’23 organic sales flat to down MSD and adj. EBITDA of $395-425M vs. consensus $414M. In digital, EQIX 4Q AFFO/share beat Street estimates by 28c, while higher power costs drove an FY23 guidance beat for revenue but miss for AFFO.

 

Insurance & Services:

·     P&C insurance: ALL announces estimated catastrophe losses for January of $307M or $243M, after-tax, William Blair said January results signaled growth prospects for both PGR and digital aggregators QNST and MAX as the report highlighted that the earnings rebound is in full swing, and that growth is accelerating. TFC agreed to sell a 20% stake in its Truist Insurance Holdings Inc. unit for $1.95 billion in a deal that values the insurance brokerage at $14.75 billion. AIG Q4 adj EPS $1.36 vs. est. $1.29; Property damage, floods and power outages from frigid conditions pushed up AIG’s catastrophe losses in the quarter to $235M from $189M y/y.

 

Healthcare

Biotech & Pharma:

·     INO announced positive preliminary results from the second cohort of its Phase 1/2 clinical trial evaluating INO-3107 for the treatment of HPV 6 and HPV 11-associated Recurrent Respiratory Papillomatosis.

·     SGEN 4Q product revenue beat ($464mn vs. $426mn) was driven by Adcetris ($238mn vs. $213mn) and Padcev ($122mn vs. $112mn) and FY23 product revenue guidance of $1,925-$2,000mn bracketed consensus (upgraded at Raymond James to OP).

·     WST shares jump and among top gainers in the S&P 500 after earnings results.

 

Healthcare Services & MedTech movers:

·     In diagnostics/labs: LH beat quarterly profit estimates, helped by strength in its diagnostics business and demand for its drug development services as test providers such as ABT have seen a rebound in demand for routine testing in the recent quarters; QDEL reported strong Q4’22 earnings and gave FY’23 guidance that was above street estimates.

·     Dental stocks slide after HSIC Q4 sales of $2.01B miss $2.12B estimates and guided year EPS $4.69-$4.86 below est. $4.95 citing patient appointment cancellations and staffing shortages (shares of XRAY, ALGN, PDCO pressured on day).

·     In life sciences: TXG reported revenue of $156mn vs. est. $148mn (vs $144mn last year), gross margin for 4Q22 was 76% compared to gross margin of 81% y/y and guided to FY23 revenue of $580mn to $600mn or 12%-16% y/y growth vs. est. $614mn. 

·     In hospitals: CYH rallies after reporting 4Q results that were ahead of consensus, with EBITDA of $404M (vs. ~$370M cons), with the quarter driven by strong volumes with adj admits +8.2% and initial 2023 rev guidance was slightly below consensus while adj EBITDA guide was above.

·     In services: TRUP reported a strong Q4 with subscription pets up +24% Y/Y.

 

Materials, Industrials, Aerospace & Defense

·     In Defense, the Chinese Commerce Ministry said it blacklisted LMT and an arm of RTX over the companies’ arms sales to Taiwan. Putting the companies on its "unreliable entities list" prohibits them from export and import activities related to China.

·     In waste sector: RSG beat 4Q top- and bottom-line consensus estimates and guided FY23 adj. EPS/FCF above the Street and price/yield trends improved sequentially; WCN beat 4Q top- and bottom-line consensus estimates on stronger price and margin performance while guiding FY23 slightly above Street.

·     In chemicals: SMG upgraded to Overweight from Equal weight at Wells Fargo with $100 tgt after fireside chat with CFO Garth/Hawthorne’s Hagedorn saying visibility on FY23 seems good. AVNT upgraded to Outperform from Perform at Oppenheimer following its strong operational 4Q results, despite the challenging demand/de-stocking environment and see potential for run-rate revenue to bottom in 1H. TROX posts wider Q4 loss and revs fell -26% y/y to $649M missing the consensus estimate of $660.7M, driven by lower sales volumes (CC, KRO, VNTR). In lithium space, ALB 4Q adj EPS $8.62 vs est. $8.28 on revs $2.62B vs est. $2.63B; sees FY revs $11.3-12.9B vs est. $11.17B. in ag chemicals, CF rises on mixed results – Q4 EPS $4.35 vs. est. $4.30; Q4 revs $2.61B vs. est. $2.84B; longer-term, management expects global nitrogen supply-demand balance will remain tight into at least 2025.

 

Technology

Internet, Media & Telecom

·     In internet: SHOP shares slide on mixed results as Q4 EPS and GMV top consensus but guides 1Q rev growth in high teens %, expects expenses to grow LSD. ETSY shares tumbles over 5% midday after Citron Research with a negative mention; In media: ROKU Q1 revs outlook $700M tops est. $687M and Q4 rev beat though sees 1Q EBITA loss $110mn vs est. 80mn and ARPU decline – results exceeded revs and EBITDA expectations, primarily due to higher Media & Entertainment revenue within the Platform revenue line. PARA Q4 revenue rose 2% to $8.13B missing the $8.16B estimate and said TV advertising revenue declined 7% in Q4, compared with a 3% decline in the prior quarter; said expects to raise Paramount+ price $2.00 on premium tier. SNAP at its investor day talked about user base growth — with global MAUs up to 750 mm (new stat vs. 600 mm at 4/22 Snap Partner Summit) & domestic MAUs now 150 mm (also a new stat).

 

Hardware & Software movers:

·     In software: TWLO mixed beat, $1B share buyback lifts shares reported good 4Q w/ growth of 22% above guide of 18-19%, but 1Q guide of 14-15% was below Street at 17%; positive is that post the ~1,400 headcount cut last week, mgmt. targets FY23 op profit of $250-$350m, above Street at $80m; DOCU reduces current workforce by approximately 10%; DDOG Q4 revs of $469.4M and adj. EPS of 26 cents, both above expectations while guides Q1 revs in range of $466-470M below consensus of $482M and lower FY guide too; AMPL reported a mixed quarter, as 4Q results beat expectations, but 2023 revenue guidance was below consensus; RNG mixed results with a top line miss due to the lack of a 4Q budget flush, deal cycles extending, and deployments got smaller towards year-end and materially weaker rev guide for ’23. TOST tumbles after mixed Q4 results and guidance.

·     In software research: CHKP downgraded to Underperform at SMBC Nikko saying anemic growth, margin contraction, and lack of catalysts will lead to underperformance. SE added to Conviction List at Goldman Sachs and upped tgt to $132 as believe SE will outperform on profitability this year, then demonstrate a return to growth.

·     In networking: CSCO beats and raises as 2Q adj EPS $0.88 vs est. $0.86 on revs $13.6B vs est. $13.4B, adj op mgn 32.5%; guides 3Q revs +11-13% vs est. +5.8%, adj EPS $0.96-0.98 vs est. $0.89; sees FY revs +9-10.5% vs est. +5.8% (JNPR, ANET, CIEN moved in reaction). Bank America said they believe the environment remains weak, which is the same conclusion we drew after Arista, Juniper and Fortinet reported. Analysis of the backlog trends suggests a major contribution, masking weak underlying orders. However, the company is executing well.

·     In video games: EA downgrade from Buy to Hold with a $125 PT at Deutsche Bank saying the fundamental outlook is being negatively impacted by greater macro-related challenges, a reset of EA’s mobile strategy, and less new content than we were anticipating next year. The form upgraded ATVI from Hold to Buy as believe Activision Blizzard has the highest concentration of " must-have" content across the sector, which puts the company in a unique position.

·     In EDA/IP space: SNPS reported a stronger than expected fiscal 1Q (January) but provided downside guidance relative to consensus expectations for 2Q, along with CDNS better-than-expected FY23 guide on Monday, showing strength in industry.