Closing Recap

Thursday, July 18, 2024

The day started out promising, as stocks opened higher after posting one of the worst losses of 2024 for the Nasdaq and S&P 500 on Wednesday following a sharp decline in technology/semiconductor stocks…but it was not to be…as investors sold the bounce. Markets did get a late day bounce in the final minutes to pare losses heading into July option expiration Friday. The Dow Jones Industrial Average hit a fresh all-time high of 41,376 earlier before pulling back and ending down more than 1% on the day, snapping its 6-day win streak. The Smallcap Russell 2000 (RUT) hit a more than 1-year high of 2,278.13 on Wednesday as well but sunk today over -2% under 2,200 as Smallcap July strength unwinds. Today also marked the first back-to-back daily declines in the S&P since 6/20-6/21 and the Nasdaq 6/21-6/24. Utilities, Homebuilders, and Energy stayed strong again today, continues to see upside on rising expectations of falling interest rates by the Fed in September (July FOMC meeting next week). Along with the pullback from record highs for several S&P sectors, there is also plenty of political uncertainty with more pressure from Democrats for President Joe Biden to bow out of the Presidential race – though his campaign continues to say, “he isn’t going anywhere”.  Just today, the Washington Post reported former President Barack Obama has told allies in recent days that Joe Biden’s path to victory has greatly diminished and he thinks the U.S. president needs to seriously consider the viability of his candidacy. The European Central Bank kept interest rates unchanged as expected, with its president Christine Lagarde saying a move in September was “wide open”. Earnings will really kick into gear next week, but first look at big tech with Netflix (NFLX) earnings results tonight.

• U.S. Philly Fed factory index for July reported at 13.9 above est. 2.9 with strong gains in employment at 15.2 vs -2.5 previous, and new orders at 20.7 vs -2.2 previous, while business conditions 38.7 vs 13.8 previous, while the prices paid dipped to 19.80 vs 22.50 previous.

• Treasury yields with modest gains on day, but still hovering near multi-month lows with the 10-yr at 4.18% (+3bps on day) and 2-yr 4.45% (up 2bps); PCE inflation data and GDP data late next week).
• The Dollar Index (DXY) rebounds +0.3% back above the 104 level on better Philly Fed data.
• U.S. crude oil futures settle at $82.82/bbl, down 3 cents, 0.04%, Brent Crude futures settle at $85.11/bbl, up 3 cents, 0.04% and Front Month Nymex Natural Gas Rose 4.42% to Settle at $2.1250

• In Retailer rating changes on Wall Street: Morgan Stanley upgraded GPS to Overweight while downgraded both CURV and FL to Underweight. For GPS, ranks 2^nd in their proprietary scorecard and alongside room for positive EPS revisions in 2H (& possibly L-T), they upgraded shares. But notes CURV screens among the worst in their scorecard with risk of negative adj. EBITDA revisions both N-T & L-T, & room for valuation de-rating. For FL, sees to EPS L-T (I.E., negative EPS revision risk), which led to its downgrade to Underweight with an $18 PT. Citigroup upgraded VFC to Buy from Neutral saying the announcement of the sale of Supreme for $1.5B (more than CITI expected) has cleared the way for the company to repay both of their upcoming debt maturities and believes Vans is getting closer to bottoming out.
• In Food & Beverages: among the strongest sector yesterday, led by food names; today, TAP was downgraded to Underweight from Equal Weight in beer sector at Barclays and cut its tgt to $47 from $55 as believes a challenging industry backdrop will weigh on Molson’s results "for some time" and notes consensus estimates are yet to reflect the softer than originally anticipated U.S. beer category performance in 2024. WSJ reported that Anheuser-Busch InBev’s Michelob Ultra (BUD) brand climbs to second place behind Modelo Especial (STZ). BYND shares fell on a WSJ report that it has joined up with bondholders to initiate talks about a balance-sheet restructuring. Lawyers for the company are beginning debt discussions with bondholders owed $1.1B, according to the report https://tinyurl.com/5dvp4ydt
• In Restaurants: DRI entered into a definitive agreement to acquire CHUY for $37.50 per share, in an all-cash transaction with an enterprise value of approximately $605M. Chuy’s will complement Darden’s portfolio of iconic brands, which currently includes Olive Garden, LongHorn Steakhouse, Yard House, Ruth’s Chris Steak House, Cheddar’s Scratch Kitchen, The Capital Grille, Seasons 52, Eddie V’s and Bahama Breeze. DPZ shares slid following results/comp sales as Q2 EPS $4.03 vs. est. $3.65 and revs $1.098B, vs. consensus $1.103B; Q2 U.S. same-store sales growth of 4.8% in the quarter fell just short of expectations of growth of 4.91% – warned that it will fall short of its international store growth target for the year due to challenges being faced by franchisee Domino’s Pizza Enterprises. (shares of PZZA fell in sympathy).

• In Home Improvement Retail: Piper said after their disappointing Q2 survey results, they lower Q2 comp estimate for TSCO to -1% – now representing Street-low. Certainly, the set-up for Q2 earnings is a little tricky as there appears to be mixed reads on credit card data and TSCO underwent a short-lived social media driven boycott during June.

• In Casinos & Gaming: MLCO was downgraded to Neutral from Overweight at JP Morgan and lowered its slightly above consensus Q224 Macau property level EBITDA estimates to levels below Consensus saying while the co likely grew Q224 table gross gaming revenues mkt share q/q, the result is below JPMC’s prior GGR forecast.
• In Autos: GM and Ford (F) shares both extend gains to 52-week highs today; Volvo (VLVLY) reported a 28% increase in adjusted operating profit, revenue slipped 0.7% to SEK101.45B, and warned that potential EU tariffs on electric vehicles from China will hit sales. Europe sales increased by 40%, led by U.K. and Germany, while U.S. and China sales decreased by 10% and 4%, respectively. The EU has outlined provisional new duties of between 17.4% and 37.6% for all electric cars imported from China, on top of a 10% tariff already in place. Ford (F) outlined plans to use a Canadian plant it had earmarked for a future electric vehicle to instead build larger, gasoline-powered versions of its flagship F-Series pickup truck.
• In RV Sector: Benchmark initiated coverage of the Recreation Vehicle (RV) producers with an overall bullish stance. They said their view considers the increase in the installed base of RVs and households that have joined the RV lifestyle. While a level of attrition is expected, they see the evolution as a net positive and believe some of the equity prices to be overly discounted when considering their healthy balance sheets and ability to generate free cash flow and returns. They initiate THOR Industries (THO) at Hold, and Winnebago (WGO) and LCI Industries (LCII) at Buy

• In Regional Banks: KEY reported a -5.2% drop in Q2 profit to $237M while forecasts 7%-8% drop in average loans in 2024, worse than the 5%-7% fall it had expected earlier; OZK posts the 7th consecutive qtr of record net income and EPS, and the 8th consecutive qtr of record NII according to Piper (NII was higher than expected as the NIM fell 3 bps q/q to 4.68%); PNFP downgraded to Neutral from OW at Piper saying near-term upside appears muted; SNV posts stronger NIM and lower credit costs drive Q2 beat.

• In Consumer Finance: DFS ended the quarter with payment services volume of $99.3 billion, up 11% from the prior year as earnings beat and said its provision for credit losses significantly improved to $739 million from $1.31 billion in the prior quarter and $1.5 billion a year earlier.
• In Financial Services: EFX shares declined as better Q2 results (adj EPS $1.82 vs. est. $1.73; Q2 revs $1.43B vs. est. $1.42B) could not offset lower Q3 guidance (guides Q3 adj EPS $1.75-$1.85 vs. consensus $2.01 and sees Q3 revenue $1.425B-$1.445B vs. consensus $1.45B), while backs year EPS and revenue outlook.
• In REITs: CCI reported 2Q24 results which were in line with estimates on revenue and adj. EBITDA but missed on AFFO/share; SLG Q2 FFO per share $2.05 vs. est. $1.61; Q2 revs rose +0.8% y/y to $222.8M vs. est. $183.4M; Q2 net operating income $73.6M, down -24% y/y; forecasts FY FFO/shr $7.45 to $7.75, vs. prior forecast $7.35 to $7.65.

• ALPMY (Astellas Pharma) downgraded to Hold from Buy at Jefferies and cut revenue estimates for the next five years by an average 5% and cut its EBITDA estimates by an average 17%. The firm trims estimate of sales of overactive bladder treatment Mirabegron, hot flash treatment Veozah and geographic atrophy treatment Izervay.
• NVO, LLY, ALT, VKTX and other obesity drug making stocks saw follow through pressure from day prior after Roche (RHHBY) reported promising early-stage data from an experimental obesity pill.
• NVS Q2 core EPS $1.97 tops consensus $1.89 and revs $12.51B above ests $12.37B; said FY core operating income is expected to grow mid- to high teens in constant currency, up from a prior view of low double-digit to mid-teens but maintains net sales view.
• TEVA announces first phase 3 evidence of efficacy and safety of an anti-CGRP monoclonal antibody in children in Ajovy® (fremanezumab) space trial for prevention of episodic migraine.

• In MedTech: ABT edged its full-year profit guidance after results as strong growth in its medical-devices segment helped quarterly results beat estimates. TXG was downgraded to Neutral at JP Morgan as believes shares are likely range bound in the near-to-medium term as investors assess the evolving competitive landscape and the impact of macroeconomic pressures across the business.
• In Managed Care: ELV was downgraded to Neutral from Buy at Bank America and cut tgt to $530 from $646 after earnings saying in Q2 both UNH signaled there is incremental Medicaid pressure, making it difficult to have conviction about where and when Medicaid margins trough, as well as the timing of any potential recovery. Meanwhile, peers such as CNC, CI and MOH are already trading at a 3x discount to ELV.
• In Healthcare Services: DOCS was downgraded to Underweight at Wells Fargo saying net-net, its survey appears to support further deceleration in revenue tailwinds. ALGN shares rose after Stifel said company to launch Invisalign program with COST and diligence suggests the program will be specific to Costco’s online sales and offer Costco members the opportunity to purchase an e-card for $100 from Costco.com.

• In Shipping: Baltic index snaps 3-day losing streak on Capesize demand, rising 22 points, or 1.2%, to 1,912 as Capesize index rose 67 points, or 2.3%, to 3,007, the first daily percentage gain since July 12; Panamax index was up 1 point, or 0.1%, to 1,714 and Supramax index was unchanged at 1,370.
• In Aerospace: HXL reported top and bottom-line beat for Q2 but lowered its FY24 EPS view to $2.02-$2.18 from $2.10-$2.30 (vs. consensus $2.21) and guided FY24 revenue $1.90B vs. consensus $1.95B. HUBG was downgraded to Hold from Buy at TD Cowen and cut tgt to $43 from $50 saying they see downside to ’25 consensus given IM and Dedicated pricing pressure that is likely to weigh on margins.

• In Lithium space: Keybanc said although lithium prices are likely to improve later than they expected, it continues to be upbeat on the outlook for ALB and ALTM shares over the next 12-18 months. With a combination of healthy downstream demand and a pullback in investment, lithium prices should recover to their l-t assumption of $20K-$25K/ton.

• In Media & Entertainment: NFLX to report earnings after the close tonight kicking off streaming; WBD shares rose early on reports it is discussing plans to split up, including splitting its digital streaming and studio businesses from its legacy television networks, Financial Times reported. TKO was initiated Buy and $129 tgt at Redburn saying with combat entertainment becoming more mainstream, TKO has leverage in its upcoming rights negotiations and Redburn sees upside to current valuations. In Advertising, PUBGY boosted its FY organic revenue to grow between 5% and 6%, compared to its previous guidance of 4% to 5% growth after Q2 results beat in ad space.
• In Internet: META is in talks to acquire a stake of about 5% in eyewear giant EssilorLuxottica, the company it partners with to make its Ray-Ban smart glasses, according to people familiar with the matter the WSJ reported. Based on EssilorLuxottica’s recent market value, a roughly 5% stake could be valued at around 4.5 billion euros.

• In Hardware, Software, IT Services: AAPL shares weakened midday following tweet from TFI Securities analyst Ming-Chio Kuo saying "Although there have been rumors of increased orders for iPhone 16 orders from time to time after WWDC, recent earnings calls from two key Apple suppliers (TSMC and Largan) have hinted that the iPhone 16 orders May not have increased" INFY shares climbed after raises fy25 revenue growth guidance to 3%-4% after Q1 net income 63.7B rupees, est. 62.48B rupees. SMAR shares popped late day on Reuters story that the company with a market value of $6.3 billion, has tapped investment bankers after attracting acquisition interest from buyout firms.

• Semi’s and semi-equipment group rebounds after tumbling over 6.5% yesterday for the SOX index after: 1) semi equipment maker ASML missed Q3 guide; 2) Republican Presidential candidate Trump commented that Taiwan "should pay" the U.S. for its protection per Bloomberg ; and c) Bloomberg reported the Biden administration has told allies that U.S. is exploring most severe trade restrictions in the form of imposing foreign-direct product rule to suppress business in China by equipment makers like Tokyo Electron and ASML.
• In Semi-Equipment names today: TER was downgraded to Market Perform at Northland noting semiconductor capital equipment shares often peak or trough around SEMICon West and notes yesterday, the increased risk of trade restrictions on equipment sales to China and the risk of the US allowing Taiwan to fend for itself pressured the group.