Mid-Morning Look

Friday, April 14, 2023

U.S. stocks moved to best levels this week, extending yesterday gains initially as better earnings results in the banking sector (JPM, WFC, PNC, C, BLK all top earnings expectations) offset recession fears after weaker monthly retail sales, import and export prices. Since the early spike, markets have faded, moving to overnight lows in the S&P. Two Fed speakers out this morning with vastly different outlooks for futures interest rates as Chicago Fed President Austan Goolsbee in a CNBC interview took a more dovish take on rates while Federal Reserve Governor Christopher Waller said despite a year of aggressive rate increases U.S. central bankers “haven’t made much progress” in returning inflation to their 2% target and need to move interest rates higher still. Fed Funds Futures traders see 82% chance of quarter-point rate hike in May after comments by Waller as the 2-year Treasury jumps to 4.08%. Stock market fear non-existent as the CBOE Volatility index (VIX) slips -1.4% to 17.55, below yesterday low 17.77 and lowest levels since early February. U.S. Treasury yields and the dollar rose despite weaker economic data. Markets brace for the earnings deluge starting next week and carries for a month. So far, results have come in much better than consensus views (small sample size).

Economic Data

·     March Export prices fell (-0.3%) vs. est. (-0.1%) and vs Feb +0.4%; March import prices fell (-0.6%) vs. consensus (-0.1%) and Feb (-0.2%)

·     March Retail Sales fell a greater (-1.0%) vs. est. decline (-0.4%) and vs. Feb (-0.2%) from prior (-0.4%); Retail Sales Ex-autos fell (-0.8%) worse than est. (-0.3%) and Feb unchanged; March cars/parts sales fell (-1.6%) vs Feb (-1.3%).

·     Industrial output for March rose +0.4%, topping consensus of +0.2% and vs. Feb +0.2% while Capacity utilization rate 79.8%, above Feb 79.6% and consensus 79.0%; U.S. March motor vehicle assembly rate fell to 10.11 mln units/year from Feb 10.31 mln units/year.

·     University of Michigan sentiment reported at 63.5 vs. est. 62.0; consumers current conditions index prelim April 68.6 (consensus 67.3) vs final March 66.3 and consumers expectations index prelim April 60.3 (consensus 60.0) vs final March 59.2

·     Michigan 1-yr inflation expectations reported at 4.6% (vs. prior reading was 3.6%) and 5-yr reported at 2.9% (vs. prior 2.9%)

·     Business Inventories for February rises +0.2% to $2,471.6B vs. 0.3% expected and -0.2% in January (revised from -0.1%).

Sector Movers Today

·     Bank earnings highlight news: JPM posted a 52% increase in Q1 profit and record revenue (rose 25% y/y) as Q1 EPS $4.10 vs. est. $3.41; Q1 revs $38.3B vs. est. $36.23B (net income of $12.62B from $8.28B y/y); deposits at JPMorgan surged by $37 billion from December to $2.38 trillion at the end of March. Q1 net interest income (NII) was $20.8 billion, up 49%; Q1 provision for credit losses $2.3B, Q1 credit costs of $2.3B included a $1.1B net reserve build and $1.1B of net charge-offs. Citigroup (C) Q1 adj EPS $1.86 tops consensus $1.67 on higher revs $21.45B up 12% y/y vs. est. $20.03B with Q1 ROE 9.5%, RoTCE 10.9%, CET1 capital ratio 13.4% and tangible book value per share $84.21. Q1 net profit rose 7% from a year earlier; said Q1 cost of credit is about $2 bln vs $0.8 bln a year earlier. WFC Q1 profit and revenue top the Street as EPS of $1.23 topped estimates of $1.13 and above prior year of $0.90 as revenue rose 17% y/y to $20.73B tops $20.08B expected; Q1 net interest margin on a taxable-equivalent basis was 3.20% vs 2.16% reported last year; Q1 CET1 capital ratio 10.8%; Q1 ROE 11.7%; Q1 net charge offs $564M. PNC Q1 EPS $3.98 vs. est. $3.67 as NII weaker and the beat drive by non-NII; Q1 revs $5.60B vs. est. $5.61B; Q1 provision for credit losses of $235M; Q1 average loans $325.5B vs $290.7B y/y; Q1 average deposits of $436.2B, increased $1.3B, or 0.3%. vs Q4; guides FY23 revs up 4%-5%, down from prior view of up 6%-8% and average loans up 5%-7%.

·     In Medical Equipment: STE downgraded to Neutral at Piper as multiple factors have them concerned margin expansion may be tough to realize in FY’24, which has the firm bracing for a below-consensus EPS guide from management next month; VRAY downgraded by two research firms (BTIG, Stifel) following announcement of its plan to explore strategic alternatives. QDEL preannounced 1Q revenues of $840M-$850M (above $747M est.), with both non-respiratory (mostly driven by labs business unit, incl $21M non-recurring) and COVID respiratory sales.

·     In P&C Insurance: HIG pre-announces Q1 core EPS of $1.68, a miss versus consensus of $1.99 as analysts note elevated catastrophe losses and poor performance of its personal lines’ unit and other sources unidentified. RBC Capital previews Q1/23 earnings and notes the set-up into Q1 is favorable for both P&C and Life insurers. Checks suggest P&C pricing remains robust and even strengthens a bit in property lines. Says favorite P&C names into the quarter include AIG, CB, and WRB remains their best broker idea and favorite life ideas are RGA, MET, and CRBG.

Stock GAINERS

·     BLK +4%; Q1 adj EPS $7.93 vs. est. $7.73 as profit dropped 18%; Q1 revs $4.24B vs. est. $4.25B; Q1 AUM $9.09T, down 5% y/y; today’s crisis of confidence in the regional banking sector will further accelerate capital markets growth.

·     JPM +7%; leader in the Dow and helping lift banks after posted a 52% increase in Q1 profit and record revenue (rose 25% y/y) as Q1 EPS $4.10 vs. est. $3.41; Q1 revs $38.3B vs. est. $36.23B and boosted net interest income forecast for the full year to $81 billion from about $73 billion.

·     QDEL +9%; preannounced 1Q revenues of $840M-$850M (above $747M est.), with both non-respiratory (mostly driven by labs business unit, incl $21M non-recurring) and COVID respiratory sales, while non-COVID respiratory was lighter. 

·     VFC +6%; double upgraded to Buy from Sell at Goldman Sachs and raise tgt to $28 as expects VFC’s strategic initiatives, including better inventory management, and unexpected CEO change to improve execution and drive stock’s outperformance.

Stock LAGGARDS

·     BA -6%; said it will pause deliveries after identifying a non-conformance in the fuselage aft section of certain 737 MAX units; BA named SPR as the supplier of the faulty part.

·     CTLT -24%; after the company flagged productivity issues and higher-than-expected costs experiences at three of its facilities, including two of its largest during the quarter will materially and adversely impact F3Q and FY outlook.

·     CURLF -8%; after a New Jersey regulator declined to renew the annual license for the cannabis producer, which allows the company to cultivate and sell adult use cannabis within the state.

·     HIG -3%; pre-announces Q1 core EPS of $1.68, a miss versus consensus of $1.99 as analysts notes elevated catastrophe losses and poor performance of its personal lines’ unit and other sources unidentified.

·     LCID -8%; Reported Q1 production of 2,314 vehicles. LCID delivered 1,406 vehicles vs. est. 1,835.

·     RIVN -4%; downgraded to neutral from overweight at Piper saying the company’s capital-intensive model may discourage investors in the current macro environment.

·     SPR -20%; as Boeing halted deliveries of some 737 MAXs due to a new supplier quality problem by Spirit which manufactures fuselage, thrust reversers, engine pylons and wing components for the 737 MAX airplanes.

·     TEVA -11%; announced that the FDA has issued a complete response letter to its partner ALVO for the Biologics License Application for AVT02.

·     UNH -2%; despite beat and raise as Q1 adj EPS $6.26 tops est. $6.13; Q1 revs $91.93B vs. est. $89.77B; raises FY23 adjusted EPS view to $24.50-$25.00 from $24.40-$24.90 (est. $24.94); Q1 2023 medical care ratio at 82.2% compared to 82% last year.