Mid-Morning Look

Wednesday, August 02, 2023

U.S. stocks slumping after Fitch rating agency downgraded the United States to AA+ from AAA overnight in a move that drew an angry response from the White House and surprised investors. Fitch Director said the key areas behind the downgrade decision were deterioration on fiscal and debt side, and governance. Meanwhile in another sign of a strong U.S. economy, U.S. private-sector employment jumped by 324,000 in July payroll processor ADP said, surpassing the 175,000 estimates on Wall Street (ahead of nonfarm payroll data Friday) as businesses hired more workers to keep up with rising demand for services such as travel, fine dining. Mixed data has markets confused about the outlook on interest rates as employment and wages remain strong, but manufacturing prints lately show weakness (yest ISM below 50 for a 9^th straight month). Note we have gone 47 trading days without a 1% decline in the S&P 500, will that end today with early broad weakness? In China overnight, the China Securities Journal reported that the government will release more policies to stabilize the economy, including further infrastructure financing from policy banks. The yield on the benchmark Treasury yield rises as high as 4.097% (highest since Nov) while the US dollar rises to 3-week high around 102.65 after the better jobs report. Stocks pressured early as NYSE breadth more than 4:1 decliners leading advancers (breadth was negative yesterday as well) as Healthcare and Staples higher early.

Sector Movers Today

·     Insurance: AFL Q2 EPS $1.58 tops $1.46 est. on favorable claim trends in Japan (+$0.11) and the U.S. (+$0.06), partially offset by Corporate (-$0.06). Expenses were also a bit lower than forecast. AIG Q2 EPS beat $1.75 vs $1.69 est. on a better core loss ratio +.05, lower cats +.02, higher investment income +.01, higher other operating income +.01. AXS reported 2Q23 operating EPS of $2.23/share, beating consensus of $1.95 driven by lower-than-projected catastrophe losses ($32 mln vs. $48 mln est.; $0.13 beat), higher NII. PRU Q2 EPS $2.90 misses $2.95 est. on higher expenses partially offset by better group results. PRU further normalizes for lower VII (-$0.11 vs. -$0.21 est.), unusual expenses (-$0.22), PGIM other revenues (-$0.04), underwriting experience (-$0.01), and seasonality (-$0.06) said KBW. UNM Q2 EPS $2.06 tops $1.87 est. as Core business underwriting experience was broadly favorable, including a Group Disability benefit ratio of 59.4% vs. 60.5% est. Growth metrics were also strong, with core business premiums +4.7% vs. +3.7% est.

·     Chemicals: AXTA reported 2Q23 EBITDA of $227M, compared to consensus of $235M and relative to Keybanc’s model, the Company missed in both Performance Coatings and Mobility Coatings. DD Q2 adj EPS $0.85 vs. est. $0.83 and revs $3.09B vs. est. $3.03B but sees Q3 adjusted EPS 84c on revs $3.15B below consensus 93c/$3.18B and cuts FY23 adjusted EPS view to $3.40-$3.50 from $3.55-$3.70 while raises year revs outlook. MOS Q2 adj EPS adj $1.04 vs. est. $1.09 as sales declined to $3.39B from $5.37B the prior year but above consensus $3.13B; said Q2 selling, general, and administrative costs were $129.9M vs. $108.2M y/y. SMG tumbles after it missed consensus profit and revenue targets due to weaker-than-expected results in its core lawn products business and a 40% decline at its Hawthorne unit, which sells equipment for growing pot. Q3 EPS $1.17 on sales $1.12B vs. est. $1.46/$1.15B

Stock GAINERS

·     ELF +17%; reported 1Q24 results that significantly beat expectations again as sales were up +76.5% to $216.3M vs Street at +52.0% and adj. EPS was $1.10 vs Street at $0.57, gained +280 bps of mass cosmetics share to 9.5% share and raised guidance.

·     EMR +4%; posts Q2 beat and raise driven by strength in Control Systems and Software along with Measurement and Analytical with outlook also raised ahead of consensus.

·     ERIE +16%; will replace PDCE in the S&P MidCap 400 effective prior to the opening of trading on Tuesday, August 8. CVX is acquiring PDC Energy

·     FRSH +23%; reported better-than-expected 2Q23 results and guidance, with revenue of $145M consensus $141M), up 19% y/y (20% cc).

·     HUM +5%; Q2 EPS tops estimates helped by a lesser increase in medical costs than expected of 86.3% for Q2, up from 85.8% a year earlier, but lower than analysts’ estimates of 86.50%.

·     PXD +3%; reported adj EPS/EBITDA of $4.50/$2.144B compared to consensus of $4.15/$2.072B as beats across-the-board; production by 3% vs consensus, costs and FCF exceeded expectations.

·     ROVR +17%; as reported a “beat and raise” 2Q23 quarter as revenue came in 10% above the high end of guidance and EBITDA came in $5.5M above the high end of guidance as we increase our 2023 EBITDA by 17%

·     TEVA +10%; posts upbeat Q2 profit, boosted by a jump in sales of its Austedo treatment for Huntington’s Disease; Q2 EPS is $0.56 vs. $0.68 a year earlier, beating ests. by $0.03.

·     VRT +23%; Q2 beat driven by better margins and topline with guide also raised ahead of consensus; sees 2023 adj EPS in the range of $1.54-$1.64, up from $1.22-$1.32 expected earlier.

Stock LAGGARDS

·     CMBM -43%; as guided to 3Q23 EPS of $0.13-$0.25 (prior $0.32) on revenues of $62M-$70M (prior $85M) and gross margins of 50.3% were below estimate by 70 bps.

·     CWH -9%; as Q2 adj EPS $0.73 vs est. $0.78 on revs $1.9B vs est. $1.97B, same-store used vehicle units +8.8%, same-store new vehicle units -23.7%; gr mgn 30%.

·     EA -6%; Q1 net bookings of $1.58B slightly miss ests of $1.59B, due to high competition, muted spending by gamers while sees Q2 net bookings of $1.70-$1.80B, below estimates of $1.81B.

·     GNRC -18%; Q2 adj EPS $1.08 misses the $1.15 estimate on revs $1B vs. est. $977.15M; cuts FY23 revenue view to (12%)-(10%) vs. prior (10%)-(6%).

·     NVRO -24%; Q2 revenue was $108.8M, in line with consensus of $108.2M while FY23 guidance was lowered, given the changes that new CEO Kevin Thornal is implementing to NVRO’s commercial organization.

·     PAYC -15%; as reported Q2 results ahead of consensus but beat of 0.7% was smaller than the company’s historic average beat of 2.5% and recurring revenue ex-float (est.) grew 20% Y/Y vs 30% in the year-ago quarter and 22% last quarter.

·     SEDG -16%; reported in-line 2Q and released below-Street 3Q guidance, noting the same channel inventory issues that were already telegraphed by ENPH last week.

·     SMG -16%; after it missed consensus profit and revenue targets due to weaker-than-expected results in its core lawn products business and a 40% decline at its Hawthorne unit, which sells equipment for growing pot. Q3 EPS $1.17 on sales $1.12B vs. est. $1.46/$1.15B.