Mid-Morning Look

Thursday, February 03, 2022

A wild morning thus far for major averages, opening sharply lower following a major disappointment in tech, with shares of Meta (FB), formerly called Facebook posting an earnings miss/lower revenue guidance/growth, causing a rippling selling effect in the Internet, digital advertising and social media sectors ahead of AMZN earnings tonight. Defensive Consumer Staples and Utilities among the early gainers, and retail names also popping higher, while rest of market seeing selling pressure early. Managed care a bright spot (HUM, UNH) after the Centers for Medicare & Medicaid (CMS) gave a proposed rate update for 2023, as the net increase for MA plan in 2023 will be +4.48%, well above investor expectations. Banks not seeing strength early despite the spike in Treasury yields. Economic data was mixed as U.S. Service sector growth slowed notably in January amid the Omicron outbreak and softer demand conditions, while weekly jobless claims dropped more than expected and nonfarm productivity jumped while unit labor costs eased. Treasury yields popping to highs, 10-yr above 1.84%, up 7.5 bps following the BOE rate hike this morning, better U.S. economic data. All about earnings today with macro dealings with Russia and Fed commentary to back burner. U.S. dollar getting hammered early after BOE rate hike, as the euro tops 1.14, while gold prices remain around $1.800 an ounce.

Economic Data

·     Weekly jobless claims fell to 238K in latest week from 261K prior week and vs. consensus 245K; the 4-week moving average rose to 255,000 from 247,250 prior week; continued claims fell to 1.628M from 1.672M prior and U.S. insured unemployment rate unchanged at 1.2%

·     ISM Non-manufacturing sector shows PMI 59.9 in January vs. est. 59.5 and vs 62.3 in December; business activity index 59.9 in January vs 68.3 in Dec; prices paid index 82.3 vs 83.9 in Dec; new orders index 61.7 in vs 62.1 in December and employment index 52.3 vs 54.7 in Dec

·     Factory orders for December fell -0.4% vs. est. (-0.25) and vs. Nov +1.8%; factory orders ex-transportation +0.1% v. est. +0.8% and ex-defense +0.1% vs. Nov +1.6%

·     U.S. Q4 non-farm productivity jumped +6.6%, topping the +3.2% estimate and better than the Q3 reading of -5.0%; Q4 non-farm unit labor costs +0.3% vs. est. +1.5% vs. Q3 reading of +9.3%

·     IHS Markit U.S. Services sector final PMI for January at 51.2 vs flash reading 50.9 and final December 57.6; final input prices index for January at 71.9 vs flash reading 71.7 and final December 77.4; Composite PMI for January at 51.1 vs flash reading 50.8 and final December 57.0

·     Challenger, Gray & Christmas announced 19,064 job cuts in Jan., 76% lower than the 79,552 cuts announced in Jan. 2021; Health care sector announced the most job cuts, with 5,053, followed by warehousing, with 3,051

Sector Movers Today

·     Healthcare Services; Managed care stocks were strong today (UNH, CNC, MOH, AGL) after the Centers for Medicare & Medicaid (CMS) gave a proposed rate update for 2023, as the net increase for MA plan in 2023 will be +4.48%, well above investor expectations of flat to -1% to +1%. Cowen said that “newly public MA pure-plays ALHC and CLOV will also be impacted” – Mizuho HUM and UNH will be positively impacted the most (29% and 13% of MA biz respectively), followed by CVS (Aetna) ~12% of total medical membership then ANTM, CNC and CI; separately, CI reported earnings Q4 EPS $4.77 vs. est. $4.71; Q4 revs $45.69B vs. est. $43.88B; raises dividend; CAH 2Q adj EPS $1.27 vs est. $1.23 on revs $45.5B vs est. $45.6B; guides FY22 adj EPS $5.15-5.50 (was $5.60-5.90) vs est. $5.37, continues to experience significant inflationary impacts and global supply chain constraints on US medical products and distribution

·     Utilities & Solar; FSLR downgraded to Neutral at Bank of America as it is increasingly likely that the Section 201 tariffs on bifacial panels will not be extended; Needham upgrades SEDG to Buy as its geographic and customer diversification shields the company from the outcome of CA NEM; After yesterday’s EXC spinoff of CEG, EXC was downgraded at Wells, RBC, and Vertical Research while CEG was initiated at OW by BMO and Wells; Note overseas, UK power regulator approves record price hike for power companies – has approved a rate hike of 54% to consumers starting April 1st – that follows an approved 12% hike this past October (can make adjustments every 6-months); in earnings, CMS Q4 EPS missed estimates while its revenue was better than expected and it raised the upper-end of its FY22 adj EPS guidance range; WEC posted a top and bottom line beat in Q4 while reaffirming FY22 earnings guidance; NRJ Q4 adj EPS missed

·     Housing & Building Products; AZEK Q1 adj EPS, EBITDA, sales top estimates, now sees stronger FY22 sales growth than before; FBHS Q4 adj EPS $1.32 vs est. $1.29 on sales $2B vs est. $1.9B, guides FY22 adj EPS fully above estimate, sales +5.5-7.5% vs est. +5.7%; CCS Q4 adj EPS $4.78 vs est. $4.07 on revs $1.21B vs est. $1.18B with record net new home contracts and homes in backlog; SKY Q3 EPS $1.18 vs. est. $0.74 on revs $534.7M vs. est. $499.2M, said near-term operating environment remains challenging due to ongoing disruptions in supply chain and covid-related labor headwinds; UBS upgraded PHM to Buy and NVR to Neutral post-Q4 due to stronger future EPS estimates driven by stronger pricing and margins

·     Semiconductors; QCOM posted strong Q4 earnings and gave an upbeat sales outlook, as it generated $10.7 billion in sales and $3.4 billion in net income in the most-recent quarter, surpassing Wall Street expectations; QRVO reported in-line DecQ and MarQ guide at $1.15B/$2.94/52% (consensus $1.15B/ $2.87/52.3%) and guided MarQ Mobile flat q/q, (vs QCOM QCT up ~2% q/q, RF flat q/q) with volume phone launches and better supply; FORM posted another quarter of solid results although the guide was below expectations due to supply constraints and covid-related labor shortages

Stock GAINERS

·     DXC +12%; after delivered a better all-around quarter highlighted by strong FCF generation and guides FY adj EPS $5.00-5.25 vs est. $3.67along with buyback news

·     PENN +5%; revs missed, but FY22 online losses are better than expected (~$50m v prior $80-$100m) and says expects ‘meaningful’ EBITDA in 2023 (Canada not online yet but no NY)

·     QCOM ; reverses overnight weakness after reported in-line DecQ and MarQ guide at $1.15B/$2.94/52% (consensus $1.15B/ $2.87/52.3%) and guided MarQ Mobile believe flat q/q

·     RL +4%; as net revs rose 27% to $1.82B topping ests and raises year rev view to 39%-41% from 34%-36% prior and announces stock buyback

·     TMUS +9%; posted higher Q4 revenue and total net customer additions of 1.8M, up from 1.7M y/y while logged $422M in Q4 net income, but down from $750M y/y due to a planned increase in merger-related costs

·     UNH +1%, HUM +5%; as managed care stocks benefit after the Centers for Medicare & Medicaid (CMS) gave a proposed rate update for 2023, as the net increase for MA plan in 2023 will be +4.48%, well above investor expectations of flat to -1% to +1%

Stock LAGGARDS

·     APTV -3%; posts Q4 revs of $4.13B vs $4.21B y/y, hurt by supply chain snags (but above ests $3.89B) while mid-point of year eps guidance below vies ($3.90-$4.80 vs. est. $4.56)

·     BIIB -4%; Q4 bested expectations but FY22 profit outlook was well below estimates due to minimal sales from its Alzheimer’s drug Aduhelm

·     CSII -3%; after results, guidance – due to Labor shortages and other constraints at hospitals overrun by patients with COVID-19 disrupted procedures with the company’s coronary artery disease systems

·     FB -22%; tumbles, dragging the rest of social media names lower after posting its 1^st ever sequential decline in global daily active users (DAUs) for Facebook while also guided Q1 rev guidance to $27B-$29B or 3%-11% YoY growth, well below the $30.15B estimate

·     HON -6%; Q3 missed on revenues, while guided top and bottom lines lower for next quarter and the year on supply chain

·     LITE -12%; after Q3 forecast of $1.01-$1.19 for EPS misses the $1.36 estimate saying revs negatively impacted by more than $65M due to supply shortages; watch shares of IIVI, IPGP, NPTN in comm, networking, optical, photonic stocks

·     SNAP, PINS, TTD, TWTR, MGNI fall – digital advertising and social media names fall with FB

·     SPOT -15%; declined after quarterly results and its forecast of weaker than expected Q1 subscriber numbers