Mid-Morning Look

Thursday, February 16, 2023

U.S. stock markets are lower, but again bouncing off the lows, showing unbelievable resiliency in the face of surging Treasury yields (highest since December) and a bouncing buck as economic data today included rising inflation. January PPI came in well above consensus, jobless claims fell again, and both housing and Philly Fed data came in much weaker, laying out a difficult path for the FOMC. On top of that, Fed President Mester with another hawkish tone noting she saw a compelling case for 50bps at last FOMC meeting and Fed has more work to do to control inflation. So what is keeping the market higher after a massive run to start the year? Earnings growth has slowed, the base case for markets of lower inflation is not happening quickly enough for the Fed’s liking and bond markets are telling you they believe the Fed will raise multiple times the next few months as short term yields jump. Still the path of least resistance has been higher, with growth names pacing the way and defensive sectors lagging. Possibly monthly option expiration tomorrow playing a factor in the underlying strength in markets, as the S&P (SPX) holds above the 4,100 level. Several momentum names moving higher after earnings results including CSCO, ROKU, TWLO in tech while PARA, RNG, SAM, SHOP, TOST tumble. 

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.

Sector Movers Today

·     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.

·     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.

·     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 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. CHKP downgraded to Underperform at SMBC 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.

·     REITS: 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.

Stock GAINERS

·     CROX +12%; 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.

·     CSCO +5%; 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%

·     CYH +26%; 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%.

·     ROKU +9%; reported 4Q revenue and EBITDA upside (though 4Q guide was likely overly conservative said analysts) with revenue growth flat y/y (vs. guidance of -7.5% y/y).

·     SGEN +10%; 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).

·     TA +71%; BP to acquire TA for $86.00 per share, or approximately $1.3B, represents a 74% premium.

·     TWLO +15%; 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.

·     TXG +12%; 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. 

Stock LAGGARDS

·     AMPL -10%; reported a mixed quarter, as 4Q results beat expectations, but 2023 revenue guidance was below consensus.

·     HST -6%; 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.

·     PARA -6%; 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.

·     QS -13%; 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).

·     RNG -12%; mixed 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.

·     SAM -12%; 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.

·     SHOP -16%; 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.

·     SNPS -4%; reported a stronger than expected fiscal 1Q (January) but provided downside guidance relative to consensus expectations for 2Q.