Mid-Morning Look

Tuesday, February 21, 2023

U.S. stocks are slumping to start the week as disappointing earnings results from Dow component Home Depot weighs on retail, while a spike in Treasury yields and the dollar, given rising interest rate expectations from the Fed also weigh on market sentiment. The 2-year yield hits highs around 4.72%, the 10-yr topped 3.95% and the 1-yr moved above 5.03%. The CBOE volatility index (VIX) moves above 22for its best levels in 6-weeks. Markets are now pricing in a 24% chance of a 50-bps rate hike in March, where a 25-bps was baked in just 2-weeks ago and futures now see a greater chance of at least three hikes in 2023 and no expectations of a rate cut end of year. Geopolitical concerns also a drag on sentiment following the recent Chinese balloons shot down over US soil in recent weeks and US Deputy Treasury Sec. Adeyemo today saying the US and its allies have issued a warning. Chinese companies that attempt to avoid Russian sanctions and export controls will face repercussions. Treasury yields rise following yet another stronger-than-expected economic data as the S&P Global PMI readings top views: the 10-yr yield spikes to 3.93% after PMI (off lows of around 3.32% just a month ago), up 10 bps and 2-yr up 9.3 bps at 4.71%. Oil prices flat, but on track for its 8th down month in last 9. Gold slides as the dollar rebounds and investors back to hedging with the VIX moving above 22 level (highest since Jan 6^th 22.90)

Economic Data

·     S&P Global Feb manufacturing PMI at 47.8 vs 46.9 prior; the composite PMI at 50.2 vs 46.8 prior and flash services PMI at 50.5 vs 46.8 in January.

·     Existing Home Sales for January fall for a 12^th straight month, down -0.7% at 4.00 mln unit rate vs. est. 4.10M and down from Dec at 4.03M; inventory of homes for sale 980,000 units, 2.9 months’ worth; national median home price for existing homes $359,000, +1.3% y/y.

Sector Movers Today

·     In chemicals: HUN posts Q4 loss of (-$91M) vs year-ago profit of $597M, as EPS missed estimates hurt by lower sales though said sees some green shoots in areas like China, automotive, and aerospace, but construction demand globally is still under pressure. WLK notable EPS miss ($1.79 vs. $2.28 est.) miss driven by performance and essential mats (74c), housing and infra (33c), while revs also below views at $3.33B vs. $3.39B est. VNTR Q4 revs fall -32% y/y to $366M but tops consensus of $357M as TiO2 revs down -41% y/y to $240M.

·     Home improvement retailers slip after HD posts mixed Q4 results (EPS beat, sales miss), Q4 comp sales decreased 0.3% below est. +0.55%; expects 2023 EPS to decline in the mid-single-digit percentage range, compared with estimates of a 0.4% increase to $16.72 and sees 2023 sales growth and comparable sales growth to be about flat compared with fiscal 2022 levels. LOW to report earnings later this week; also watch TSCO. In building products, AWI modest operating miss driven by weaker margins with FY guide also marginally below consensus. JELD shares outperform in construction materials after guiding year EBITDA $360M-$400M (vs. est. $355M) after Q4 top and bottom-line results easily top consensus.

·     Autos: Europe Jan. Car sales rose 11% for sixth monthly gain in a row. In auto suppliers, DAN Q4 adj net loss of $0.10/share, worse than ests of a profit of $0.26 and guides FY 2023 adj earnings between $0.25-$0.75, well below analysts’ ests of $1.74 saying they experienced unexpected headwinds in the fourth quarter. In auto dealers: at JPMorgan downgraded AN to Underweight and SAH to neutral from overweight, while remain OW on GPI and LAD, and Neutral ABG.

·     In metals: TECK said it will spin off its steelmaking coal business to shareholders, creating two independent, publicly listed companies (Teck Metals Corp. and Elk Valley Resources Ltd.), which will focus on base-metals production and steelmaking coal production, respectively. Teck also reached an agreement with its steelmaking coal joint-venture partners Nippon Steel Corp. and POSCO to exchange their minority interests in two of their operations. ARNC operating beat (miss adj for Russia) with FY outlook that’s also bracketed by consensus. CLF said it is increasing current spot market base prices for all carbon hot rolled cold rolled and coated steel products by a minimum of $100 per net ton.

Stock GAINERS

·     APLS +11%; shares rise after saying late Friday the FDA approved syfovre to treat geographic atrophy secondary to age-related macular degeneration.

·     FCX +3%; as metals broadly higher to start – AA, CLF, RIO.

·     GIS +4%; raised its organic sales guidance by 1.5% at the midpoint and EPS by 2% ahead of its CAGNY presentation this morning.

·     META +1%; said it was testing a subscription service, called Meta Verified, which will let users verify their Facebook and Instagram accounts using a government ID and secure a blue badge.

·     TAP +5%; Q4 EPS $1.30 tops consensus $1.07 and revenue $2.63B above est. $2.62B while guides FY23 net sales low single-digit increase vs. 2022 on a constant currency basis.

·     VIR +9%; upgraded to Buy from Neutral and tgt raised to $53 from $41 at Goldman Sachs.

·     WMT +0.5%; reverses earlier weakness; posts better Q4 results, but lower Q1 guide: Q4 revs $164B tops est. $159.75B on better earnings $1.71 vs. est. $1.51 and on higher comps ex-gas +8.8% vs. est. +5.24%; guides Q1 EPS guide $1.25-$1.30 vs. est. $1.36 and op margins +3.5%-4%.

Stock LAGGARDS

·     AEL -12%; after Prosperity issued a statement this morning saying they are withdrawing its proposal to acquire American Equity for $45.00 per share.

·     BCRX -16%; after posting wider than expected Q4 EPS loss of (-$0.38) and expects sales of its oral treatment Orladeyo in Q1 2023 to be like or slightly less than Q4 sales of $70.7M.

·     CVRX -33%; shares tumble after a trial of its BeAT-HF therapy for heart failure did not reach statistical significance on the primary endpoint.

·     DAN -14%; Q4 adj net loss of $0.10/share, worse than ests of a profit of $0.26 and guides FY 2023 adj earnings between $0.25-$0.75, well below analysts’ ests of $1.74 saying they experienced unexpected headwinds in the fourth quarter.

·     DDS -9%; mixed Q4 results as EPS beats, but sales slip and inventory rise 4% on unchanged comps.

·     DOCU -8%; downgraded to Sell from neutral at UBS with free cash flow considered not as compelling compared to that of Zoom and other low-growth software peers.

·     EXPD -5%; posts Q4 EPS of $1.38, missing consensus $1.96 on light revs falling -36.2% y/y to $3.44B vs. est. $4.01B, citing a drop in buy and sell rates and a softening in demand.

·     HD -5%; posts mixed Q4 results (EPS beat, sales miss), Q4 comp sales decreased 0.3% below est. +0.55%; expects 2023 EPS to decline in the mid-single-digit percentage range, compared with estimates of a 0.4% increase to $16.72 (drops to its 200-day MA support of $301.30).

·     GNRC -6%; downgraded from Buy to Hold at Truist (tgt to $145 from $160) saying they see high interest rates coupled with higher product prices prolonging a recovery and posing a meaningful risk to the company’s 2023 financials.

·     JD -9%; after the company said it is launching a 10 bln yuan ($1.5 bln) subsidy campaign next month to compete against rival PDD budget shopping app Pinduoduo, South China Morning Post reported overnight.

·     WLK -4%; notable EPS miss ($1.79 vs. $2.28 est.) miss driven by performance and essential mats (74c), housing and infra (33c), while revs also below views at $3.33B vs. $3.39B est.