Mid-Morning Look

Tuesday, January 14, 2025

U.S. stocks getting an early “bump” helped as December producer price index (PPI) inflation data was “cooler” than economists were expecting (but were slightly above the prior month reading), while investors got a boost on reports of an easier approach to tariffs by the incoming Trump administration. Bloomberg reported overnight that members of Trump’s economic team are considering a gradual approach to increasing tariffs, potentially by 2% to 5% per month, to boost negotiating leverage while mitigating inflation risk. The report notes the plan is still in early stages and has not been presented to Trump. During his 2024 campaign, Trump suggested minimum tariffs of 10%-20% on all imports and up to 60% on goods from China. Also, some better headlines surrounding big tech with report EU could dial back its regulatory push against the group given its proximity to Trump. US listed China stocks rebound (BABA, BIDU, PDD) following strength in Shanghai and Hang Seng overnight after China’s Central bank reiterates easing pledges amid policy dilemmas. In stock news, obesity drug makers lagging (NVO, VKTX, ALT) after LLY provided disappointing revenue guidance for its weight loss drugs. Crypto stocks rebound led by a 2% bounce in Bitcoin boosting miners. Chemical stocks (CE, OLN, FMC) rebounded on analyst commentary/ratings changes. Homebuilders got an early bounce after KBH results overnight (though higher Treasury yields remain an issue). Treasury yields dipped initially on the PPI report to 4.75% for the 10-yr but is back at 4.8% while the US dollar slips -0.4% to 109.50 for the DXY. Gold is higher along with Bitcoin while oil slips.

• In Payments & FinTech: Seaport Global with several changes in the sector as they downgraded MA from Buy to Neutral as continues to like the story but see the shares as relatively fairly valued here; FLYW was downgraded from Buy to Neutral saying they lost confidence in the story as the India/Canada situation and is growing more concerned post the US election about the MT-LT outlook for China-inbound into the US in Education; Visa (V) was upgraded to Buy from Neutral primarily due to Visa’s more significant US exposure (a key theme of theirs in ’25) and FI was upgraded from Neutral to Buy with $240 tgt as they like the earnings power and believes Fiserv stands to benefit as US SMBs eventually re-accelerate their growth (a second key theme of Seaport).
• In Heavy Duty Machinery: PCAR was upgraded to Buy from Neutral at Bank America as it adopts a more positive view on the US truck production cycle and notes PCAR shares underperformed in 2024 (+11% vs SPX +25% vs XLI +17%) on price vs cost concerns and production downturn in the truck market. CMI was also upgraded, rising from Underperform to Neutral at Bank America noting CMI execution notably improved in 2024 following a rocky stretch. CMI is clearly on stronger footing and the power gen unit is likely a tailwind out to 2027e.
• In Chemicals: APD was upgraded from Equal Weight to Overweight at Wells Fargo as believes an improved APD will emerge post its upcoming AGM, with an improved risk culture that should drive attractive growth and multiple expansion. ADM was downgraded from Neutral to Underperform at Bank America and cut tgt to $54 from $63 saying the outlook for ADM’s profitability has soured considerably over the past few months with increased macro risks stemming from the US election results as well as the company’s own performance. CE was double upgraded to Buy from Underperform at Bank America driven by signs that the acetyls market is bottoming, expected demand recovery in the years ahead for most of CE’s products, its view that leverage remains addressable with free cash flow. FMC was upgraded from Underperform to Neutral at Bank America as stills believe its path to recovery off the 2024 trough will be tough given company-specific issues, challenging ag fundamentals, and more recently concerns about trade wars and a strong USD. EMN was upgraded from Neutral to Buy at Bank America after noting 2024 played out worse than expected for commodity chemical companies, and notes valuation looks attractive once again at 7.5x EV/EBITDA and 9.8x P/E on its 2025 estimates, and they remain constructive on the company’s revenue/earnings growth prospects. OLN was upgraded to Buy from Neutral at Bank America saying valuation is now highly attractive in its view at 5.1x its 2025E EBITDA and even just 7.3x 2024’s depressed EBITDA and sports the best free cash flow yield in BAML’s commodity coverage.

• APLD +16%; after Australia’s Macquarie said it will invest up to $5 billion in Applied Digital’s AI data centers and will take a 15% stake in the company (confirms a report in the WSJ overnight). Macquarie’s asset management arm has agreed to invest up to $900M in a data center campus that APLD is developing in North Dakota.
• CE +6%; double upgraded to Buy from Underperform at Bank America driven by signs that the acetyls market is bottoming, expected demand recovery in the years ahead for most of CE’s products, its view that leverage remains addressable with free cash flow.
• CEG +3%; as nuclear, power utilities seeing strength with VST, NRG, SRE, SMR, OKLO higher
• HEES +106%; as URI agreed to buy HEES for $92 per share in cash, reflecting a total enterprise value of approximately $4.8 billion, including approximately $1.4 billion of net debt as they gain a fleet of equipment to serve construction and industrial markets. https://tinyurl.com/3y6ywyth
• INGN +7%; guides prelim Q4 revs $79.0M to $80.0M, vs. est. $73.9M; raises FY24 revenue view to $334.5M-$335.5M from $329M-$331M vs. consensus $329.62M.
• KBH +5%; reported a better-than-expected quarter as homes delivered rose 17% y/y to 3,978 and EPS $2.52 vs est. $2.45 on revs $1.999B vs est. $2.008B, housing adj gr mgn 20.9%; guides FY25 housing revs $7.00-7.50B vs est. $6.988B, avg selling price $488-498K.
• RILY +16%; shares gain after releasing its quarterly report for three months ended June 2024, after delaying it for months due to issues stemming from its investment in retailer Franchise Group; says it will return to a normal filing cadence in 2025; reports net loss of $14.35 per share for Q2 vs. $1.55 profit y/y.

• CRL -5%; after saying expects 2025 revenue will decline organically in a similar range as estimated in 2024 and expects 2025 non-GAAP operating margin will be modestly below estimated 2024 level.
• ICLR -3%; shares fell after guiding 2025 EPS $13.00-$15.00 vs. est. $14.83 and midpoint of co’s 2025 rev outlook of $8.05B -$8.65B is also lower than estimates of $8.50B.
• LLY -6%; provided a disappointing Q4 revenue outlook (about $13.5B vs. est. $13.93B), citing slower-than-expected growth in sales of its weight-loss drugs; said sees growth in 2025 from new medicines.
• LVS -2%; as consensus appears to already reflect strong underlying market growth plus share gains in Macau, resulting in less upside to #s and a more balanced risk-reward.
• SIG -22%; shares fell after forecasts Q4 adj. Oper income $337M to $347M, below prior forecast $397M to $427M and guides Q4 total sales $2.32B to $2.34B, also below forecast $2.38B to $2.46B.