Mid-Morning Look

Friday, July 14, 2023

Major averages are trading higher, with the biggest names again pacing market gains as Technology leading along with healthcare +1.2% following UNH strong earnings results, but 8 of 11 sectors in “red”, with Energy down -2% biggest drag as NYSE breadth favored decliners by nearly 3:1 initially. Smallcap Russell 2000 led gains early in the week, but under pressure this morning (still +3.75% on week). The US dollar thus far able to stop the bleeding overnight, +0.12% to 99.90 following 6 straight days of losses totaling -3.5%. Big bank earnings were mostly better as JPM and WFC report stronger results, while Citi was mixed (details below). Note the Nasdaq is set to announce Friday how it will reweight the Nasdaq 100 via a “special rebalance” that will take place on July 24. The “Magnificent Seven,” Apple, Microsoft, NVIDIA, Google stock, Amazon.com, Tesla and Meta Platforms are expected to see lower weights. Oil prices drop along with gold as the dollar and Treasury yields rebound after tumbling this week following softer-than-expected CPI and PPI inflation data. Earnings kick into full-gear the next few weeks.

Economic Data

·     June import prices fell -0.2% M/m vs. est. (-0.1%) and vs. May (-0.4%), while June export prices fell (-0.9%) vs. est. (-0.2%) and vs. May (-1.9%); U.S. June year-over-year import prices -6.1%, export prices -12.0%.

·     University of Michigan surveys of consumers sentiment prelim July 72.6 tops consensus 65.5 and above final June 64.4; current conditions index prelim July 77.5 vs. final June 69.0 and expectations index prelim July 69.4 vs final June 61.5.

·     University of Michigan surveys of consumers 1-year inflation outlook prelim July 3.4% vs final June 3.3% and University of Michigan surveys of consumers 5-year inflation outlook prelim July 3.1% vs final June 3.0%.

Sector Movers Today

·     Banks rise after JPM, WFC reported strong second quarter results:

·     1) JPM Q2 adj revs rose 34% y/y to $41.3B from $30.7B a year earlier and above ests. $39.34B, while adj EPS was $4.37 vs. est. $3.83 as profit rose 67% after First Republic rescue; Q2 ROE 20%, ROTCE 25%; profit rose to $14.47B, or $4.75 per share, up from $8.65B; Spending on credit cards rose 8% and card loan balances jumped 16%. Auto lending increased, with loan volume up 71%; Trading revenue fell 10%, with fixed-income revenue down 3% and equities down 20%.

·     2) WFC Q2 EPS $1.25 topped estimates $1.16 as revs rose 20.5% y/y to $20.53B vs. est. $20.11B; said Q2 Provision for Credit Losses nearly tripled to $1.71B from $580M and vs. est. $1.55B; net interest income jumped 29.1% to $13.16 billion to beat expectations of $12.82 billion. Average loans increased 2.1% to $945.9 million while average deposits fell 6.8% to $1.35 billion.

·     3) Citigroup’s (C) Q2 profit tumbled 36% hurt by trading business; Net income dropped to $2.92B or $1.33 per share from $4.55B y/y, but EPS beat the $1.31 estimate; Q2 revs fell -1% y/y to $19.44B vs. est. $19.34B; personal banking and wealth management revenue rose 6.1% to $6.40B, institutional clients group revenue declined -8.6% to $10.44B; fixed income revenue was down -13.5% to $3.53 billion and equity revenue fell 10.2% to $1.09B.

·     Managed care stocks got a boost after Dow component UNH reported a beat and raise, as Q2 adj EPS $6.14 vs. est. $6.01; Q2 revenue rose 15.6% y/y to $92.9B vs. est. $91B; raised its adjusted EPS guidance range to $24.70 to $25.00 from $24.50 to $25.00. Medical care ratio of 83.2% compared with 81.5% a year ago (shares of CI, CNC, ELV, MOH, HUM all rising in sympathy).

·     Comm Equipment and Parts: GLW downgraded to Neutral from Buy at UBS as it reduces estimates on a slower recovery in customer demand and sees the stock more fairly valued; the firm said it believes GLW’s largest business, display glass (~45% of income), has troughed. NOK cut its annual outlook saying it now expects sales in the year at 23.2 billion euros ($26.02 billion) against 24.6 billion seen earlier, saying high inflation affects customer’s spending plans; ERIC shares slide after saying it expected Q3 EBITA margin to be in line with or slightly higher than Q2, followed by a seasonally stronger Q4.

·     Housing: Homebuilders were active again, with the group setting new all-time highs several times this month already. Raymond James today upgraded TOL to strong buy saying homebuilders’ resilience to rates poised to continue. Also upgraded LEN, PHM, KBH, and MDC. In Home furnishing: Bank America raised estimates on W, RH and ARHS on improved industry trends in 2Q, strong web traffic data. Total furnishings & bedding trends improved in June. Online furnishings decelerated 3ppts but are still 5ppts above Apr/May.

Stock GAINERS

·     ACAD +14%; announced 2Q preliminary Daybue net sales of $21-23M and 3Q guidance of $45-55M, crushing consensus of $2.3-3.0M. ACAD also acquired ex-US rights for trofinetide from Neuren and global rights in Rett and Fragile X to Neuron’s NNZ-2591.

·     ELAN +11%; as the Environmental Protection Agency (EPA) announced that it had concluded its registration review of Elanco’s Seresto medicated flea and tick collar.

·     GKOS +8%; after CMS released their 2024 proposed rule for ASC reimbursement and GKOS saw two large, proposed reimbursement increases for iStent and Infinite.

·     LUNR +6%; after saying it successfully completed a spacecraft test run of its Nova-C lunar lander at the Houston Spaceport.

·     NKLA +9%; extends Thursday 61% rally after BayoTech agreed to buy up to 50 of its hydrogen fuel cell EVs over the next five years.

·     UNH +7%; as Q2 adj EPS $6.14 vs. est. $6.01; Q2 revenue rose 15.6% y/y to $92.9B vs. est. $91B; raised its adjusted EPS guidance range to $24.70 to $25.00 from $24.50 to $25.00 (shares of CI, CNC, ELV, MOH, HUM all rising in sympathy).

Stock LAGGARDS

·     AA 6%; downgraded from Overweight to Neutral at JP Morgan and cut tgt to $36 from $54 driven primarily by its cautious near-term aluminum view.

·     ERIC -11%; after saying it expected Q3 EBITA margin to be in line with or slightly higher than Q2, followed by a seasonally stronger Q4.

·     GLW -6%; downgraded to Neutral from Buy at UBS as it reduces estimates on a slower recovery in customer demand and sees the stock more fairly valued.

·     LESL -33%; guided Q3 EPS 42% below the Street to $0.39-0.41 vs est. $0.69 and cut 2023 EBITDA guidance by 40% and sees FY net sales $1.43-1.45Mm vs est. $1.6Mm and adj EPS $0.28-0.32 vs est. $0.77 while announced CFO Steve Weddell is stepping down.

·     NOK -10%; cut its annual outlook saying it now expects sales in the year at 23.2 billion euros ($26.02 billion) against 24.6 billion seen earlier.

·     THRX -68%; after discontinuing enrollment in the ongoing phase 1/2 study and terminating development of THE-630 in patients with gastrointestinal stromal tumors, or GIST.