Mid-Morning Look

Friday, July 26, 2024

U.S. stocks off to a nice start to the trading day, looking to cut weekly losses for the S&P 500 index and Nasdaq Comp as both came into the day losing 6 of the last 7 trading days following a mixed week of earnings results. Smallcaps continue their outperformance in July, rising another 1.5% for the Russell 2000 above 2,250, now up over 10% in July compared to a -2.3% decline for the Nasdaq in July (narrows performance on year as RUT up about 10% YTD and QQQ up over 14% YTD). The Dow Jones Industrial Average outperforms as well +1.4% or 565 points to 40,500 as MMM rises +16% on earnings and guidance giving big boost to index (UNH, HD, CRM also up over 2% in the Dow). Inflation data offered markets no surprises or significant changes, keep the September FOMC rate cut expectations intact as PCE price index for June shows a 2.5% increase Y/Y while May’s print is revised higher; core PCE (Fed’s favorite inflation gauge) rose 2.6% Y/Y, holding steady from May’s upwardly revised level, while monthly figures were about in-line. U.S. Treasury yields fell after data showed that U.S. prices rose modestly in June, offsetting concerns about a higher-than-expected uptick in inflation. Given today’s PCE data, the Fed is still seen keeping rates on hold at next week’s meeting and cutting rates in September. The yen strengthens against the dollar around 153.60 following this week’s ‘crazy’ rally as risk appetite makes a cautious comeback ahead of next week BoJ meeting. Gold prices rebound 1% after tumbling -2.5% on Thursday while Bitcoin also recovers, rising 3.7% to $67,700.

• The June PCE Price Index M/M for June rose +0.1%, in-line with ests and vs. prior +0.0% and the headline PCE Price Index Y/Y for June rose +2.5%, in-line with est. +2.5% (vs. prior +2.6%).
• The Core PCE Price Index M/M for June rose +0.2% vs. est. +0.1% (prior May +0.1%) and the Core PCE Price Index Y/Y for June reported at +2.5%, in line with consensus (vs. prior +2.6%).
• University of Michigan surveys of consumers sentiment final July 66.4 (consensus 66.0) vs preliminary July 66.0 and final June 68.2; current conditions index final July 62.7 vs prelim July 64.1 and final June 65.9; University of Michigan surveys of consumers expectations index final July 68.8 vs prelim July 67.2 and final June 69.6.
• Michigan surveys of consumers 1-year inflation outlook final July 2.9% vs prelim 2.9% and final June 3.0% and the University of Michigan surveys of consumers 5-year inflation outlook final July 3.0% vs prelim 2.9% and final June 3.0%.

• In Transports: in rails, NSC Q2 results came in ahead of expectations while a positive turn in key operating metrics marked an important inflection point for the company in its drive to improved operating margins according to RBC Capital. In Shipping, the Baltic Exchange’s main sea freight index extended its losing streak to a sixth straight session on Friday, falling -26 points, or 1.4%, to 1,808, hitting its lowest level in nearly two months. The index dropped 3.6% for the week. The Capesize index fell 82 points, or 3%, to 2,614, its lowest level since late May. In airlines, LUV was downgraded to Hold from Buy at Deutsche Bank saying Southwest continues to experience margin pressure as its revenue generation continues to lag its elevated cost structure.
• In Aerospace & Defense: FTAI upgraded from Hold to Buy at Stifel and raise tgt from $69 to $132 saying if the narrowbody engine market is going to be tight through 2027 and beyond, Stifel believes this stock is worth buying, even if it is expensive today. Deutsche Bank upgraded LMT to Buy (form Hold) driven by strong 2Q results (raise tgt to $600 from $540) and upgraded NOC to Buy (from Hold) with $575 tgt (from $474) believe clarity offered on yesterday’s earnings call with respect to future B-21 profit trends eliminates an overhang that had until now justified a comparatively conservative approach. The firm downgraded GD to Hold (from Buy) with unchanged tgt of $320 as bias shifts elsewhere for now until we gain better confidence in the scale of potential estimate upside and downgraded LHX to Hold (from Buy), principally citing the ~16% YTD run in shares and limited upside to (increased) target price (of $257).

• CHTR +16%; Q2 EPS $8.58 tops consensus $7.98 on better revs $13.69B vs. est. $13.59B citing rev growth on increases in residential mobile service, residential Internet, enterprise and other revenues; cut its cap-ex spending for 2024 to about $12B from prior view of $12.2B-$12.4B; lost 149,000 internet customers in Q2 vs expectations of loss of 264,520.
• COUR +54%; after the online educational company reported Q2 revs above consensus, highlighting that it has surpassed more than two million enrollments in its generative AI catalog of courses.
• DECK +9%; reaffirmed FY25 revenue (HOKA +20% y/y; UGG +MSD% y/y) and raised EPS outlook after F1Q results beat expectations, with EPS beating by $1.03.
• EVRI +41%, IGT +14%; entered into definitive agreements whereby IGT’s Gaming & Digital business and Everi will be simultaneously acquired by a newly formed holding company owned by funds managed by affiliates of Apollo (APO) in an all-cash transaction valued at approximately $6.3B. Everi stockholders will receive $14.25 per share in cash, and IGT will receive $4.05 billion of gross cash proceeds for IGT Gaming.
• MMM +16%; as Q2 EPS/revs beat ($1.93/$6.3B vs. est. $1.68/$5.88B) and raises lower end of FY adj EPS from continuing operations to $7.00-$7.30 from prior $6.80-$7.30 (est. $7.17); still sees FY adj organic sales 0% to +2%.
• NSC +10%; Q2 results came ahead of expectations while a positive turn in key operating metrics marked an important inflection point for the company in its drive to improved operating margins.
• NWL +30%; after results and guidance, tightens the upper end of its annual core sales target; now expects a decline of 4% to 3%, compared with a 6% to 3% decline expected earlier.

• CRI -7%; mixed Q2 results (EPS beat but revs miss) and guides Q3 and year weaker at Q3 adjusted EPS $1.10-$1.35, below consensus $1.88 on weaker revs $735M-$755M (est. $805.92M); sees FY24 EPS $4.60-$5.05 below consensus $6.20 and sees FY24 revenue $2.798B-$2.83B vs. est. $2.92B.
• DXCM -40%; Q2 sales rose 15% to $1B but missed ests. of $1.04B and lowered its outlook for the year for sales to +11%-13% to $4B-$4.05B, down $25M from the prior outlook and below forecast for $4.3B; the softer outlook and commentary weighed on insulin companies PODD (despite better guide) and TNDM.
• LUV -3%; downgraded to Hold from Buy at Deutsche Bank saying Southwest continues to experience margin pressure as its revenue generation continues to lag its elevated cost structure.
• OLN -7%; as posted Q2 adj EBITDA $278.1Mm vs est. $288.8Mm on revs $1.644B vs est. $1.709B and said sees Q3 adj EBITDA reduced by about $100Mm due to incremental costs.
• ZYXI -18%; following Q2 results and outlook that disappointed as lowers FY24 EPS view to ‘at least’ $0.20 from ‘at least’ $0.50 (est. $0.51) and lowered revs view to “at least” $200M from “at least” $227M.