Mid-Morning Look

Thursday, June 01, 2023

U.S. stocks bounce early on mixed data and after being mostly for sale yesterday. Sentiment gets a boost as China Caixin Manufacturing PMI printed expansionary and a 11-month high (Caixin manufacturing PMI rose to 50.9 in May from 49.5 in April) while the House passed the debt ceiling deal which now heads to the Senate for a vote. Inflation data points helped the mood with more cooling in Europe, while the ISM report at 10:00 AM showed prices paid came in at the lowest number of the year. The inflation concerns overshadow more strength in the jobs market as ADP private payrolls came in well above ests though wages eased (ahead of tomorrow’s nonfarm payrolls). NYSE breadth little less than 1.5:1 as advancers leading decliners early as Communications (XLC) +0.8% and a rebound in Materials (XLB) +0.7% and Industrials (XLI) after China Caixin data overnight. Treasury yields have rolled this morning since the economic data release at 8:30 AM, down -4.6bps to 3.9% (lowest in 2-weeks) and the 2-yr -3.5bps to 4.355% – after both surged in May. Yields extended losses after the ISM report at 10:00 AM. Retailers mixed after earnings (JWN rises while PVH, M, DG, VSCO decline on results).

Economic Data

·     Jobs data remains strong as the ADP national employment report shows U.S. employment increased by 278,000 private sector jobs in May, well above the forecast for a rise of 170,000 jobs, while prior month slightly revised to 291K from 296K).

·     U.S. Q1 non-farm productivity revised to -2.1% vs. consensus -2.5% and vs. previous (-2.7%), while Q1 non-farm unit labor costs revised to +4.2% vs. consensus +6.0% and previous +6.3%.

·     Weekly Jobless Claims rose to 232K in the latest week vs. est. 235K and the prior week was revised to 230K from 229K; the 4-week moving averages fell to 229,500 from 232,000 prior week; continued claims rose to 1.795M from 1.789M prior week.

·     Challenger Gray job cut announcements rose 287% y/y vs. 176% in prior month; tech sector led the pack with 22,887 cuts in May & total of 137k YTD, the most for the sector since 2001.

·     ISM U.S. Manufacturing activity index 46.9 in May (7^th straight time in contraction territory – below 50) vs 47.1 in April (est. 47.0) as prices paid index fell to 44.2 in May vs 53.2 in April; new orders index 42.6 in May vs 45.7 in April and the employment index 51.4 in May vs 50.2 in April.

·     April construction spending rose +1.2% more than the consensus +0.2% to $1.908 trln, vs March +0.3% (prev +0.3%); private construction spending +1.3%, public spending +1.1%.

Sector Movers Today

·     In department stores: Macy’s (M) shares slipped after lowering its full-year sales and adj EPS guidance after underperformed on revenue in 1Q amid weakening demand trends; cuts year EPS to $2.70-$3.20 from $3.67-$4.11 and sales to $22.8B-$23.2B from $23.7B-$24.2B prior. JWN posted better results as Q1 EPS $0.07 vs. est. loss (-$0.08); Q1 revs fell -11.6% y/y to $3.18B vs. est. $3.12B; sees FY23 adj EPS $1.80-$2.20 vs. est. $1.88 and sees FY23 revenue down 4%-6%.

·     In Steel sector: Wolfe research downgraded US Steel (X) from Peer Perform to Underperform w/ $19 PT while upgraded NUE to Peer Perform from Underperform, switching to more defensive positioning and argues that the recent selloff leaves the shares more fairly valued as likes Nucor’s strong free cash flow and infrastructure exposure. Notes for US Steel, Headwinds have grown from falling Central European sheet and global oil country tubular goods (OCTG) prices.

·     In airlines: LUV raised the low end of Q2 RASM guidance to (10%) to (8%) vs. prior (11%) to (8%) and reiterated Q2 ‘solid profit’ and ASMs of ~+14%; guided Economic fuel costs per gallon to $2.55 vs. prior guide $2.45-$2.55. In rails: CSX upgraded from Neutral to Buy at UBS saying with intermodal volumes likely bottoming y/y in 2Q, the co sees a path to volume growth for CSX in 2024 with intermodal growth of +4% offsetting a -1% decline in merchandise. In freight/logistics: TFII upgraded to Buy from Neutral at UBS, supported by its expectation of strong free cash flow plus improving US LTL margin performance despite the current soft backdrop in freight activity.

·     In oil In Majors: RBC Capital upgraded CVX from Sector Perform to Outperform and raised tgt to $180 from $165 as believes the macro environment is likely to remain volatile, however weaker end-product demand and OPEC+ managing the oil market leaves CVX’s upstream heavy weighting well-placed. RBC downgraded XOM from Outperform to Sector Perform noting it has outperformed most global peers over the last year, supported by strong refining margins and improving perception on the duration of its free cash flow profile,

Stock GAINERS

·     AYX +11%; upgraded at Bank America to Buy from Neutral and raise tgt to $70 from $60 saying Analytics cloud strategy working, should be good growth driver and base is resilient.

·     CEG +5%; said it is acquiring NRG’s 44% ownership stake in the South Texas Project Electric Generating Station, a 2,645-megawatt, dual-unit nuclear plant.

·     CHWY +23%; reported 1Q results well ahead of expectations, with active customers growing modestly versus expectations of a decline, revenue ahead of the high end of guidance, and a meaningful adj. EBITDA beat given better gross margin; also, better guidance.

·     CRDO +12%; after reported an in-line AprQ at $32.1M and guided to a better JulQ at $34M (cons. $31.5M) with GMs at ~59% (cons. 57.6%) and noted AI content for AEC potentially 5x vs general compute, MarQ should be the trough with revenue up q/q through F24 and improving GM.

·     HRL +7%; reported fiscal second-quarter profit that beat expectations, but sales fell shy, as volumes fell in all business segments.

·     NTAP +7%; reported Q4 revenue of $1.58B (down 6% y/y), above the Street at $1.54B, driven by higher Hybrid Cloud revenue, specifically higher margin Support and Services revenue.

·     PSTG +18%; as Q1 revs $589.3Mm vs est. $559.34Mm, adj gr mgn 72.2%, adj op mgn 3.3%; sees 2Q revs $680Mm vs est. $656.1Mm.

·     VEEV +14%; reported solid F1Q results with revenue and billings exceeding expectations while FY24E outlook for billings, revenue edged higher, and OFC was raised $30M.

Stock LAGGARDS

·     AAP -5%; adds to yesterday 30% decline after earnings miss, lower guide and dividend cut (was downgraded by a few analysts today).

·     ABBV -4%; as CHRS plans to sell a biosimilar version of ABBV’s Humira — one of the world’s best-selling medicines at a steep discount and will work with Mark Cuban’s generic drug company; the Coherus medicine will carry a $995 list price for a carton of two autoinjectors, 85% discount less than the $6,922 that AbbVie charges for Humira.

·     AI -16%; after announced F4Q23 results consistent with its May 14 preannouncement but sees 1Q revs $70M-$72.5M vs. est. $72.1M and sees 1Q adj operating loss $25M-$30M; sees 2024 revs $295M-$320M vs. est. $317M.

·     CRM -4%; Q1 revenue / cRPO results (+12% y/y vs. +11% est.) showed only modest upside and cRPO growth guidance (+10%) fell a bit short of consensus, as management pointed to incremental demand softness for multi-year transformational projects.

·     CRWD -3%; as reported top and bottom-line beat for Q1 but mkt disappointed as reported over $170mn in net new ARR in Q1, below Q4 net new ARR of $222mn; other metrics better as margins improved and raised FY24 guidance.

·     DG -18%; said the economic environment is more challenging than the discount retailer had previously anticipated and is “having a significant impact on customers’ spending levels and behaviors; Q1 comp sales rose +1.6% below est. +3.8% and sales +6.8% y/y to $9.34B vs. $9.5B.

·     LCID -14%; said it plans to raise about $3 bln through a stock offering, nearly two-thirds of which will come from Saudi Arabia’s Public Investment Fund (PIF).

·     OKTA -20%; reported solid Q1 results, though mgmt provided cautious guidance for CRPO due to increasing macro headwinds; said cRPO grew 20% y/y (below expectations) but operating margin made considerable strides at 7% (300bps over consensus).

·     VSCO -11%; reported a meaningful EPS miss ($0.28 vs. $0.54), as sales came in slightly below and mgmt utilized targeted promos; guides Q2 EPS $0.10-$0.40 below consensus $0.88 and sees Q2 revenue down mid-single digits.