Mid-Morning Look

Friday, October 13, 2023

U.S. stocks are mixed, initially rebounding from Thursday’s declines and on track to close out the week with solid gains as Treasury yields and the dollar slip following yesterday’s spike post CPI data, giving a boost to haven assets amid increased tensions in the Middle East. Financials among pleasant surprises early with shares of WFC, C, JPM rising following quarterly earnings results. Oil prices rising over 3% after the U.S. tightened its sanctions program against Russian crude exports, raising supply concerns in an already tight market. Also, Israel is close to launching a ground invasion of Gaza after its military ordered more than a million people in the territory to flee south. Managed care stocks rallied behind UNH results as the Dow component posted a quarterly beat and raised guidance. In the U.S., economic data showed September import/export data was mixed, while consumer sentiment fell from the prior month and below expectations while the inflation outlook jumped from the prior month (that inflation data point pared Treasury yield losses and pushed the dollar higher). In China, data was mixed as CPI was flat and Import/Export figures came in a bit better. During its earnings comments, JP Morgan CEO Jamie Dimon issued a stark warning after reporting quarterly results saying, “this may be the most dangerous time the world has seen in decades.” Beyond the military conflicts in Ukraine and Israel, Dimon cited the burgeoning national debt and “the largest peacetime fiscal deficits ever.”

Economic Data

·     Import prices for September rose a smaller-than-expected +0.1% vs. est. +0.5% and below Aug +0.6% while Export prices rose +0.7% topping the +0.5% estimate, but below Aug +1.1%. U.S. Sept year-over-year import prices -1.7%, export prices -4.1%.

·     University of Michigan surveys of consumers sentiment prelim Oct 63.0 vs. consensus 67.2 and below Sept-Final 68.1; current conditions index prelim Oct 66.7 vs. Sept-F 71.4 and consumers expectations index prelim Oct 60.7 vs. Sept-F 66.0.

·     Inflation expectations rise: University of Michigan surveys of consumers 1-year inflation outlook prelim Oct 3.8% vs final Sept 3.2% and University of Michigan surveys of consumers 5-year inflation outlook prelim Oct 3.0% vs final Sept 2.8%.

Sector Movers Today

·     Banks acting well after results from large caps provide beats on top and bottom line: 1) JPM Q3 profit rose 35%, boosted again by rising interest rates as income hit $13.15B, up from $9.74B a year ago (EPS $4.33 tops $3.95) as revs rose 22% y/y to $39.87B; 2) Citigroup (C) Q3 EPS $1.63 above estimates $1.22 on better revs $20.14B (est. $19.26B) as better revs in FICC sales & trading $3.56B (est. $3.25B), investment banking $844M (est. $662.8M), while equities sales & trading revs $918M below views around $960M. 3) WFC said Q3 profit rose as EPS $1.48 tops the $1.24 estimate on better revs $20.86B vs. est. $20.1B helped as customers pay higher interest on loans; its Net interest income (NII) climbed 8% to $13.1B in Q3 and said sees FY23 NII 16% higher than FY22’s $45B; 4) PNC said it would reduce its staff by about 4% as part of a cost-cut initiative, while revs fell -5.7% y/y to $5.23B vs. est. $5.32B and average deposits fell 3.8% to $422.5B, compared with $439.2B y/y; posted profit of $3.60 vs. est. $3.11.

·     In Semi-equipment: AMAT and LRCX were both upgraded to Buy from Hold at Needham saying LRCX looks to be an outperformer in 2024-2025 and expects resilience from AMAT; expects memory WFE to normalize at ~40% of total WFE by 2025. Needham is launching its Wafer Fab Equipment (WFE) model and setting its initial 2023, 2024, and 2025 WFE estimates at $90B, $90B, and $100B respectively. Separately, Deutsche Bank said in Q3 preview, LRCX in large cap and ENTG in mid-cap are fav names in semi equipment into earnings.

·     In Aerospace & Defense: BA and supplier SPR slide after saying they expanded the scope of their ongoing inspections of a production defect affecting 737 Max 8 aircraft. In August, the plane maker identified a new quality problem with its popular 737 MAX aircraft involving Spirit that resulted in improperly drilled holes on the aft pressure bulkhead made using an automated drill. AVAV shares jumped after Wiliam Blair said data points suggest the co has received its first large order for its anti-tank Switchblade 600 loitering missile system, with more on the way.

Stock GAINERS

·     AEM +3%; as gold miners rise (AEM, NEM, GFI, HMY, GOLD) amid rotation back into “haven” assets after reports Israel is close to launching a ground invasion of Gaza after its military ordered more than a million people in the territory to flee south.

·     AVAV +7%; after Wiliam Blair said data points suggest the co has received its first large order for its anti-tank Switchblade 600 loitering missile system, with more on the way.

·     CMTL +31%; as Q4 adj EBITDA $18.9Mm vs est. $13.23Mm on net sales $148.8Mm vs est. $140.13Mm; entered into a definitive agreement with Stellant.

·     DG +7%; announced a CEO transition, with the rehiring of Todd Vasos, who had retired as CEO in November 2022 while also lowered 2023 guidance.

·     JPM +4%; as big banks Citi, WFC report beats on top and bottom-line quarterly results.

·     NVO +1%; raised its FY23 sales and profit outlook citing higher-than-expected U.S. prescription volumes for its diabetes/weight loss drugs Ozempic, Wegovy; now sees full-year company sales rising as much as 38% from prior view up to 33% growth and operating profit growth of 40-46%.

·     PGR +7%; Q3 EPS $1.89 topped ests $1.68 as Q3 combined ratio reported 92.4%, Q3 net premiums earned $14.89B and Q3 net premiums written $15.59B.

·     UNH +2%; 3Q upside was driven by lower MCR and strong NII as Q3 EPS of $6.56 exceeded ests $6.31 and MCR below Goldman est. by 50bp and revs slightly stronger and raised the low end of its 2023 EPS guidance by $24.85-$25.00 from $24.70-$25.00 (est. $24.83).

Stock LAGGARDS

·     BA -3% and supplier SPR slid after saying they expanded the scope of their ongoing inspections of a production defect affecting 737 Max 8 aircraft.

·     BDC -24%; guided Q1 revs about $625M vs. est. $685.2M; narrows Q3 EPS view down to $1.75-$1.77 from $1.75-$1.85 (est. $1.82) and cuts Q3 revenue view to $625M from $675M-$690M (est. $685.2M) saying demand to weaken in Q3.

·     JD -4%; extending yesterday losses after Morgan Stanley downgraded to EW from OW citing slower-than-expected consumer demand recovery in China and slashed tgt to $33 from $55; Citi, Daiwa and Jefferies also cut tgts and rev growth forecasts today.

·     HRMY -37%; after announces topline data from phase 3 Intune study evaluating pitolisant in patients with idiopathic hypersomnia; said safety & tolerability profile in adults with idiopathic hypersomnia consistent with established safety profile of pitolisant.

·     NFLX -1%; was downgraded from Outperform to Peer Perform at Wolfe Research ahead of earnings next week saying while Netflix should continue to gain share of the global premium video revenue pie, they have rising concern about 2024-25 growth forecasts.

·     OM -47%; reported a Q3 preliminary revenue of $30.4MM, below Street’s $36.0MM and 16% below guidance of flat sequential growth. FY23 guidance was lowered to $130MM from $144-150MM, implying flat sequential growth in Q4.

·     SAVA -21%; after article in “Science” stats Co-developer of Cassava’s potential Alzheimer’s drug cited for ‘egregious misconduct’ https://tinyurl.com/nhd2nkmz

·     SGH -40%; Q4 results (EPS $0.35/$316.7M vs. est. $0.45/$375M) and Q1 guidance (EPS loss -$0.16 plus/minus 15c vs. est. $0.40 and revs $250M-$300M below consensus $383.4M) fell short of expectations as sales were down -12.6% y/y for Q4.