Closing Recap

Thursday, March 03, 2022

Equity Market Recap

·     Stocks slip, pushing stock back into negative territory for the week! Another volatile day for U.S. stocks, opening the day firmly in positive territory, but given the impact of financial sanctions to Russia, the unintended consequences of creating surging commodity prices (corn, wheat, oil, copper, nickel) due to supply concerns, along with weak economic data, and a rising interest rate cycle on the horizon from the Fed (and other central banks to fight inflation) you had the perfect storm for a late day pullback. Russia and the Ukraine held another round of talks as attacks on Ukraine’s largest cities continued but was not enough to lift market sentiment. Comments earlier from Russian leader Putin also unnerved markets, telling French leader Macron the goals of Russia’s Ukraine operations will be achieved in any case; winning time through talks will not work. Macron said he believes the worst is yet to come. Ahead of the monthly jobs report tomorrow for nonfarm and private payrolls, investors saw weaker services data as ISM Non-Manufacturing slumped to 12-month lows, dropping from 59.9 to 56.5, against expectations of a rise to 61.1, while also shows a plunge in new orders and employment.

·     Stock & Sector movers: industrial metals/materials extend gains FCX, AA, Z, CLF, with many hitting 52-week highs on supply concerns given the Ukraine/Russia conflict and impact on exports; coal stocks BTU ARCH, among top gainers in the commodity sector – UBS noted benchmark NEWC thermal coal price lifted ~67% over the last week to US$400/t, the highest level ever driven by disruption to Russian coal export; Software space active after several earnings reports – SNOW plunges to lowest levels since May, VEEV to 52-week lows after following weak guides, OKTA drops despite strong sales as guidance calls for larger EPS losses next year, PSTG PLAN SPLK better results retail another mixed sector following earnings – BJ BIG BURL roll after quarterly misses, AEO sinks on weak guidance, BBY rises despite a weaker quarter and forecast, VSCO green as a quarterly beat outweighs weaker guidance; grocer KR soars to record highs on its robust quarter and EPS guidance with BF/B also among S&P leaders after results in staples, CHPT bounces as it sees full-year revenue nearly doubling YoY and 25% above consensus at the midpoint; INTC QRVO TER slip after Morgan Stanley downgraded each as show me stories with a lack of clear near-term catalysts.

Economic Data:

·     Weekly Jobless Claims fell to 215K from 233K last week and below consensus 225K; the 4-week moving average fell to 230,500 from 236,500 prior week; continuing claims rose to 1.476M from 1.474M last week (est. 1.475M); U.S. insured Unemployment Rate unchanged at 1.1%

·     U.S. Q4 non-farm productivity unrevised at +6.6% vs. est. +6.7%; while non-farm unit labor costs revised to +0.9% vs. estimate and prior reading of +0.3%

·     U.S. IHS Markit February final composite PMI at 55.9 (vs flash 56.0) and U.S. IHS Markit February final services PMI at 56.5 (vs flash 56.7); input prices index for February 75.5 vs flash reading 76.1 and final January 73.2

·     ISM Non-manufacturing for Feb shows PMI 56.5 in February vs 59.9; business activity index 55.1 in February vs 59.9 in January; prices paid index 83.1 in February vs 82.3 in January; new orders index 56.1 in February vs 61.7 in January; employment index 48.5 in February vs 52.3 in January; ISM non-manufacturing PMI index and new orders index at lowest since February 2021

·     Factory Orders for January rose +1.4% to $544.2B vs. +0.5% consensus and +0.7% prior (revised from -0.07%) as Shipments +1.2% to $536.9B and Unfilled Orders +0.9% to $1,283.5B

Commodities

·     Oil prices were all over the map, hitting its highest levels in over a decade above $116 per barrel for WTI crude and Brent around $120, but prices ended the day lower. WTI crude fell -$2.93 or 2.65% to settle at $107.67 per barrel (off lows $106.43). Oil prices began to slide on a report that Iran may reach agreement to revive nuclear deal, allowing Iran to export more oil. The decline today snapped a 3-day 21% rally on fears of global shortages due to Russia’s invasion of Ukraine.

·     Gold prices close higher, rising $13.60 or 0.7% to settle at $1,935.90 an ounce, as investors again look to haven assets amid stock market volatility and uncertainty in Europe. Chicago corn futures rise by exchange limit to $7.60/bushel; Wheat prices yet again surge behind fears of reduced exports amid Russia/Ukraine crisis (both larger exporters). Ukraine and Russia are both known as top grain suppliers, but with the ongoing war and loss of exports out of the region, soybean prices have also jumped as well in broad move for commodities (nickel, aluminum, thermal coal).

·     After three straight days of more than 10-bps moves for 2s, 10s and others, Treasury yields were a bit calmer today, as the 10-year hit highs around 1.9% shortly after the stock market open, falling to lows around 1.83% late morning before settling in the middle. Bond markets again active following the volatile action in stocks given headline “tape bombs” on Russia/Ukraine, as well as Fed commentary from Chairman Powell and Fed President Mester. The U.S. dollar index (DXY) pushed higher again on mixed economic data and a rising outlook for interest rates. The SEK, NOK, EUR, and GBP all lower versus the greenback.

Sector News Breakdown

Consumer

·     Retailers; busy day of earnings as BBY Q4 adj EPS and revenue relatively in-line with consensus, comps -2.3% vs est. -0.9%, raised its dividend to 88c from 70c, said it plans to repurchase $1.5B of stock this year, and guides FY23 EPS $8.85-9.15 vs est. $9.16 on revs $49.3-50.8B vs est. $51B with comp sales falling 1-4% vs est. -1.4%; BIG Q4 adj EPS $1.75 missed est. $1.89 on revs $1.73B vs est. $1.72B with comps -2.3% as the quarter was negatively impacted due to adverse shrink results, and Q1 EPS view $1.10-1.20 is below est. $1.28 with revenue view of a low-double digit decline vs est. -6.8%; BJ posted a wide Q4 comp sales ex-gas of +0.9% vs est. +4.78% though adj EPS 80c topped est. 74c on revs $4.36B vs est. $4.38B, sees EPS flat in FY23 from $3.25 (est. $3.39); AEO Q4 adj EPS and revs matched estimates and said it is taking a cautious view of 2022 while seeing an earnings decline in H1 due to stimulus last year and continued freight pressures and see a full-year operating profit $550-600M down from $603M YoY; VSCO posted a Q4 beat with EPS $2.70 ahead of est. $2.63 on sales $2.715B vs est. $2.14B with a new $250M buyback program but sales guidance was weaker than expected with Q1 sales view $1.425-1.495B fully below est. $1.52B and full year outlook of sales growth flat to up low-single digits vs est. +2.4%; BURL Q4 comp sales rose 6% but missed est. +10.8% increase with adj EPS $2.53 and sales $2.61B also missing expected $3.25 and $2.78B, and did not provide guidance due to extremely unpredictable year as they lap stimulus programs along with continued inflation; BKE February comp sales rose +33.3% and net sales +32.9%

·     Consumer Staples; KR rallies after Q4 EPS of $0.91 tops est. $0.72 on better sales and Q4 identical-store sales ex-fuel +4% vs. est. +2.62% (down vs. 10.6% y/y) while guides FY adj EPS $3.75-$3.85 above the est. $3.44; BF posts Q3 EPS beat of $0.54 vs. est. $0.48 as sales rose 14% y/y to $1.04B (est. $981.5M) and operating margin 33.5% vs. est. 30.8%; in food, UTZ said Q4 sales rose 22% to 4300.9M from $246M y/y, but earnings were hurt by higher costs, reported at $0.11, missing the $0.15 estimate; GRWG downgraded to Neutral at Roth Capital

·     Casinos, Gaming, Lodging & Leisure sector; DKNG boosted its long-term adjusted ebitda outlook to $2.1 billion at its investor day and reiterated its belief that five more states would become contribution profit positive in fiscal 2022, after five states, including New Jersey, went positive in 2021; MGM buyback announced a $2B share buyback plan; RSI downgrade from Buy to Hold w/ $10 PT from $19 at Hallum after earnings; BALY downgraded at KeyBanc not as a result of the 4Q21 results/FY22 outlook, but more a function of our evolving view that there is a high hurdle rate for new money into LT-oriented story stocks pending whatever outcome BALY’s board decides; Auto sector; German newspaper Handelsblatt reported Thursday that TSLA received its final permits for its new facility near Berlin; Electrek reported that after backlash, RIVN backtracks on price hike, letter from Founder/CEO; CHPT bounces as it sees full-year revenue nearly doubling YoY and 25% above consensus at the midpoint

Energy

·     Energy sector: oil prices tumble off morning highs (WTI hit $116.57 overnight, highest levels since 2011) after a report that Iran may reach agreement to revive nuclear deal, allowing Iran to export more oil. Benchmark Brent crude oil prices climbed close to $120 a barrel on Thursday, with Russian oil exports disrupted as traders try to avoid becoming entangled in sanctions. Energy stocks opened the day as the lone sector in negative territory before broader markets played catch-up. Bespoke noted earlier, coming into today, the Energy sector XLE is up 31.4% in 2022. The next closest sector was Consumer Staples XLP, which is down 2.4% YTD. Coal stocks BTU, ARCH, HCC among leaders as investors look to coal and other alternative energy given oil spike. UBS noted coal prices rally aggressively from high level after Ukraine invasion The benchmark NEWC thermal coal price lifted ~67% over the last week to US$400/t, the highest level ever. This is driven by disruption to Russian coal exports.

Financials

·     Bank movers: Citi (C) downgraded to Neutral at KBW and Atlantic after yesterday’s investor day; TW Feb. average daily volume $1.17B; ICE Feb. avg daily volume +15% and open interest +6% YoY; Goldman double-upgraded CIB to Buy from Sell with a new $45 PT from $27 following strong Q4 results and constructive guidance in a country expected to post the greatest GDP growth in Latin America this year

·     FinTech & Payments; FLYW posted a wider Q4 EPS loss of (11c) than est. (5c) on revenue $51.4M that topped est. $41.9M with payment volume rising 75% YoY above $3B, guided full year revenue $266-276M ahead of est. $238.4M

·     Consumer Finance; Visa (V) disclosed in a filing that roughly $1.2 billion of its annual net revenue comes from Russia and Ukraine, where sanctions and war have made it difficult to do business, accounting for some 4% of Visa’s total net revenue in its last fiscal year; RELY Q4 EPS (10c) vs est. (23c) on revs $135.3M vs est. $125.4M, guides FY revs $605-615M vs est. $602.4M

·     REITs; Evercore downgraded BXP and KRC to In Line as their significant YTD outperformance vs the Office Index and RMZ Index YTD leaves less runway and puts valuation close to historical norms, and upgraded DEI to Outperform given the underperformance YTD relative to the Office Index; SAFE priced a public 2M share offering at $59, below yesterday’s $62.07 closing price

Healthcare

·     Pharma, Services movers; in cannabis, TLRY agreed to buy up to $211M of HEXO senior secured convertible notes held by HT Investments MA LLC as part of a strategic alliance between the two cannabis companies; TNXP said the FDA granted Orphan Drug designation for its drug candidate, TNX-2900, for treatment of Prader-Willi syndrome; AZN said its rare disease group Alexion has closed an exclusive global deal and license agreement with Neurimmune AG to commercialize NI006; TDOC was upgraded to Buy from Hold with $95 tgt at Argus saying after years of operating losses despite robust revenue growth, Teladoc is now on a clear path to profitability; TGTX stock falls as FDA extends review of blood cancer drug combo

·     Biotech movers; BIIB upgraded to Outperform from Sector perform and raise tgt to $248 from $227 at RBC Capital; at Mizuho, increase price Target for BHVN (to $154 from $144) in SMID biotech, while lowering tgts for KRTX (to $178 from $182), ACAD (to $28 from $33) and SAGE (to $41 from $44); NBIX downgraded to Neutral at Piper saying with co pricing in aggressive LT Ingrezza growth, believe the potential for considerable value creation is limited.

Industrials & Materials

·     Defense, Industrial & Machinery; North American Class 8 truck orders fell to 21,100 vehicles in Feb y/y, while rose only 6.6% in Feb m/m, the lowest in three months and the biggest monthly drop since Jan. 31 (shares of CMI, ALSN, NAV, PCAR among names leveraged to class 8 data); HON said it’s reaffirming its 1Q and FY 2022 guidance and upgrades long-term financial framework, including organic growth, margin expansion and long-term segment margin targets; BA secures order for additional mh-47g block ii chinook helicopters from U.S. Army at $195M

·     Transports; GRAB reported a wider-than-expected net loss for Q4; ODFL qtr-to-date, LTL rev per hundredweight & LTL rev per hundredweight, excluding fuel surcharges, up 16.8% & 10.7%, respectively; ALGT downgraded to in-line from outperform while upgrade LUV to Outperform from in-line in airlines sector at Evercore/ISI; Dow transports were strong early, led by another day of gains in railroads UNP, CSX, NSC

·     Metals & Materials; BLL upgraded to Outperform from Market Perform and up tgt to $105 from $87 at BMO Capital saying growth rates have accelerated in the beverage can market as consumer goods companies focus on sustainability; in metals, HSBC upgraded VALE shares; lithium producer SQM reported a Q4 net profit of $321.6M, topping ests of $266.4M and compared with a net profit of $67.0M y/y; CF, MO strong again as price rally for grain prices of late (corn, wheat, soybeans) helping for them – wheat touching record highs recently given the Russian sanctions; FCX approaching $49 to highest levels since 2011, along with continued gains in aluminum AA, steel X and iron ore CLF

Technology, Media & Telecom

·     Semiconductors; INTC downgraded to Underweight and both QRVO and TER downgraded to EW from OW at Morgan Stanley while upgrade GFS saying not really changing bigger picture views materially but trying to rebalance our ratings to be more consistent with our overall In-Line view on the semiconductor industry and make room for more actionable names; WDC cuts Q3 adjusted EPS view to $1.30-$1.60 from prior view of $1.50-$1.80 and vs. consensus $1.50; cuts Q3 revenue view to $4.2B-$4.4B from $4.45B-$4.65B (est. $4.06B); updated its outlook due to the recent chemical contamination issue

·     Software movers; SNOW shares slide as reported strong FQ4’22 results with 3% upside on product revenue but shares slip as FY23 product rev guide of 65-67% to $1.88B-$1.9B vs est. $2.01B, due to a $97m headwind from platform improvements and announced definitive agreement to acquire Streamlit; SPLK beat revenue and EPS targets by large amounts, accelerating revenue to +21% Y/Y (vs. -5% in FY20) – RPO and bookings grew at healthy rates and guided well ahead of 1Q and full-year FY23 revenue and operating margin views; OKTA reported F4Q22 results, with non-GAAP EPS of ($0.18) (consensus ($0.24)) on revenue of $383M, up 63% y/y (consensus $359.9M), and billings grew 91% y/y (normalized billings reflect 71% y/y growth), but shares fell due to the lowered operating margin outlook for FY23

·     In a busy night of SaaS earnings, PLAN stood out with a strong finish to FY22 as results topped the bar with better-than-expected billings, cRPO and client additions and increased guidance for FY23; VEEV billings noise and cash flow guidance surprised to the downside, overshadowing better Q4 results; ZUO fundamentals showed continuous improvements, combined with a new strategic investment from Silver Lake of $400M

·     Hardware, Components & Services; BOX posted better than expected results & guidance, w/ ~17% Q4 rev growth marking the 4th consecutive qtr of YoY rev growth acceleration and FY23 guidance looks for acceleration in FY23 vs. FY22; NTNX top-line modestly beat expectations in FQ3, driven by ACV billings upside, mostly from early renewals. Combined with opex discipline, in part from the difficult hiring environment, EPS outlook improved; PSTG strong quarter and both the Q1 and FY23 outlook were ahead of expectations as continues to land new customers, but beat and guide up was excellent penetration of the installed base in the Americas; HEAR slides on weak qtr/guidance as Q4 adj EPS $0.16 vs. est. $0.23; Q4 revs $109.4M vs. est. $108.2M; sees 2022 EPS $0.70-$1.20 vs. est. $1.14; sees 2022 revenue flat, plus or minus 5%, from 2021; RXT announces $75M buyback

·     Internet, Media & Telecom movers; GOGO reported strong Q4 results and issued long-term targets as Q4 revenue was $92.3M, up 18.9% Y/Y, fueled by strong growth in both service and equipment revenue and net income from continuing operations was $209.1M; BILI posted a smaller-than-expected quarterly loss and revenue beat, sending shares higher; WEAV downgraded by two analysts following 4Q21 results that fell short of expectations, with an initial 2022 outlook that implies a much more pronounced reset to growth/margins than we anticipated