Closing Recap

Friday, March 11, 2022

Equity Market Recap

·     Markets appeared poised to soar after Russian President Vladimir Putin noted positive developments in talks with Ukraine around 6AM, but the rally never materialized and stocks rolled over throughout the day to close at their worst levels. Selling pressure has been unrelenting for the past several weeks as the Dow is now on a five-week losing streak and the S&P and Nasdaq have been unable to mount any kind of rally, posting only one positive week in the past five and six weeks respectively. Momentum names that exploded over the past two years have been hit particularly hard with Docusign losing over 20% today on decelerating growth and guidance worse than expected to return all the way back to March 2020 levels as the latest to get crushed. Consumer staples and food names have also been affected by rising input costs during the Russia-Ukraine conflict and rising energy prices amidst the conflict have also dampened the outlook for consumer discretionary names. The Federal Reserve’s two-day meeting next Tuesday-Wednesday will attract most of the attention as investors await policy reactions given the current geopolitical climate and response to the hottest inflation in 40 years. A 25bps rate hike is presumably going to be announced (current probabilities imply a 95% probability for this with the remaining 5% calling for a 50bps hike), but the forecasted number of rate hikes will also be front and center as prognosticators are mixed in their assessment of how many hikes the central bank will take to combat surging prices.

·     Stock & sector news; DOCU gives up all its pandemic gains to trade at the lowest levels since March 18, 2020 as revenue growth slowed sequentially and forward guidance was weaker than expected, ORCL rallies from an early drop on a mixed quarter with an EPS miss on in line revenue in tech earnings; RIVN sinks to record lows nearly half of its Nov. 10 $78 IPO price after reporting a quarterly miss with supply chain headwinds continuing to impact production; LZ also hits record lows more than 60% off last June’s $28 IPO price after posting a quarterly miss but stock spikes to green; DIDI plunges below $2 after halting its planned Hong Kong listing when Chinese authorities said their data security measures were insufficient, YUMC tumbles after warning it may have to delist from NY exchanges due to the SEC probe into Chinese companies with FXI, KWEB, BABA, BIDU, JD, TCEHY all rolling as well; ZUMZ, TLYS, AOUT sharply roll in retail after weaker results and/or guides

Economic Data:

·     University of Michigan Consumer Sentiment Survey prelim March 59.7 (consensus 61.4) vs final Feb 62.8. This is the lowest reading since September 2011.

Commodities

·     Oil prices reversed a two-slide, rising $3.31, or 3.12%, to settle at $109.33/barrel. However, prices were lower on the week despite hitting 14-year highs on Monday.

·     Gold prices were unable to hold the $2,000 level, losing -$15.40, or 0.8%, to settle at $1985/oz.

Sector News Breakdown

Consumer

·     Retailers; ZUMZ Q4 EPS $1.70 and sales $346.7M missed estimates $1.76 and $353.2M with Q1-to-date sales falling and their view for Q1 EPS 0-10c on sales $215-221M well below estimates of 42c and $258.2M; TLYS Q4 EPS 38c vs est. 41c on sales $204.5M vs est. $204M and sees Q1 sales $143M-$148M vs est. $166.2M; AOUT 3Q adj EPS 52c vs est. $0.46 on revs $70.1Mm vs est $72.6M, guides FY net sales $245-250Mm vs est $281.3Mm and adj EPS $1.65-1.78 vs est $2.06, and announces Grilla Grills acquisition that is expected to be immediately accretive to net sales and adj net Inc; BKE Q4 EPS $1.69 vs est. $1.48 on in-line sales $380.9M, comp sales +20%; BSET declared a special dividend and boosted its buyback

·     Auto sector; RIVN Q4 adj EPS ($2.43) was wider than expected ($1.97) loss on revenue $54M vs est. $60M with supply constraints limiting 2022 production; DIDI halted its plans to list in Hong Kong after Chinese authorities said their proposals to prevent security and data leaks were insufficient; BLNK posted a wider Q4 EPS loss than projected on better revenues; MCW upgraded to Buy at Stifel following a 15% pullback since their Neutral initiation with unchanged estimates and a $20 PT; VWAGY reported FY21 revenue rose 12% to EUR 250.2B with profit nearly doubling to EUR 19.28B, and sees FY22 rev +8-13% with deliveries increasing +5-10% though the outlook is subject to risks from the current situation in Ukraine and its impact on the global supply chain in particular

·     Consumer Staples; ULTA Q4 EPS $5.41 topped est. $4.58 on revs $2.73B vs est. $2.17V, same-store sales +21.8% with a new $2B buyback authorization and guidance for FY EPS $18.20-18.70 vs est. $17.84 on sales $9.05-9.14B vs est. $9.14B; NAPA Q2 adj EPS 17c vs est. 15c on sales $98.7M vs est. $92.7M, guides FY adj EPS 55-58c vs est. 58c; SKIN initiated at OW with a $24 PT at JPMorgan who believes the company is on track for another year of solid 20%+ growth even with challenges from Omicron; ALTO posted stronger Q4 EPS and revenue ahead of consensus; BMO designated BRBR as its Top Pick for 2022 given its likely earnings power recovery; BTI concluded that its ownership of business in Russia is no longer sustainable and will no longer have a presence in Russia, and revised their FY guidance as Russia and Ukraine accounted for 3% of group revenue and a slightly lower proportion of adj profit, now expecting +2-4% revenue growth and msd adj EPS growth

·     Restaurants; TXRH upgraded to Buy at Stifel after its pullback of ~17% since the end of February provides a fair entry point for a high-quality casual dining name; RRGB Q4 EPS ($1.36) vs est. ($0.53) on revenue $283.4M vs est. $292.1M, expects 2022 pricing to increase in the mid-single digits with mid-to-high single digit commodity and labor cost inflation; LOCO Q4 EPS beat estimates on in-line sale; YUMC warned it may have to delist from NY stock exchanges by 2024 after it failed to provide US regulators access to audit documents

·     Casinos, Gaming, Lodging & Leisure sector; PSO rejected a takeout offer from APO valued at roughly $8.5B as they believe it significantly undervalues the company; LAZY received a $25/share cash buyout offer from RILY; CLSA upgraded GOTU to Underperform from Sell as it focuses on professional education and vocational training after ceasing its entire K-12 tutoring business last month; Loop lowered their price targets on UBER and LYFT but maintained their Buy ratings as they remain bullish on rideshare as a secular growth opportunity; GENI Q4 revenue beat estimates with a FY22 forecast of ~$340M vs est. $340.4M and FY23 $430-440M vs est. $430M

Energy

·     E&P and Majors; JPMorgan raised their oil price forecasts and maintains a positive view on majors with a preference for cheaper CAD vs US and downgraded CVX to Neutral on valuation after its +24% gain in the past month while remaining OW on CVE, XOM and Neutral on CMQ, COP, IMO, MEG, OXY, SUTruist raised their price target on OXY to $75 from $58 as they see continued re-rating even after it rose +50% since Feb. 25; BP, E (Eni) formed a 50/50 JV in Angola

·     Refiners: Bank of America said valuations in oilfield services are no longer cheap after the OIH’s +65% move since mid-December that has outperformed other energy and upgraded GTLS, LBRT to Buy, downgraded WHD, CHX to Neutral, and double-downgraded NOV to Underperform from Buy, and keeps HAL on its US1 list

·     Utilities & Solar; SHLS was upgraded to Buy at Gugg as they expected the softer Q1 outlook reported last night with inline Q4 results; Mizuho upgraded EXC to Buy on valuation as an attractive opportunity trading at a P/E discount; Evercore downgraded PNW to Underperform on Arizona’s uncertain regulatory environment with the latest rate case having a worse than expected outcome that should cap its valuation at a meaningful discount vs electric utilities who are growing earning and have more diversified service territories; UBS downgraded DTE to Neutral as its recent outperformance vs the XLU over the past 3 months leaves limited upside to their price target with it now trading among the highest P/E valuation in the group

Financials

·     Bank movers; BLK said it has taken about $17B in losses from its Russian securities holdings because of the attack on Ukraine

·     FinTech & Payments; JPMorgan initiated NVEI at OW with a $65 PT as it allows merchants with payments services through a single integration instead of having to use multiple regional provides and is down 59% from last fall’s high despite positive revenue/EBITDA revisions; MLNK Q4 adj EPS slightly missed on a revenue beat with Q1, FY revenue forecast ranges fully above consensus; Mizuho sees payments best positioned within tech for a 2H bounce as the two-year rev growth stack is about to inflect positively in the comping quarters with FLT, MA, V (Visa), WEX, GPN, ADP, FIS, FISV likely to see the most acceleration; FUTU Q4 revenue came in ahead of consensus and authorized a $500M buyback; OPFI Q4 adj EPS 13c vs est. 14c on revenue $95.9M vs est. $99.3, net originations +25% to $187M, and sees total revenue +25% in FY22

·     Consumer Finance; GHLD Q4 adj EPS 37c widely missed est. 61c on revenue $343.1M vs est. $365.7M; MKTW downgraded to Neutral at Wedbush with a $6 PT from $11 after yesterday’s Q1 outlook implies declining y/y growth in revenue and billings

·     REITs; WE Q4 revenue rose 9% sequentially to $718M and occupancy improved to 66% from 60% in Q3, and they see Q1 revs $740-760M and Q2 $775-825M before reaching positive adj EBITDA in Q3-Q4 with revenue $900M-$1B with full-year physical occupancy 75-80%; in healthcare, Bank of America remains constructive after earnings and upgraded VTR to Buy on accelerated senior housing fundamentals and SBRA to Neutral as they see fewer tenant issues than peers despite remaining cautious on skilled nursing facilities, and downgraded MPW to Neutral as they see it trading in line with its historical average given uncertainty around a dilutive tenant repurchase option; BMO also upgraded VTR to OP with increased confidence in the senior housing recovery and its discount to WELL leaving room for relative multiple expansion and downgraded CTRE to Market Perform as they turn more cautious on skilled nursing; RBC initiated CSR at Sector Perform with a $16 target on underappreciated potential offset by single-market risk

Healthcare

·     Pharma movers; PFE closed its $6.7B acquisition of Arena Pharmaceuticals; NOVN acquired specialty dermatology company EPI Health for $27.5M upfront

·     Biotech movers; Wedbush added DAWN and FHTX to its Best Ideas List and also said they would be buying CDAK ahead of several near-term catalysts as it is significantly undervalued at these levels

·     MedTech Equipment; Cowen reiterated EW as Outperform as a Top Pick as they are more confident in its recovery and ability to maintain and gain market share after their health care conference; CDRE Q4 EPS 13c vs est. 18c on revs $103.5M vs est. $104.4M with FY sales guidance $434-441M vs est. $439.5M; AXGN assumed at OW by Cantor on favorable views of its target market, belief its offering could become the standard of care, and significant undervaluation

·     Healthcare Services; LFST Q4 revenue $190.1M vs est. $191.7M and guides Q1 revenue $195-200M vs est. $205M after facing a $3-7M impact from Omicron with a full-year forecast of $865-885M that sandwiches est. $875.9M; CVS CEO removed several executives following an internal investigation into how they handled sexual harassment complaints

Industrials & Materials

·     Aerospace & Defense; Barclays raised their defense price targets by 15-20% on average as they see the majority of the re-rating behind us but an outlook that is still favorable with GD, LHX their top picks

·     Industrial & Machinery; Wells issued OW ratings on AGCO, DE, HEES, HRI, ROLL, TEX, URI, EW ratings on CAT, OSK, and UW on MTWUBS reiterated CAT at Buy with a $250 PT on its underappreciated strong cash position and flexibility and cut their PT on sell-rated MMM to $118 from $168 as their base case is for further multiple de-rating towards historical P/E lows but see a wide range of significant up/downside cases if we get more clarity on various overhangs that have dominated the stock’s recent narrative

·     Metals & Materials; LEU Q4 adj EPS $8.14 on revenue $89M and was downgraded to Neutral at Roth; SQM upgraded to Sector Perform at Scotiabank

Technology, Media & Telecom

·     Internet; Deutsche said the YTD sector re-rating provides a prime opportunity to build positions in secular winners and initiated AMZN, FB, SNAP, RBLX, MTCH, CHWY, BKNG, EXPE with Buy ratings and Hold ratings on BMBL, ETSY, LYFT, TWTR

·     Semiconductors; AMAT announced a new $6B share repurchase authorization and raised their dividend to 26/shr from 24c

·     Software movers; ORCL Q4 adj EPS $1.13 missed est. $1.18 on in-line sales $10.5B and was downgraded to UW at Piper due to more than 70% of revenues tied up in traditional product categories where Q4 revenue declined -1.6% YoY; DOCU Q4 adj EPS 48c vs est. 47c on revs $580.8M vs est. $562M with growth slowing sequentially to +35% from +42% growth in Q3 and its guidance was weak with Q1 revenue forecasted $579-583M vs est. $594.4M and FY revs $2.47-2.48B shy of est. $2.61N; DSP reported an adj profit in Q4 with adj EPS 17c vs est. (1c) on revs $82.7M vs est. $73.2M; Evercore added XM to its SMID-Cap Best Ideas List

·     Media & Telecom; WB downgraded to Neutral at UBS who expects weaker monetization and margins in 2022; Gugg upped their PT on NWSA to $38 from $34 as they said their acquisitions of OPIS and Base Chemicals were at very attractive valuations; TRI added to Bank of America’s US1 List; T reiterated 2022 guidance for growth in revenues, adj EBITDA, and earnings excluding WarnerMedia and Xandr and sees 2023 continued lsd revenue growth with adj EPS $2.50-2.60, adj EBITDA $44.3-44.5B, and FCF reaching $20B from $16Bin 2022