Closing Recap

Wednesday, November 03, 2021

Equity Market Recap

·     The S&P’s rally had appeared to take a breather with the index trading slightly red and in a very narrow range into the 2PM FOMC decision, but the central bank’s actions sent soaring with the benchmark index making a new record high for the fourth consecutive day and the Nasdaq enjoying its fifth straight new intraday high as nothing appears to stymie stocks. In the morning, both ADP Private Payrolls and the ISM Non-Manufacturing Index came in well above expectations as the labor market and broader economy show signs of recovery, which bolstered the Federal Reserve’s case to taper the stimulus that was adopted to rescue an economy amid a pandemic with broad lockdowns and an uncertain timeline. The Fed unanimously voted to keep interest rates at the accommodative 0-0.25% level but announced it will start tapering its monthly $120B bond purchases by $15B in November and another $15B in December, also saying comparable decreases in pace are likely each month but they are willing to adapt if necessary. On the inflation front, the central bank echoed their position that inflation is largely transitory and repeated that the path of the economy depends on the virus as the rise in cases over the summer slowed certain sectors’ recovery. Bond yields popped in reaction to the FOMC, but many of the moves in equities were brief with indices returning towards as this decision was generally expected and priced in. EA, TTWO, FSLY, ETSY, ROKU, QCOM, NKLA, PENN, MGM, and MRNA are among those with earnings on the docket for tonight and tomorrow morning.

·     Stock/sector movers: ZG plummet over 20 after it missed on quarterly revenues, officially shut its iBuyer business, and will lay off about 25% of its workers, prompting several analyst downgrades; LYFT rallies after reporting a profitable quarter with strong rider and driver growth (UBER follows the stock up ahead of its report tomorrow night); ATVI plunges on weak sales guidance, the departure of Blizzard’s co-head after only 3 months, and the delays of two game releases; retailers strong with CPRI surging to 3-year highs and SHOO to record levels after beat and raise reports, BBBY was the latest meme stock trade as it rose to highs over +50% after expanding its KR partnership, UAA extends yesterday’s post-EPS gains on multiple positive analyst notes; M 52-week highs, TPR, PVH, HBI among S&P leaders; TMUS jumps after adding more subscribers than expected and on a Raymond James upgrade; DE shares retreat after union workers reject the tentative agreement and will continue their strike, reversing Monday’s gains on news that a deal was reached.

Economic Data:

·     Strong private payroll report as ADP Employment Services said there were 571K jobs added in October, topping the estimate for 400K, ahead of this Friday’s non-farm payroll report

·     September Factory Orders rose +0.2% to $515.9B vs. +0.1% consensus and +1.0% prior (revised from +0.7%).

·     ISM Non-Manufacturing Index with a healthy beat at 66.7 reading, topping the 61.9 consensus and 61.9 prior; prices paid index jumps to 82.9 vs. 77.5 prior (2^nd highest reading ever); the New Orders Index better at 69.7 vs. 63.5 prior and Employment Index 51.6 vs. 53.0 prior.

FOMC Meeting Results

·     The Federal Reserve said (as expected) in a unanimous decision, that it will reduce its purchases of Treasuries and mortgage-backed securities (MBS) later this month as it eases off the economic gas. The central bank will reduce its purchase of Treasury securities by $10B per month and MBS by $5B per month from its current monthly rate of at least $80B for Treasuries and $40B for MBS. The federal funds rate target remains at 0.0-0.25%. Fed funds futures imply 90% chance of fed raising rates by July 2022 after september statement; futures show traders expect 2 hikes by December 2022 after’s fed’s september statement; 10-yr yield highs as approaches 1.6%.

Commodities, Currencies & Treasuries

·     Oil prices fell on Wednesday, with WTI crude dropping -$3.05 or 3.63% to settle at $80.86 per barrel, as industry data pointed to a big build in crude oil and distillate stocks in the United States, and as pressure mounted on OPEC to increase supply ahead of its meeting tomorrow.

·     Gold prices tumbled ahead of the FOMC policy meeting, as December gold slipped -$25.50 or 1.4% to settle at $1,763.90 an ounce, its lowest level in over three-weeks. Positive economic data pressured precious metals initially, which lifted the U.S. dollar initially.

·     The U.S. dollar initially fell after the FOMC announcement, though quickly recovered as the EUR-USD popped from 1.1583 to 1.1610, before dropping back to 1.1590, while USD-JPY fell from near 114.00 to 113.78, since rallying back over 114.00.

·     Treasury yields headed higher on the announcement, taking the 10-year up 5 bps on the day to 1.60%. The Fed announced details of its QE taper program, as widely expected, while the statement said they expect inflation to fall, as the high current levels are "largely reflecting factors that are expected to be transitory.

Sector News Breakdown

Consumer

·     Retailers; BBBY surges after announcing marketing collaboration with Kroger (KR) and accelerated stock buyback as expects to complete its $1 bln share repurchase plan by end of fiscal 2021, two years ahead of schedule; BIRD sold about 20.2 million shares at $15 each, up from the 19.2 million shares at $12 to $14 each it had planned to offer; CPRI rises as 2Q adj EPS $1.53 vs est. $0.95 on revs $1.3B vs est. $1.27B; guides FY revs approx $5.4B vs est. $5.31B, sees FY adj EPS $5.30 vs est. $4.57; NKE’s Vietnamese subcontractors have resumed production and the company plans to increase its reliance on the Southeast Asian country to make its shoes with more investments, according to a report on the Vietnam government’s website; UAA upgraded at William Blair and Telsey and several analysts raise tgts following strong earnings; DKS announces a loyalty program with NKE, allowing Dick’s online customers to shop for shoes and apparel exclusive to Nike’s loyalty members; BGFV 3Q results slightly below expectations but inline with guidance while Q4 earnings guidance above our prior expectations; SHOO, ODP, RCKY among other earnings; TUP tumbles on big revenue and Ebitda miss

·     Auto sector; in auto suppliers, BWA 3Q adj EPS $0.80 vs est. $0.72 on revs $3,416B vs est. $3.427B; guides FY adj EPS $3.65-3.95 vs est. $3.91, sees FY revs about $14.4-14.7B vs est. $14.8B; KAR reported 3Q21 adj. EBITDA modestly below consensus and the midpoint of the preannounced guidance range it provided on 9/20; LEA downgraded from Outperform to Sector Perform with $176 tgt as believe the stock over the next 6-12 months is more tied to global production (cycle) than LEA specific factors; Ford (F) U.S. sales rose 12.3% M/M in October led by SUVs; EV sales up 195% Y/Y

·     Housing & Building Products; ZG tumbles a 3^rd day after saying it plans to close Zillow Offers, its business that buys and sells homes, in a move eliminating a quarter of its workforce after reporting Q3 revenue below consensus; LL Q3 EPS $0.29 and revs $282.2M missed $0.30/$289.0M ests; comps (4.5%) vs consensus (1.8%); GM 37.3%, down 240bps y/y primarily reflecting significantly higher transportation and material costs, and higher tariffs

·     Consumer Staples; MDLZ posted a solid Q3 top-line beat and raised guidance on organic growth for FY’21 for the second consecutive quarter; FDP shares slide after a quarterly profit miss citing higher costs and labor shortages; INGR was upgraded at both BMO Capital (to OP with $112 tgt) and Credit Suisse (to OP with $110 tgt)

·     Restaurants; EAT posted a miss on the top and bottom line for Q3, while guides FY22 EPS $3.50-$3.80 below estimates of $3.91; SHAK upgraded to Buy with $98 tgt at Northcoast as believe Shake Shack is experiencing stronger sales trends in October compared to a lackluster summer which kept momentum at bay; DENN posted mixed Q3 results as comp sales missed, decelerating in Aug./ Sept., driven by the COVID spike, but have re-accelerated in Oct (+0.8%); WING slipping to 4-month lows as Q3 missed estimates (29c/$65.8M vs. est. 45c/$74.7M) and guides year comp sales 7%-8%, below the 8.8% estimate

·     Casinos & Gaming sector; SGMS downgraded to Hold from Buy at Stifel but raise tgt to $90 from $84 noting the stock is up 4-fold since the Perelman sale (3-fold vs. pre-COVID), and think the asset-sale driven value creation has largely played out; CZR reported a rare miss in Q3 despite, once again, delivering record quarterly results in Vegas, but significantly, the EBITDAR loss for Caesars Digital, which includes the company’s retail and online sports betting and iGaming businesses, was wider than the Street’s – $128mn estimate; RRR Q3 EPS 93c vs. est. 82c on revs $414.8M vs. est. $415.8M, adj EBITDA $184.5M (+15%), increased its share repurchase program from $150M to $300M

·     Leisure and Lodging; LYFT posts 3Q beats across most metrics, 8% EBITDA margin as reported Rev./EBITDA of $864.4mn/$67.3mn vs. the Street at $862.0mn/$33.0mn and had 18.9mn Active Riders (52% y/y, 45pt deceleration q/q) came in 2% below the Street at 19.3mn; CWH came in nicely above consensus (ebitda +$40.6m and revenue +$84.0m), increasing the fy21 ebitda outlook +$72.5m at the midpoint; NCLH Q3 passengers carried 57,931 was less than half of est. 117,015, adj EPS loss ($2.17) was wider than est. ($1.96) on revs $153.1M that widely missed est. $265.9M, said they expect 75% of capacity to resume sailing by end of 2021 from ~40% at end of Q3 with its full fleet being operational by April 2022, and operating cash flow to turn positive in 1Q22; MAR 3Q adj EPS $0.99 vs est. $0.98 on revs $3.946B vs est. $3.811B, comparable systemwide REVPAR +118.4% worldwide and +134.7% in US and Canada, said leisure travel remained very strong but cannot provide guidance due to the continuing material impact of covid; FUN Q3 EPS $2.60 vs est. $2.45 on revs $753.4M vs est. $663.4M, attendance was 82% of 3Q19, revs for the 5-week period ending October 31 increased 42% vs 2019, said early sales for 2022 season passes has outpaced its record period in 2019, and it is in the position to return quarterly cash distributions by no later than 1Q23

Energy

·     E&P and Majors; busy night of earnings; DVN better than forecasted 3q21 results, which were accompanied by higher than expected base and variable dividend payable in 4q21, and a $1bn buyback authorization; BRY Q3 EPS was in line with consensus as higher cash costs and lower production were offset by better realized pricing and electricity sales/3Q21 capex was $1M below consensus/3Q21 production was 2.8% below consensus; CRK was 1% above consensus on slightly lower costs, capex was 4.4% above consensus and 3Q21 production was in line with consensus and raised its 2021 capex budget by 12%; GPOR was 2.3% above on higher production and better pricing and 3Q21 production was 2.5% above prior guidance; PUMP posted in-line Q3 with better free cash flow; LPI posts Q3 beat and raises FY21 production

·     MLPs & Refiners: MPC downgraded and removed from Conviction Buy list at Goldman Sachs while the firm upgraded PSX and added to Conviction buy list; PAA reported adj EBITDA of $519M, which was 1% higher than the Street with no change to ’21 adj EBITDA guidance of $2.175B

·     Utilities & Solar; EIX raised its estimated losses from wildfires in 2017-18 to $7.5B from previous guidance of $6.2B, after reaching a settlement with California Public Utilities Commission; WEC reported strong 3Q results of $0.92 EPS, vs. consensus of $0.79 and took the opportunity to introduce its 2022-2026 capital investment plan, an increase of 10% compared to its 2021-2025 capital plan

Financials

·     Bank & Insurance movers; LMND unveiled its newest product – Lemonade Car – designed to bring a fresh, tech-first approach to the category; ATH posts Q3 EPS beat as Retirement services business posts 49% jump in adj. operating income

·     Lending, FinTech & Payments; at SMBC Nikki, they initiated Payments, Processors, & FinTech with top Picks: TOST and AFRM; Core Holdings: ADYYF, BILL and SQ. While all the stocks in our coverage deserve the disruptor label, for reasons we outline in the respective initiations, we see either see less upside or potential downside among the following: Neutral: NVEI, LSPD and PAY; Underperform: PYPL and MQ; FUTU announces us$300 million share repurchase program; WU reported Q3 EPS of $0.63 that was modestly above the consensus estimate of $0.58, despite weaker-than-expected revenue;

·     Bitcoin news: RIOT said it produced 464 bitcoins in October, up 433% YoY; MARA produced 417.7 Bitcoins in October, up from 340.6 BTCs in the prior month, though down from the 469.6 peak in August and now holds about 7,453 Bitcoin; COIN is starting to test a subscription-based service that will include such benefits as zero-fee trading and prioritized phone support, The Block reported

·     Services; RRD to be acquired by Atlas for $8.52 per share in cash, in a deal valued at ~$2.1B https://bit.ly/3qaRmSS ; TW trading volume reaches new record of $25.6T in October; FRSH slumps after results as posted Q3 revs $96.8M, up 46% YoY but below the 56% growth in Q2 due to tougher comps in Q3, and a few headwinds from reserves; HRB Q2 EPS ($0.78) and consensus $192.6M; EBITDA ($138.8M); notes y/y quarterly results are not comparable due to last year’s tax season being extended to 15-Jul-20, causing revenue and earnings to occur in the prior year

Healthcare

·     Biotech, Pharma movers; The CDC recommended use of PFE Covid-19 vaccine among children ages 5 to 11 years, opening the door for immunizations to start; AMGN quarter was in line with expectations for topline revenues ($6.71B vs. $6.67B FactSet consensus) and bottom-line estimates ($4.67 vs. $4.28 FactSet consensus; SAVA shares tumble following a “short” report; ICPT rallied behind earnings results

·     MedTech Equipment; shares of IRTC, GKOS surge after the CMS issued the final physician payment rates and final outpatient facility fees for CY2022 that were better than expected (Stephens upgraded GKOS after the far more favorable rates than expected for MIGS, the procedure that uses GKOS’ devices); EXAS shares slide after the cancer screening firm posted updated 4Q revenue guidance about 5% below Street estimates at its mid-point; QGEN shares active after Bloomberg reported the company has been said to explore a combination with BioMerieux

·     Healthcare Services; CVS reported Q3 adj EPS $1.97, topping the $1.78 estimate as revs rose over 10% YoY to $73.8B, above the $70.5B estimate and raised its year EPS view to $7.90-$8.00 from prior $7.70-$7.80; managed care stocks slip as HUM posted weaker Q3 revs than ests while lowers its 2021 adjusted EPS guidance to about $20.50 from previous range of $21.25 to $21.75, due to rise in COVID-related costs from the delta variant (est. $21.53); WBA to provide PFE covid-19 vaccines to children ages 5 to 11 at select stores nationwide beginning Saturday

Industrials & Materials

·     Metals & Materials; FMC reported 3Q21 EBITDA of $293M, beating consensus of $274M, largely a result of higher volumes as well as EBITDA margins; CLW topped its guidance and consensus in 3Q (adj. EBITDA of $50M vs. guidance of $40M-$48M and consensus of $47M) on better-than-expected U.S. tissue demand and continued robust SBS boxboard market conditions; DD was upgraded to Outperform from Neutral at Credit Suisse with a $95 price target, saying DuPont "hits the gas pedal" with the decisions, potentially adding $0.36 to EPS.

·     Industrial & Machinery; in heavy duty machinery (CMI, PCAR, ALSN), ACT released October preliminary Class 8 net order figures of 23,600, which is down from 27,400 units in September, and compares to 36,900 in August and 25,480 in July – it was the lowest in five months and the biggest monthly drop since Sept. 30; GNRC was downgraded at bank America to neutral as the co reiterated 2021 revenue guidance, but reduced 2021 gross margin and adj EBITDA margin guidance by 125bps mainly due to continued cost pressures; DE shares slip as workers set to continue three-week-old strike after they voted to reject a second contract between Deere and the United Auto Workers (UAW) union; EMR posted mixed Q4 as EPS beat but revs fall short of views, while issues upside FY22 EPS outlook

·     Transports; CAR receives multiple downgrades (Deutsche Bank, JPMorgan) saying they cannot justify, using any reasonable traditional valuation metric, the $10.5 billion of incremental value generated by the more than doubling of the stock in one day; XPO reported a top and bottom line beat although a slip-up in the LTL segment and a resetting of near-term OR expectations which put shares under pressure today; for truckers (CHRW ), Transport operators are riding high as shipping costs surge in the supply-chain crunch, the WSJ reported as freight brokers and shipping lines are reaping big gains as companies scramble to move their goods; The Baltic exchange’s main sea freight index falls 9.3% to 2,892 points

Technology, Media & Telecom

·     Semi’s & Internet; AKAM reported clean 3Q results with revenue up 8% Y/Y cc (3 point acceleration) driven by 25% cc growth in the security business (also accelerated 3 points); COUR reported Q3 adj EPS (6c) vs est. (9c) on revs $109.9M vs est. $108.4M, sees Q4 revs $109-113M vs est. $109.8M; LSCC reported results and guidance above expectations with YoY growth metrics up strongly, while margin and profitability metrics, importantly, continue to improve with Q3 gross margin up 210 basis points on a year-over-year basis

·     Hardware, Software movers; ATVI tumbles as forecasts Q4 adj sales of $2.78B, missing the $2.93B after in-line Q3 sales while Blizzard co-lead O’Neal says she will step down after just three months in the role and delays the launch of two games "Overwatch 2" and "Diablo IV"; PAYC results beat across the board with revenue growth of 30% (~300 bps better than ests) as the company benefited from broad-based demand in new client adds and solid cross-selling motions to existing-clients; LPSN downgraded at Mizuho noting growth declined 1% Q/Q (first ever since COVID) due to slippage of two large deals and a slowdown in Gainshare (13% of rev vs 16% in Q2)

·     Media & Telecom movers; TMUS rises after saying it added 673,000 phone subscribers who pay a monthly bill in Q3, above the Street estimate of 644,000, while Q3 EPS beat but revs missed; MTCH Q3 EPS 43c and revs $802M missed consensus 55c and $838.5M, while quarterly payers increased 16% to 16.3M, and expect FY22 revenue growth in mid-to-high teens; NYT Q3 results beat estimates with adj EPS 23c vs est. 20c on revs $509.1M vs est. $499.1M, and digital subscribers 7.59M also topped est. 7.39M with digital ad revs also increasing over 40%, said they are not seeing impact on ads from supply chain problems, and sees ad revs increasing in the mid-teens in Q4; DISCA Q3 EPS 24c vs est. 41c on in-line revs $3.15B as operating expenses increased 77% partly due to the Olympics, and added 3M DTC subscribers bringing its total to 20M; SBGI Q3 EPS 25c vs est. (86c) loss on revs $1.535B vs est. $1.58B, said the ransomware attack it faced October 17 still has not been fully resolved and certain disruptions remain due to the attack, and guided Q4 revs $1.54-1.57B below est. $1.58B; Bernstein upgraded WPP to Market Perform as its rally is more than a reopening traded given its solid execution on a sound restructuring plan and steady sequential improvement in relative performance since last year; UONE shares fell after its proposal to build a casino in Richmond, VA lost in a referendum last night