Mid-Morning Look

Tuesday, July 27, 2021

U.S. stocks slip off record highs to start the day, as tighter restrictions in China broadens out from tech across various industries including education, healthcare, real estate, and foods. Transportation sector the biggest decliner, falling around 2%, dragged down by UPS quarterly results as EPS/revs beat but margin forecast disappoints. Earnings so far this quarter coming in at near record clip of beats with almost 90% of the S&P companies that have reported so far (about 30%) topping views. Defensive sectors moving higher early with healthcare and staples, while energy and tech slide. China’s regulatory overhaul has prompted panic selling out of Asia since late last week with the Shanghai and Hang Seng posting massive losses the last few sessions. In virus news, the New York Times reported that the C.D.C. will recommend that some vaccinated people wear masks indoors again, a sharp turnabout from the agency’s position since May that vaccinated people do not need to wear masks in most indoor spaces. Also of note, the FOMC two-day meeting kicks off today with commentary and Powell press conference tomorrow afternoon (no rate change of bond buying changes expected – but watchful eyes on inflation comments). All three benchmarks are on the verge of ending a daily win streak at five sessions, after posting record closes on Monday. Investors awaited earnings reports from Apple (AAPL), Microsoft (MSFT) and Google parent Alphabet (GOOGL) at the conclusion of regular trading. Tesla and other EV stocks fall (LI, NIO, XPEV) as China regulatory crackdown concerns grow.

Economic Data

·     U.S. June Durable Goods Orders rose +0.8%, below est. +2.2% (May revised to 3.2% from 2.3%); June Durable Goods Orders, Ex-Transportation, +0.3% vs. May +0.5% (from 0.3%); June durables ex-defense orders +1.0% vs. May +2.8%; June durables shipments +1.0% vs. May +0.4%

·     U.S. S&P Case Shiller home price index rose 2.1% to 262.7 for the 20-City gauge in May after increasing 2.2% to 257.4 (was 257.1) in April. This is another all-time peak continuing a record run to highs since February 2019. The annual pace accelerated to 17.0% y/y from 15.0% y/y

·     May FHFA House Price Index rose +1.7% vs. +1.8% consensus and +1.8% prior; and on a year-over-year basis, up +18% vs. +15.7% prior

·     Richmond Fed manufacturing shipments index +21 in July vs +15 in June; Richmond fed composite manufacturing index +27 in July vs +26 in June

·     Consumer Confidence for July 129.1 reading, above consensus 123.9 and vs. June revised 128.9 (previous 127.3); the consumer present situation index 160.3 in July vs June revised 159.6 (previous 157.7) and the expectations index 108.4 in July vs June revised 108.4 (previous 107.0)

Sector Movers Today

·     Auto sector; TSLA Q2 earnings beat and increased delivery outlook was well received by investors as shares edged higher (Q2 non-GAAP EPS $1.45 vs. est. $0.96; Q2 revs $11.96B vs. est. $11.3B; said produced and delivered over 200,000 vehicles, achieved an operating margin of 11.0% and exceeded $1B of GAAP net income); ABG posted Q2 adj EPS $7.78 vs est. $5.09 on revs $2.58B vs est. $2.36B; Raymond James upgraded AAP to Strong Buy from Outperform as the stock is trading at slight historical discount despite their turnaround efforts gaining steam and are now at the cusp of the margin unlock, and downgraded AZO to OP from Strong Buy as current valuation does not offer sizable multiple re-rating potential and challenging comps due to their large DIY mix, and ORLY to MP from OP as significant improvements by their competitors (AAP, AZO) could limit upside; Evercore initiated EVGO at OP with an $18 price target; China’s crackdown on tech companies continues to pressures shares of DIDI, EV makers NIO, LI, XPEV

·     Chemicals; AXTA reported 2Q21 EBITDA of $230M, in line with consensus of $230M as beat expectations in Performance Coatings, but fell well short of expectations in Mobility Coatings as a result of chip shortages; SHW Q2 EPS of $2.65 missed estimates by 2c on in-line sales of $5.38B while guides year EPS $9.15-$9.45, below the $9.45 est.; ECL with mostly in-line Q2 results ($1.22/$3.16B vs. est. $1.31/$3.12b) as sees strong YoY performance in 2H; RPM downgraded to Equal Weight at Wells as expect the ongoing margin pressure from raw materials and input shortages to weigh on near-term results, capping upside potential in the shares

·     Industrial & Machinery; Dow component MMM posted a top and bottom line beat as operating cash flow was $1.9B and boosted FY21 EPS view to $9.70-$10.10 from $9.20-$9.70 (est. $9.81) and boosts FY21 revenue view to up 7%-10% from up 5%-8%; GE posts slight Q2 EPS and sales beat but rises early as now sees 2021 free cash flow of $3.5 bln-$5.0 bln, vs prior forecast of $2.5 bln-$4.5 bln (reiterate year EPS view); ROK forecast adjusted EPS for the year that fell short of analysts’ estimates; CARR agreed to sell its Chubb fire and security business to APG for an enterprise value of $3.1B.

·     Bitcoin, FinTech & Payments; seeing names leveraged to Bitcoin (SI, RIOT, MARA, NCTY, MSTR, COIN) give back some of Monday gains after AMZN overnight denied a media report saying the e-commerce giant was looking to accept bitcoin payments by the end of the year. The report from London’s City A.M. newspaper sent Bitcoin prices surging above $40K before it trimmed gains to last trade around $37,500; MA launches new start path cryptocurrency and blockchain program for startups; FISV boosts its full-year guidance for adjusted EPS to $5.50-5.60, up from $5.35-$5.50 previously, representing growth of 24%-27%; and said it expects internal revenue growth of 10%-12% vs. 9%-12%

Stock GAINERS

·     BSX +3%; raised guidance after beat as 2Q adj EPS $0.40 vs est. $0.37 on sales $3.077B vs est. $2.94B; guides 3Q net sales about +12-14% vs est. +11.9%

·     FFIV +4%; posts fiscal Q3 sales and profit above consensus, saying customers traditional applications are generating more revenue and more engagement than ever before and offers midpoints of co’s Q4 rev and profit forecast both above Street estimates

·     FISV +4%; after boosts its full-year guidance for adjusted EPS to $5.50-5.60, up from $5.35-$5.50 previously, and said it expects internal revenue growth of 10%-12% vs. 9%-12%

·     GE +1%; on slight Q2 EPS and sales beat but also raises cash flow view; now sees 2021 free cash flow of $3.5 bln-$5.0 bln, vs prior forecast of $2.5 bln-$4.5 bln (reiterate year EPS view)

·     PKG +3%; big 2q beat on ~10% box demand growth and ~24% packaging ebitda margins, and (resumed) 3q guidance well above consensus

·     RTX +2%; raised its forecast for full-year adj profit to $3.85-$4.00 from $3.50-$3.70 (est. $3.85) and raises FY21 revenue view to $64.4B-$65.4B from $63.9B-$65.4B on the back of an increased demand for its products and services as commercial air travel recovers

Stock LAGGARDS

·     ATIP -8%; shares downgraded by several analysts (Citi, Jefferies, benchmark) saying its first earnings report as a public company, fell short of expectations and reduced its financial guidance significantly

·     BABA -4%; Chinese internet companies extend losses premarket as Beijing steps up its tech crackdown; Chinese regulators have vowed to strengthen the oversight of its big tech firms which have put immense pressure on shares of BIDU, JD, NTES, as well as other U.S. listed China names

·     CNC -4%; as Q2 EPS of $1.25 missed the $1.39 estimate but revs of $31B above views; managed care membership of 25.4 mln, up 0.8 mln members, or 3%, compared to June 30, 2020 and raises year PES and rev outlook

·     COIN -4%; falls along with other crypto based names after AMZN overnight denied a media report saying the e-commerce giant was looking to accept bitcoin payments by the end of the year

·     UPS -7%; Q2 beats but company’s full-year margin forecast suggested it will be lower than the level seen in the second quarter (forecasts consolidated operating margin of approximately 12.7% vs 14% in Q2)

·     TSLA -2%; despite 2Q results beating on both revenue and margins as margin of 24.1% was +280bps Q/Q, bolstered by higher ASP, even ahead of new Model S/X ramps

·     WDAY -6%; as AMZN reportedly halted a planned company-wide adoption of Workday’s human-resources software three years after the deal was announced https://bit.ly/3y3kqgp