Mid-Morning Look: June 24, 2021

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Thursday, June 24, 2021


·     MRNA tgt raised to $230 from $220 as the company studies potential COVID-19 vaccine boosters. The company develops therapeutics and vaccines based on messenger RNA for the treatment of infectious and cardiovascular diseases, rare diseases, immunological conditions, and cancer, and has created one of the three vaccines approved for the prevention of COVID-19 in the United States. Moderna’s coronavirus vaccine, which has been shown to be 94% effective against the virus, is administered in two doses and has been used in a wide range of countries. It has also been submitted for approval in certain key markets for adolescents, potentially extending its reach to new populations.

·     INTC announced a reorganization meant to drive focus toward growth areas including software and HPC. We believe the reorganization meant to restore momentum to the Data Center business, which is being challenged by traditional (AMD) and new (QCOM, MRVL) competitors. The currently strong PC business could weaken in coming quarters, adding urgency to Intel’s moves to refocus its data center business. We believe that Intel is taking the proper steps with the change in leadership to a more engineering-focused CEO and by exiting businesses where it has been a second-tier player



·     BBBY upgraded to Buy from Neutral with $38 tgt



·     NOC, RTX, GD – we look at the use of defense-related exclusions at ESG funds, as well as the utility of third-party ESG ratings for evaluating Aerospace & Defense stocks. We have found defense stocks to offer a high quality, high yield investment opportunity, uncorrelated with inflation. ESG is often cited as a concern – we do not believe the evidence supports that concern

·     DISCA – This report offers an interpretation of what the market is telling us about expectations for the T/DISCA merger, as expressed by the price of DISCA stock. What price are investors paying, today, to participate in the potential upside while being adequately compensated for the risk? We estimate the market is currently paying 9.6x EV/EBITDA, relative to the $14bn FY23 guidance, in PV terms. Decomposing that into “legacy” ($14.5bn FY23 EBITDA, based on consensus + synergies) vs. “streaming” ($15bn revenue guide), there are any number of combinations one could believe the market is currently paying, such as 6x legacy EBITDA/3.2x streaming revenue, or 7x legacy EBITDA/2.2x streaming revenue.

·     IBM – the co has stated that it expects RemainCo will grow revenues mid-single-digits post the Kyndryl divestiture, and that M&A will account for 100-150 bps of the growth. We note that post the Kyndryl spin, IBM RemainCo will have ~$59B in revenues, suggesting that it needs to acquire $600-900M of revenue to generate 100-150 bps of annual topline growth. We estimate that IBM will be able to spend about $2B – $4B per year on acquisitions

·     PYPL – A bull case on PayPal could be summarized into 2 key points in our view 1) Sustainability of >20% TPV growth over the next 5-yrs, 2) TAM expansion beyond eCommerce payments, and into digital financial services for both consumers and merchants. In this note, we will discuss our analysis and perspectives on #1 – ability for strong sustained TPV growth. eCommerce is the profit engine in PayPal’s TPV growth story, driving ~80-90% of revenue and fueling other monetization streams such as credit, etc.



·     SPT – After speaking with a number of industry participants over the past few weeks, we now have increased confidence in the uptake in social media management as a core investment across businesses of all sizes. Thus, we are raising our price target to $110 (from $80) based on increased growth expectations in 2022 and beyond. As the world has increasingly moved digital and Customer Experience (CX) becomes the focal point of sales and marketing spending, Sprout’s growth is expected to remain elevated for the next few years, in our view.

·     VAPO – We are looking past the pandemic, and VAPO clearly is too, with a decidedly long-term focus to the discussion and with no change to near-term guidance. VAPO set a goal of doubling revenue from $85M in 2021 (midpoint of guidance range) to $170M in 2026, as well as hitting 65%+ GM by 2026. We think this ~15% CAGR looks achievable, especially since VAPO is poised to introduce new products, reach more patients, and build new markets; this represents a total potential TAM of $8.3B.



·     WMT – We continue to believe that WMT is emerging from the pandemic stronger than ever. The core business strength was evident in 1Q results, and over the next several years we expect strength to be driven by growth in additional higher margin profit streams such as advertising, fulfillment services, marketplace and FinTech. Considering these powerful aspects of the WMT business, we use a sum-of-the-parts analysis to understand the market implied valuation for the core and additional profit streams combined

·     Latin American airlines – As the pandemic fades, uneven improvements in global inoculation rates and a greater comfort with video meetings suggest that global business travel has a long road to recovery. This puts network carriers such as Sell-rated American Airlines, which relied significantly on international premium passenger flow, in a tough spot. On the other hand, Buy-rated discount airlines such as Frontier and Spirit, along with Volaris, Azul and GOL in Latin America, had virtually no pre-pandemic global business travel exposure and/or had business travel from small companies that purchased economy class fares on domestic flights

·     PPG – We visited PPG management in Pittsburgh, with CEO Michael McGarry, CFO Vince Morales, and CTO David Bem. We came away thinking that the mood is still optimistic on the recovery despite headwinds in 2Q such as raw material inflation and chip shortages affecting auto customers. Auto production seems to be affected more negatively than previously thought (negative for AXTA too), but what makes PPG a unique story, in our view, is its recent string of four M&A deals at the beginning of the economic recovery. All are accretive, and EBITDA synergies of 6-8% seem higher than some recent industry deals



·     EQIX – Raising TAR $790 to $890 – While AFFO/share guidance of 7-10% was disappointing relative to expectations fundamentally mgmt. laid out what we viewed as a thoughtful strategy and a convincing argument for why it should continue to drive solid top-line organic growth of 7-9% that was slightly above our expectation. Raise PT to 890 after updating model albeit we view as less compelling NT after its recent rally.

·     CARR, JCI – Quantitative Framework for Assessing Commercial HVAC Demand – Ahead of the Curve – This note offers a quantitative framework for assessing how commercial HVAC (CHVAC) equipment demand might trend over the next 2-5 years. We conclude that CHVAC equipment will see a 7-10% rise through C23-24 and that then growth will slow but to a higher underlying growth rate than was the expectation before 2020. Our favorite HVAC stocks remain JCI and CARR

·     STZ – Reit Outperform – Report 6/30 – Adjusting ests. to come more in-line with Street based on read throughs from CPG companies and ongoing input cost inflation. We are now looking for STZ to deliver $2.40 in EPS (ex-WEED), which is 2c ahead of Street. Overall, we think that if there is any weakness it is a buying opportunity as STZ is our favorite idea in beer given the medium targets for continued HSD revenue growth (+7-9%). With only an 18% share of the highly- consolidated beer category, STZ remains a beneficiary of ABI and TAP’s share losses. STZ has close to $4B in authorized share repurchases, which is not embedded in FY22 EPS guidance. Reit op.

·     Retail – Early indications are for a strong back to school with opportunities for guidance revisions into Q2 results. We were encouraged by y/y data into June on Outperform rated RL, FIGS, and point out continued strength in SKX. Broad valuation contraction (-9% on avg. on FY2 P/E) across the sector creates an attractive set up. Top ideas for potential valuation multiple expansion and estimate revisions include RL, DKS, DECK, FL, LULU, ROST, BURL, YETI, UAA and ADS



·     EQIX – Investors were focused on EQIX’s updated LT guidance with a revenue outlook of 7-9% annualized through 2025, which is faster than the broader data center market. This compares well to our updated model, in which EQIX grows at a CAGR of 7.7% through ’25. We maintain our Outperform rating but lower our target price to $907 given Analyst Day guidance that came in below consensus expectations. The new TP is based on 27x our FY22E AFFOS of $29.79 per share and a DCF valuation assuming a terminal growth of 2.5% and WACC of 5.3%.

·     DISH – We are now confident in DISH’s ability to execute its Cloud RAN-native network buildout; key vendor AWS is highly incentivized to integrate the DISH vendor set and prove out the Cloud RAN concept in order to sell it to DISH’s wireless peers globally. Our channel checks suggest this Cloud RAN-native network will have both initial and ongoing cost advantages and may ultimately provide a more capable network better able to serve network slicing and edge compute use cases. We also reiterate our view that DISH can finance this buildout. Raise target price to $45

·     ABC – According to Bloomberg, the largest privately-held CRO, Parexel, has drawn interest from suitors including AmerisourceBergen, Veritas Capital, a consortium of PE firms (Cinven, Centerbridge and GTCR), among others. Bloomberg reports the deal could be valued at $9 bln including debt, implying a transaction multiple of ~20x EBITDA. While speculation around a drug distributor buying a CRO has been going on for the past few months, we are surprised to see ABC being in the mix here given the company’s recently closed acquisition of Alliance Healthcare.



·     MGM upgraded to Buy from Hold with $54 tgt – Over the last several months, we believe many have lauded CZR, ourselves included, for their margin improvements and updated Strip margin targets, and attributed the run in MGM shares to its online successes. While both are legitimate views in our opinion, we believe the next leg of the stock story for MGM is likely to be one of improving margins that extend well beyond the “over 30%” targets management has discussed as the LV Strip goal, as well as the 32.5% peak margins of 2006 (33.0% when adjusted for TI / Circus Circus). As such, we see out year Consensus as being too low and, accordingly, the perceived embedded sports / iCasino valuation as too high



·     SKIL init Buy and $14 tgt – The new Skillsoft combines the legacy Skillsoft entity and Global Knowledge to create the world’s largest corporate learning platform with CY20A revenue of $691M and adjusted EBITDA of $162M. Skillsoft is in the final stages of its turnaround, and we believe the new company presents an opportunity to invest in a combination of two leading digital learning companies with a debt-reduced capital structure and a new longer-term and strategic investor base—at a discounted valuation versus competitors. We view this steep discount to competitors in a world of highly valued SPAC business combinations as a unique opportunity—one that we believe investors should consider.



·     MGA upgraded to Buy from Neutral with $120 tgt – We believe an incremental 100K units in complete vehicles could add about $0.50 to EPS (mid single digit EPS accretion), not including the opportunity to sell through ADAS/EV content (which we discuss in more detail in the following section; Exhibit 16). In addition, Magna has discussed the potential to establish a North American footprint for complete vehicle manufacturing, which we believe could drive further EPS growth (both from increased capacity and the ability to better serve new entrants in that geography).

·     LEA upgraded to Buy with $228 tgt – believe that the fundamental backdrop will be positive for both auto OEMs and suppliers in 2H21 as semi supply increases (given strong end demand and low inventory of vehicles, especially in the US). However, while we believe that the US SAAR can remain near its historical highs in the next few years, and there are opportunities for sales to rise internationally, we believe that intermediate- to longer-term focused investors should prioritize owning stocks of companies that can grow even as auto unit sales growth begins to moderate

·     TCRR init Buy and $30 tgt – TCRR is a clinical-stage cell therapy company leveraging its proprietary T cell receptor (TCR) fusion construct T cells (TRuC-T cells) engineered to utilize the full TCR and function in an HLA-independent manner. Lead asset Ph1/2 gavo-cel targets mesothelin-expressing solid tumors in ovarian cancer, non-small cell lung cancer (NSCLC), malignant pleural/peritoneal mesothelioma (MPM) and cholangiocarcinoma (GSe $4.6bn peak global sales) where we are encouraged by data seen to-date, with an overall response rate (ORR) of 50% in patients who received lymphodepletion – with optimization levers on the forward



·     KRON init Buy and $35 tgt – In our view, Kronos possesses a novel precision medicine-driven strategy driven by computational biology married to a small molecule microarray (SMM) screening platform. The company is led by Norbert Bischofberger, the former Chief Scientific Officer of Gilead Sciences

·     LMNL downgraded to Neutral from Buy – Although the market demand and timing of the sale of the PRV could vary, we note that priority review vouchers do not expire and we don’t view the sale of the PRV as a business hurdle. To our knowledge, the FDA has only awarded four PRVs so far this year. In all, Liminal achieves the first goal of its business shift strategy (by the divestiture of the plasma business), making a big step forward to refocus on the development of small molecule pipelines.



·     RWT – We take this opportunity to reiterate our Market Outperform rating on shares of Redwood Trust, Inc. (RWT) and raise our price target to $13.50 from $12.00, supported by a sum-ofthe parts valuation approach and equal to 1.25x current reported GAAP book value, based on the continued strong housing market, the company’s recent strategic investments and partnerships, and in advance of the 2Q21 earnings report roughly one month from now.

·     ENTA – Update from HBV DNA+ patients supports robust potency, and clean safety; we reiterate our Market Outperform rating and risk-adjusted, DCF-derived $70 price target. Enanta reported updated results from the Phase 1 trial of HBV core-inhibitor EDP-514. At the higher 400 mg once-daily dose, the patients experienced a mean reduction in HBV DNA of 3.3 log10, and possibly the most robust result we are aware of (with the caveat of cross trial comparisons).



·     ATUS, CMCSA – We update Comcast and Altice USA estimates today following commentary from management teams at recent industry conferences. At Comcast we raise cable and NBC estimates and see potential upside to estimates across segments given positive commentary on trends through the quarter. At Altice USA, we trim 2Q EBITDA estimates to better reflect a difficult opex comp in the prior year period due to ~$30m of temporary opex savings in 2Q20 related to Covid. Overall, we continue to like most cable shares and Comcast is one of our favorite stocks, especially after Wednesday’s 3.7% sell-off on M&A fears – we believe Comcast is an unlikely buyer of anything in the near to medium-term and would take advantage of recent weakness into strong 2Q numbers



·     EME upgraded to Overweight with $146 tgt and raising our ’21-’22E EPS. Based on leading indicators and mgmt’s tone on bid activity, we are now more confident EME is on the cusp of a sustained top-line growth reacceleration rather than facing a COVID-driven air pocket, and we see a high probability of material upward estimate revisions. EME is a high-quality play on a recovery in comm’l construction activity, and we think the high visibility associated with secular growth themes and the capital allocation upside potential are underappreciated

·     HRC – While investors may be focused on challenging NT comparisons, we do not believe COVID-related tailwinds detracted from a sustainable LT growth opportunity in Patient Support Systems (PSS). More specifically: 1) our updated global ICU bed per capita analysis reinforces an underinvestment exposed by the pandemic; 2) it’s still in the early innings of market adoption for its Centrella platform; and 3) HRC likely continues to add revenue-enhancing capabilities around a broader connected ecosystem surrounding its smart bed portfolio

·     Oil industry – The next OPEC+ meetings to decide on production levels for August are scheduled for July 1. We think the group will continue to raise production in August on further improvement in oil demand, particularly in the U.S., China, and Europe. In terms of the numbers, we expect OPEC+ to increase production by 500,000 Bopd in August as our base case, but we also think there is a possibility that the group puts in place another two- or three-month production increase plan for August-October much like it did for May-July. However, we think the group may be more hesitant to put in place a longer-term plan this month due to the uncertainty surrounding the lifting of sanctions on Iran, which could eventually add upward of 1 MMBopd of oil production to global markets if sanctions are lifted. Front-month WTI oil prices have risen to around $73/Bbl, which is the highest level since October 2018



·     JD – hosted its first-ever analyst day early this morning, a series of virtual meetings and Q&A with the CEOs of JD Retail, JD Health, JD Logistics, JD Property, the Chief Strategy Officer and the CFO of JD.com. The focus was on significant growth opportunities ahead (especially among China’s 900M lower-tier consumers) and sustainable differentiation and value creation from JD’s supply chain capabilities. The overall tone was also somewhat cautious on slowing consumption growth, tightening regulation and increasing competition

·     ALB, LTHM, PLL, SQM – Lithium materials suppliers positioned to feed the China EV supply chain juggernaut profitably should undoubtedly see greater value over time, but we also continue to have increased conviction that the entire lithium industry is positioned to benefit from accelerating EV adoption more generally, because lithium pricing may very well be poised for a super cycle resulting from a potentially pronounced and prolonged impending supply deficit. To enable the energy transition, the world is going to need to ramp a lot more lithium supply than is currently in the aggregate pipeline. We remain Buy-rated on all of the lithium stocks we currently cover, including Albemarle, Livent (LTHM), ioneer, Ltd. (INR AU), and Piedmont Lithium (PLL).



·     FIS – We remain bullish on FIS and reiterate our Buy rating and $185 PT. Earlier this week, we hosted meetings with FIS CEO and Chairman Gary Norcross, President Bruce Lowthers, and EVP, Head of Corporate Finance Nate Rozof. The meetings focused on both near-term catalysts and long-term topics. Overall, management is excited about prospects for 2Q21 recovery and beyond, notably citing: (1) Better-than-expected volume growth in Merchant, and yields turning from a drag to a marked benefit. (2) New wins vs. Adyen in e-commerce. (3) Robust banking business as relationships like BMO continue to expand. (4) Ample opportunity in crypto.

·     RCUS – op-line readout for ARC-7 (domvanalimab/dom + zimberelimab/zim +/- etrumadenant/etruma) in 1L NSCLC (PD-L1 positive) appears quite positive as RCUS management confirmed that (1) the doublet (dom+zim) and triplet (dom+zim+etruma) combination arms met their internal benchmarks and (2) the zim monotherapy is performing consistently with other checkpoint inhibitors. No quantitative data was presented, though the analyst call incorporated what we believe to be bullish commentary based the achievement of the internal bar on ORR greater than 50% for the doublet arm, with the triplet arm also achieving the internal bar.

·     SABR – preannounced 2Q results, with upside to revenue driven by improving travel volume. However, the recovery remains skewed toward less profitable areas of the market (leisure, US domestic), and operating expenses were higher than anticipated due in part to the resumption of investment in certain areas of the business. As such, we are lowering our 2021-22 revenue and EBITDA estimates. While the COVID vaccines have set the travel industry on a path to partial recovery, in our view it will likely take many years for corporate bookings to return to pre-pandemic levels, and longer-term financial and operational challenges remain. We reiterate our Neutral rating and $13 PT



·     ATVI init Buy and $124 tgt – we think the multiyear outlook for ATVI is very good. The stability of its cash flows and sizeable net cash position on the balance sheet today gives ATVI room to materially increase its capital return program, an additional source of upside optionality.

·     EA init Neutral and $151 tgt – EA’s key franchises are unquestionably strong and its sports games portfolio, tied to the real world of sports with a die-hard affinity for teams and global star athletes, powers a consistent and durable cash flow profile. Apex: Legends has been a stellar example of executing on the promise of F2P titles with clear momentum and comes with a significant opportunity to expand into mobile. An upcoming return of the Battlefield franchise (Battlefield 2042) could return that series to prominence in the shooter category and represent an upward inflection in earnings and cash flow for EA

·     TTWO init Buy and $214 tgt – In our view, Take-Two arguably has the best owned-IP collection of franchises in the industry. A concerted effort to expand its publishing frequency should allow for margin expansion, with increased top-line scale absorbing more of its fixed overhead. Importantly, we think Take-Two has one of the best opportunities to scale organically, with significantly enhanced development capacity and a roster of world-class IP



·     STX upgraded to OP from MP – We believe that Chia has pulled forward the time HDD demand exceeds supply. While Chia demand maybe ephemeral, HDD makers are being disciplined about adding capacity. Also, mass capacity demand is growing and the headwind from falling client demand is abating. With the pullback in the shares, we are less concerned about Chia Froth, upgrading to OP and maintaining PT. Chia Froth Dissipates: STX positively pre-announced on 6/8 and has traded-off since that time. Chia trades at $1685 on May 14th and STX’s share price peaked at $104 on May 17th. Chia bottomed 6/22 at $213 and bounced yesterday. STX also bottomed on 6/22 and bounced with Chia yesterday.



·     OCSL init OP and $7.50 tgt – Oaktree Capital management is a respected credit manager and leader among alternative investment managers. Its investment strategy consists of structuring a diverse portfolio that will generate returns across market cycles and leverage the extensive resources and expertise of its manager, Oaktree Capital Management, L.P. Historically, ROE since effective IPO (10/17/17) has averaged 13.33%.

·     ZEV init OP and $15 tgt – We view Lightning eMotors as a clear leader in the electrification of Class 3-7 vehicles, leveraging a modular architecture into defensible solutions and with a blue-chip customer base. With Lightning’s diverse supply chain, demonstrated capability in delivering numerous vehicles types, and optionality on either growing through powertrain development, full vehicle sales, or being a leading integrator of fuel cell-based power systems, we believe ZEV shares offer investors meaningful upside potential.



·     DLTR downgraded to neutral from Overweight and cut tgt to $102 from $117 based primarily on concerns of intensifying inflationary pressures from both freight and wages, combined with core-Dollar Tree’s inability to pass through price increases

·     SKIN init Overweight and $24 tgt – SKIN is the legacy HydraFacial which came to the public markets through the SPAC/deSPAC process and closed May 5th. We’re assessing the model & longer-term potential for SKIN through the lens of both consumer & med-tech devices/aesthetics. From a consumer perspective SKIN plays well into secular growth trends



·     LSCC tgt to $62 from $56 – the CertusPro-NX is hitting the market where there is little to no innovation from larger FPGA players (Intel and Xilinx) and where traditional MCU (microcontrollers) are ill-suited to deal with exponentially increasing datasets. We are impressed by Jim Anderson’s record and vision in small FPGAs and things will only get better next year when the company’s foray into the mid-sized FPGA market (doubles TAM to ~$6 billion) starts to play out. Given the growth prospects driven by aggressive innovation, benign competitive dynamics, the secular nature of AI at the edge, and structural margin tailwinds, we believe LSCC is deserving of a much higher multiple.



·     PLBY init Buy and $52 tgt – Our recommendation takes a long-term view of multi-year opportunities and contemplates two avenues of plausible upside optionality that represent more than 100% upside to the current share price ($13 per share from U.S. streetwear and $35 per share from conversion to a JV in China). With opportunities for significant value creation and management commitment to invest for the big picture, we believe a long-term view is appropriate. In the near term, our estimates for EBITDA are more subdued than consensus projections due to higher expectations for SG&A investment

·     DEN init Buy and $93 tgt – With 1,000+ miles of CO2 pipelines located in a region with the greatest volumetric industrial carbon emissions in the US, access to ample, high quality storage capacity, and 20+ years of experience handling CO2, Denbury is well positioned to grow an emerging carbon capture use and storage (CCUS) business that could generate more revenue than its oil properties before the end of this decade. The passage of either of two carbon tax bills introduced to Congress this year could increase the value of the CCUS business by three-fold or more



·     AKR upgraded to Buy from Hold and raise tgt to $25 from $20 – In our view, AKR stock represents growth at a reasonable price (relatively); we estimate AKR to produce outsized growth, while valued at below peer levels. While many of its peers have already surpassed pre[1]covid stock prices, AKR is down ~25% vs. 2019 levels (+6% for peers). While there has been good reason for this (street retail focus, risk of negative lease roll, flight from urban area risk, lack of tourism, and etc), we believe the improvement in AKR’s leasing pipeline and street retail, such as SoHo, are inflecting positively and some of these concerns may still be overly priced in

·     TSHA init Buy and $60 tgt – Positive updates for TSHA-120 and TSHA-101 in 2H21 could serve as positive read-throughs to the rest of the 20+ pipeline programs as they all use the same vector, GMP manufacturing process and intrathecal route of delivery. While we have a 12-month PT of $60/sh, our longer term bull/bear scenario imply upside/ downside of $537 (+2,000%)/$5 (-80%) due to the platform nature of Taysha. We like this risk/reward setup as we head into key data readouts in 2H21 with implications to the rest of Taysha’s pipeline programs

·     ELY, GOLF – We are raising our PT on Buy-rated ELY to $40 (~22x our 2022E EBITDA) and Hold-rated GOLF to $50. We came away from our recent retail checks incrementally more positive on the N-T golf demand/margin backdrop and believe the expanding addressable audience should support industry growth for years to come. Buy-rated ELY remains our preferred name given its L-T growth profile and deeper reach with younger/less-seasoned golfers

·     ADI – On 6/24 we will host a small group meeting with ADI’s CFO, Prashanth Mahendra-Rajah. We anticipate the discussion will focus on the MXIM transaction, deal synergies, capital allocation, demand drivers, and supply/demand conditions. We continue our constructive view on the stock. Buy ADI for expected DD EPS growth from smart organic investments and M&A. PT is $179



·     Home Product Services initiations (buy rated on HYFM, SMG, SPB; neutral on CHD, EL, KMB, PSA, YETI, REYN and sell rated on CLX): We initiate coverage of the US Household Products & Personal Care sector focusing on long-term opportunities with inflections and positive marginal change. Near-term, the debates center on inflation, pricing, and underlying category demand post COVID. As a result, we expect the group to remain under pressure through CQ2 earnings season, especially given potential for negative earnings revisions. Longer-term, our view is that COVID has masked both fundamental improvements and weaknesses across our coverage & as the operating environment normalizes over the next 6-18 months, we think a few core conclusions will come to light

·     ERIC downgraded to Neutral from Buy – After strong execution in the past three years, driven by new management and supportive market dynamics with 5G and data growth, we downgrade the stock for the following reasons: (1) We believe Ericsson is reaching a peak in terms of market share with an average of above 40% excluding APAC versus Nokia’s 30%, in our estimates, having been a key beneficiary from Huawei facing geopolitical issues (we estimate Huawei is still at 20% average market share excluding APAC, versus 25% four years ago). (2) The Open RAN initiative focuses on opening up interfaces within the radio access network (RAN), which is likely to reduce barriers to entry, in our view. In the past two years, we have seen a significant acceleration of interest among operators, which we estimate will have a negative impact on Ericsson medium-term. (3) Despite a strong outlook for H2 21 driven by C-band investment in the US, we argue the current share price implies 2% growth versus history of -1% to 1%

·     PSA init Neutral and $310 tgt – PSA should benefit from industry tailwinds with its leading scale (2,500+ facilities), driving expected long-term same store growth of 3%. Plus, it should generate growth through acquisitions ($2.7 bn for 2022, $800 mm per year thereafter) & developments (ramping to $700 mm per year by 2026). But, we see this reflected in its valuation. PSA has provided increased transparency into its algorithm. We model annual FFO growth over the next 3 years of 8.1% (cons. 7.5%, long-term guidance of 6.7%-9.2%).



·     Banks – Top picks: FITB, CFG for the regionals; SBNY, SI, CUBI for the mid-caps. Even though a flattening yield curve is typically an unwelcome sign for bank stock investors, one important mitigating factor, in our view, is that the significant level of excess liquidity on bank balance sheets should enable management teams to be far less aggressive in raising deposit rates when the Fed ultimately lifts interest rates. Rising rates should lead to higher asset yields, and our expectation of lower-than[1]normal deposit betas in the next tightening cycle should lead to NIM expansion despite the prospect of a flattening yield curve. Plus, while we expect the pace of inflation to subside from the recent reading of 5% Y/Y, we believe inflation may remain above the 2% Fed target level for some time driven by wage pressure, and in our view, should lead to the 10-year treasury yield increasing to a similar level or higher relative to inflation expectations resulting in positive real yields

·     RCUS – provides positive update on the ARC-7 interim analysis. The ARC-7 study is a Ph 2 study evaluating anti-PD-1 zimberelimab (zim) + domvanalimab (dom) vs. zim vs. zim + dom + etrumadenant (etruma) in first-line PD-L1 ≥50% local-advanced or metastatic NSCLC – 50 patients will be enrolled in each arm, and this interim analysis was performed on 25 patients enrolled per arm. As a reminder, both Gilead RCUS had previously set the bar for a positive analysis to include at least >50% ORR for the doublet regimen, and clear separation from the singlet arm. Although no data was provided in the update from this interim analysis, we believe the PR and management comments are consistent with the study tracking positively by both measures; additionally, efficacy in the triplet regimen could even be tracking close to or above the high bar demonstrated by atezo and tiragolumab (66% ORR) in Roche’s Ph 2 CITYSCAPE >50% PD-L1 subgroup. Overall, we’re highly encouraged by this interim analysis update, and expect the stock to trade higher in 2H:21 ahead of a presentation of the data at a medical meeting

·     KBH – we reiterate our OUTPERFORM rating. KB’s share price decline after the EPS release on 6/23 may be attributable to KB’s F2Q21 revenues of $1.44 billion which was below consensus at $1.50 billion. Another reason may be the F3Q21 (Aug.) sales guidance of $1.50 to $1.58 billion coming in below the consensus forecast for $1.62 billion. Despite the news on F2Q21 and F3Q21, KB raised the midpoint of the FY21 revenue guidance to $6.0 billion from $5.9 billion which suggests to us that F4Q21’s sales should increase over 20% sequentially from F3Q21. The 126% Y/Y increase in F2Q21 backlog dollars to $4.3 billion and order growth of 145% exceeding consensus at +122% are also highlights in our view. Current sales activity is apparently less frenetic than earlier this year but management is still limiting sales and raising prices to keep orders from outstripping the construction capacity

·     FNMA, FMCCC – Yesterday (6/23), the Supreme Court issued its opinion declaring that the profit sweep in place for both Fannie Mae and Freddie Mac is not unlawful, as claimed by a group of investors who issued the lawsuit, and that the current restriction on the President’s ability to remove the FHFA Director is unconstitutional. The decision came down as we had expected, and per press reports, it appears that the Biden Administration will be replacing Director Calabria, although we do not yet know who the replacement will be. President Biden could bring on a potentially more liberal candidate, which could, in our opinion, lead to a loosening of the mortgage market. Calabria, per our observations, has taken more of a countercyclical approach to the mortgage market during his time in office, taking steps to tighten when the market is on an upswing, and loosening requirements when the mortgage market was cooling off. Overall, while we don’t know what changes the new Director will implement (or if they will implement any significant changes at all), the ruling against the shareholder claim that the Treasury sweep is unlawful only reinforces our view that the common shares for both companies are worth zero, but that in almost any scenario we can think of, there is still some value to the junior preferred shares



·     Rail cars – Rail Supply: historic look at cars in storage, this dynamic supports confidence that lease rates should tighten in addition to OEM market returning to a replacement level demand, would be buyers of WAB, GBX, TRN and GATX in that order

·     PYPL – Transactions: look at eWallets, believe names like PYPL, SHOP, SQ and EEFT are those that have the most to gain from the evolution of the digital wallet, also see names like FIS, FISV, JKHY, GPN, WU and PAY standing to benefit to varying degrees

·     E&P: shale 3.0 adoption is becoming ubiquitous across the E&P industry, reit our constructive view on the sector and top picks remain PXD, DVN, PDCE, favor MRO, FANG and BCEI for oil exposure and CNX, CHK and EQT for gas exposure. In Independent Refining: re-open rally has run its course in our view, and expect focus to be on margin normalization from catch the wave recovery, VLO remains our top pick

·     AVNT – Following recent due diligence, we maintain our OW rating and $60 PT on the shares of AVNT and raise our 2021E outlook where we believe leverage to volume growth could be better than expected given how well the Clariant transaction has unfolded. In addition, we see strong HSD organic growth in 2H21E which could be augmented with bolt-on acquisitions to get top line growth to DD annually. Near term, we expect AVNT’s Color, Additives, & Inks business to benefit from the reopening of the economy driving an increase in packaging demand.

·     GPK – Over the next 12-18 months, we see earnings/FCF upside from industry price initiatives across GPK’s three primary paperboard grades. In addition, we believe hybrid work models/remote learning and normalization in certain foodservice channels should support GPK’s LSD growth goals. While favorable, the scale of the recently (5/14) announced AR Packaging acquisition (M&A highlighted as part of their Vision 2025 strategy) alters the timetable for buyback activity; noting a more shareholder-friendly redeployment strategy by 2022 was part of our initial thesis. Given a more levered B/S, we are moving our PT down to $22 (prior $23) but maintain our Overweight rating













Rating abbreviations…

***OP = Outperform

***SP = Sector Perform

***UP = Underperform

***OW = Overweight

***EW = Equal-weight

***UW = Underweight


Market commentary provided by Hammerstone Markets, Inc, a firm separate from and not affiliated with Regal Securities. Regal Securities has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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