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Technology Stocks : Semi Equipment Analysis
SOXX 347.97+0.8%Oct 5 3:59 PM EDT

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To: Return to Sender who wrote (88659)7/15/2022 4:33:41 PM
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Market Snapshot

Dow 31290.14 +658.09 (2.15%)
Nasdaq 11452.39 +201.24 (1.79%)
SP 500 3863.23 +72.78 (1.92%)
10-yr Note

NYSE Adv 2575 Dec 534 Vol 1.0 bln
Nasdaq Adv 2899 Dec 1365 Vol 4.3 bln

Industry Watch
Strong: Consumer Discretionary, Communication Services, Financials, Information Technology

Weak: --

Moving the Market
-- Stronger-than-expected retail sales data

-- Follow through with yesterday's late session rally to break 5-day losing streak

-- Favorable earnings reports from Citigroup and UnitedHealth

Buyer conviction picks up to end the week
15-Jul-22 16:25 ET

Dow +658.09 at 31290.14, Nasdaq +201.24 at 11452.39, S&P +72.78 at 3863.23
[BRIEFING.COM] Buying interest picked up today to build on yesterday's rally. The major indices closed decidedly higher with the Dow Jones Industrial Average leading, up 2.2%. Despite the strong finish, the DJIA still lost 0.2% for the week while the S&P 500 fell 0.9%.

The buyer conviction was fueled by the better-than-expected Retail Sales data, which showed a 1.0% increase on both the headline level and when excluding auto sales. Retail sales are not adjusted for inflation, so the increase in sales was largely a reflection of consumers tolerating higher prices. Recall that CPI increased 1.3% month-over-month in June.

The July University of Michigan Consumer Sentiment preliminary reading was 51.1 ( consensus 49.4), compounding the positive bias. The reaction to this may be outsized since the final reading for June was the lowest reading ever on records dating back to 1978. In addition, the slight uptick in consumer sentiment was due to falling oil prices. Crude oil, which fell past its 200-day moving average yesterday (93.58) to a level not seen since late February, settled up more than $2.00 today, and up $7.36 or 8.1% off yesterday's low.

Despite the factors fueling buying interest, the Atlanta Fed GDPNow estimate was downwardly revised today and shows an expected contraction of 1.5% from 1.2% in the prior forecast.

To be fair, the positive bias today was also aided by favorable earnings and/or guidance from several large stocks. Citigroup (C 49.98, +5.84, +13.2%), Wells Fargo (WFC 41.13, +2.39, +6.2%), and UnitedHealth (UNH 529.75, +27.32, +5.4%) all showed big gains today. Citigroup had the best Q2 results of any big bank thus far while Wells Fargo missed estimates but noted that net interest income is expected to be 20% higher than 2021. UnitedHealth beat earnings estimates and issued above-consensus guidance.

These names also gave a nice boost to their respective S&P 500 sectors, financials (+3.5%) and health care (+2.5%), which closed at the top of the leaderboard. All 11 sectors closed in the green with countercyclical sectors, utilities (+0.2%) and consumer staples (+0.4%), rounding out the bottom of the pack. Even with today's underperformance, these two sectors finished the week ahead of the remaining nine sectors.

The 2s10s spread became more inverted this week with the 2-yr note yield up one basis point on the day and week-to-date to 3.13%. The 10-yr note yield dropped notably this week, settling down three basis points on the day and 17 basis points week-to-date to 2.93%.

Before Monday's open, a few more financials are set to report earnings, including Bank of America (BAC 32.25, +2.1%, +7.0%), Charles Schwab (SCHW 62.18, +1.61, +2.7%), and Goldman Sachs (GS 293.87, +12.28, +4.4%).

Economic data on Monday will be limited to the July NAHB Housing Market Index ( consensus 66; prior 67) at 10:00 a.m. ET and May Net Long-Term TIC Flows (prior $87.7 billion) at 4:00 p.m. ET.

Today's notable economic data includes:

  • Total retail sales increased 1.0% month-over-month ( consensus 0.8%) following an upwardly revised 0.1% decrease (from -0.3%) in May. Excluding autos, retail sales increased 1.0% ( consensus 0.6%) following an upwardly revised 0.6% increase (from 0.5%) in May.
    • The key takeaway from the report is that it was strong enough to keep concerns about weakening consumer spending at bay for the time being. At the same time, it needs to be acknowledged that these figures are not adjusted for inflation, so they should not be viewed as an exact reflection of consumer strength.
  • Total industrial production decreased 0.2% month-over-month in June ( consensus 0.2%) following a downwardly revised flat reading in May (from 0.2%). The capacity utilization rate decreased to 80.0% ( consensus 80.0%) from an upwardly revised 80.3% (from 79.0%) in May.
    • The key takeaway from the report is that total production was weighed down by the second consecutive month of falling manufacturing output. A continuation of this dynamic would be viewed as a negative signal about the strength of the manufacturing sector.
  • The preliminary reading of the University of Michigan Index of Consumer Sentiment for July rose to 51.1 ( consensus 49.4) from June's final reading of 50.0. One year ago, the July reading was at 81.2.
    • The key takeaway from the report is that the slight improvement in sentiment was owed to a dip in inflation expectations after the recent pullback in energy prices. While any improvement is a welcomed sight, this one could be reversed easily if energy prices rebound.
  • The Empire State Manufacturing survey rose to 11.1 ( consensus -0.9) in July from -1.2 in June.
  • Business Inventories increased by 1.4% in May ( consensus 1.2%) after increasing a revised 1.3% (from 1.2%) in April.
  • Import prices rose 0.2% in June after increasing a revised 0.5% (from 0.6%) in May. Excluding oil, import prices fell 0.5% after decreasing 0.3% in May. Export prices rose 0.7% in June after increasing a revised 2.9% (from 2.8%) in May. Excluding agriculture, export prices rose 0.9% after increasing a revised 3.0% (from 2.9%) in May.
  • Dow Jones Industrial Average: -13.9% YTD
  • S&P 400: -18.9% YTD
  • S&P 500: -19.0% YTD
  • Russell 2000: -22.3% YTD
  • Nasdaq Composite: -26.8% YTD

Energy sector lags on the week
15-Jul-22 15:30 ET

Dow +572.19 at 31204.24, Nasdaq +171.50 at 11422.65, S&P +63.58 at 3854.03
[BRIEFING.COM] The major indices are trading in a narrow range recently, near session highs.

The S&P 500 energy sector is in the middle of the pack today, up 1.5%, but week-to-date its one of the worst performers as oil prices pulled back recently, down 3.5%.

WTI crude oil futures settled the session 1.6% higher to $97.94/bbl. Natural gas made big upside moves, settling up 7.0% to $7.03/mmbtu. Unleaded gasoline futures rose 0.7% to $3.21/gal.

Before Monday's open, a few more banks are set to report earnings including Bank of America (BAC 32.31, +2.18, +7.3%), Charles Schwab (SCHW 62.15, +1.58, +2.6%), and Goldman Sachs (GS 294.16, +12.16, +4.5%).

Economic data on Monday will be limited to the July NAHB Housing Market Index ( consensus 66; prior 67) at 10:00 a.m. ET and May Net Long-Term TIC Flows (prior $87.7 billion) at 4:00 p.m. ET.

Communication services boosted by Netflix and Meta
15-Jul-22 15:00 ET

Dow +578.08 at 31210.13, Nasdaq +170.16 at 11421.31, S&P +63.74 at 3854.19
[BRIEFING.COM] The market is near the best levels of the day.

Every S&P 500 sector trades in the green currently. Communication services (+2.0%) is among the outperformers today thanks in part to the big gains from Netflix (NFLX 187.90, 13.12, +7.5%) and Meta Platforms (META 164.71, +6.66, +4.2%). Netflix is up big despite having its price target cut to $198 from $355 at UBS.

Separately, the 2-yr note yield is up one basis point to 3.13% while the 10-yr note yield is down three basis points to 2.93%.

Netflix, PayPal follow broad-based tech advance on Friday
15-Jul-22 14:30 ET

Dow +564.95 at 31197.00, Nasdaq +159.40 at 11410.55, S&P +60.81 at 3851.26
[BRIEFING.COM] The benchmark S&P 500 (+1.60%) is firmly in second place to this point on Friday.

S&P 500 constituents Netflix (NFLX 188.29, +13.51, +7.73%), Bath & Body Works (BBWI 27.56, +1.60, +6.16%), and PayPal (PYPL 73.46, +3.91, +5.62%) pepper the top of the index. NFLX is higher ahead of next week's earnings, BBWI outperforms due in part to the strong Retail Sales report for June, while PYPL follows general strength in beaten-down tech/payment names.

Meanwhile, Constellation Brands (STZ 244.50, -6.47, -2.58%) sits near the bottom of the index, underperforming a day after posting +2.4% gains.

Gold extends weekly losses to five
15-Jul-22 14:00 ET

Dow +550.81 at 31182.86, Nasdaq +167.86 at 11419.01, S&P +61.59 at 3852.04
[BRIEFING.COM] The major averages topped out at session highs in the last half hour, and have since fallen slightly off those levels; with about two hours to go the tech-heavy Nasdaq Composite (+1.49%) holds the shallowest advance, albeit on gains of almost +1.5%.

Gold futures settled $2.20 lower (-0.1%) to $1,703.60/oz, tying the bow on its fifth-straight weekly decline, even despite a modest move lower in both the greenback and treasury yields.

Meanwhile, the U.S. Dollar Index is down about -0.5% to $108.05.

Amazon is reportedly trimming its private-label business; may end up being a net benefit (AMZN)
Updated: 15-Jul-22 14:39 ET

The WSJ is reporting that Amazon (AMZN +3%) is cutting back on its private-label selection due to softening sales. The company hopes its move will have a spillover benefit in appeasing regulatory concerns.

Amazon entered the private label business in 2009, ramping up its product assortment around 2016. Amazon acknowledged the dramatic increase in private-label products on its site during its 4Q17 earnings call, stating that private labels play a great role in supplementing the company's number one focus of providing a broad product selection.

However, in recent years, Amazon has faced criticism from sellers on its platform for advertising its brands over competing alternatives. This was given heightened attention during the pandemic. A spokesperson for the company added in 2020 that Amazon spotlights its brands because they are simply preferred over the competition, boasting higher reviews and lower return rates. Regardless of whether this was true, Amazon's moves raised antitrust concerns.

  • This creates the possibility that AMZN's decision to trim its assortment of private labels is primarily a way to alleviate regulatory pressure, using the current market environment's negative impact on sales as its main reason.
  • However, with Amazon noting in 2019 that only 1% of its sales stemmed from its brands, the company was likely struggling to meet internal private-label sales targets.
  • Private brand products' production and marketing costs are typically lower than name-brand substitutes, so they carry higher profit margins. Therefore, Amazon's move may take a bite out of margin growth in subsequent quarters.
  • Still, even though Amazon's private-label product revenue may have improved during the pandemic, it likely did not soar to a meaningful percentage of overall revenue. Therefore, we do not believe the company pulling back on its assortment of private labels will negatively impact bottom-line growth.
  • In fact, we think that Amazon could see a net benefit by cutting back or even pulling out of the private label business. This is because it gives more incentive to third-party sellers to pay for promotional slots, which Amazon has been accused of taking for its own products.
Overall, while retailers are seeing a positive shift in consumer buying toward less expensive off-brand alternatives, Amazon is reducing its own-brands portfolio. With such a wide selection of products on the company's website, Amazon does not benefit in the same way as its peers, which typically sell products from a small set of name brand firms, offering its private label as the only "cheaper" option. Amazon may have further details on the subject matter when it reports Q2 earnings after-market on July 28.

Pinterest gains interest from investors after activist investor reportedly takes a large position
Updated: 15-Jul-22 13:15 ET

Pinterest (PINS +13%) is up sharply today following a WSJ report that said activist investor Elliott Mgmt has taken a large stake (more than 9%). This social media company has been struggling with declining users and slowing revenue growth.

  • Pinterest just underwent a big change in terms of management. In late June, co-founder and CEO Ben Silbermann agreed to become Executive Chairman and turned over the CEO duties to online commerce expert Bill Ready. This was an exciting choice because Mr. Ready comes over from Google, where he served as President of Commerce, Payments & Next Billion Users. Prior to Google, he served in various senior leadership roles at PayPal.
  • We think this CEO choice was smart and makes it clear that PINS wants to go beyond its advertising model and get more into facilitating online purchases for its 400 mln monthly active users. It wants to help Pinners buy, try and act on all the great ideas they see on Pinterest. Mr. Ready deeply understands commerce and payments.
  • It was not just the new CEO. Pinterest recently acquired THE YES, an AI powered shopping platform for fashion. THE YES enables users to shop a personalized feed based on the user's active input on brand, style, and size. The idea is that THE YES's platform can potentially be applied beyond fashion to other categories on Pinterest such as home, beauty and food. In fact, Pinterest plans to sunset the THE YES app and website to allow the merged teams to focus on technology integration on Pinterest.
  • PINS' main advantage during the pandemic was that it was a place to find ways to reinvent users' lives during a challenging time, especially amongst Gen Z and older Millennials. Its user base has since declined, but we think the pandemic helped PINS cement itself as a go-to place to discover new ideas. The challenge now is how to monetize that presence. Advertising will remain its primary revenue source, but expanding into online purchases is a great idea.
Overall, we are not quite sure what to make of Elliott Mgmt's involvement. Typically, they buy into a struggling company with the goal of agitating management and spurring change. However, PINS just hired what looks to be a solid CEO and seems to be full steam ahead on branching beyond ads to focus more on online purchases. Maybe Elliott is simply impressed with the recent changes and wants in. We remain in a wait-and-see mood on PINS as we have been disappointed in the past. But hopefully the new CEO can turn things around. We also think it's worth noting that the stock seems to have stabilized around the $20 mark, which is a good sign as it seem to be building a base of support.

Citigroup bucks the banking trending and reports surprisingly big upside (C)
Updated: 15-Jul-22 11:09 ET

Citigroup (C +11%) is up nicely today after reporting surprisingly strong Q2 results this morning. After misses from JPM and MS yesterday and WFC this morning, we had some trepidation heading into Citi's earnings report.

  • Citi saw EPS decline 23% yr/yr to $2.19, but that was still well ahead of analyst expectations. Revenue rose 10.6% yr/yr to $19.64 bln, which also was well ahead of expectations. Revenue was driven by increased rates, client activity in Markets and continued momentum in the US cards businesses, partially offset by a slowdown in Investment Banking activity as well as investment fee headwinds in Global Wealth Management.
  • Citi's best performing segment was also its largest segment: Institutional Clients Group (ICG). Revenue rose 20% yr/yr to $11.42 bln. Markets revenues jumped 25% yr/yr to $5.3 bln as trading volatility created strong corporate client activity. Much of that was fueled by robust Fixed Income Markets growth at 31% to $4.08 bln.
  • It was not all good news as concerns about the economy, and lapping a robust year last year, led to a big 46% yr/yr drop in Investment Banking revenue. While that percentage raises eyebrows, IB is not a huge segment with revenue at $805 mln.
  • There was also a net ACL release of $245 mln in Q2 after a $948 mln build in Q1, so that was good to see. The release was largely driven by a reduction in Russia-related risk, partially offset by a build due to increased macro uncertainty. Net credit losses were just $18 mln, down from $30 mln in Q1 and $68 mln a year ago. That was another positive in the quarter, it seems concerns over loan losses are maybe a bit overblown.
Overall, this was a good solid quarter with surprisingly strong upside on EPS and revs. Citigroup has by far been the best Q2 earnings performer among the major banks thus far, whereas JPM, MS and WFC all reported earnings misses. Bank stocks have been under pressure in 2022, mostly on concerns about a weakening economy and inflation. In turn, that would likely reduce consumer spending and chill investment banking activity. However, that is not really materializing at this point.

UnitedHealth moves higher on a solid beat-and-raise Q2 report; not out of the woods with COVID (UNH)
Updated: 15-Jul-22 11:01 ET

Health insurance titan and Dow Jones component UnitedHealth (UNH +4%) is inching higher today after delivering a solid beat-and-raise Q2 report. UNH benefited from balanced growth in the quarter as COVID-related impacts cooled off considerably, bringing about a return to more normalized business activity. As the largest health insurance firm in the US, UNH's favorable Q2 numbers and raised FY22 guidance are a good sign for the industry, particularly Centene (CNC) and Humana (HUM), which report Q2 earnings on July 26 and 27, respectively.

  • In Q2, UNH grew adjusted earnings 18.5% yr/yr to $5.57 with top-line growth of 12.6% yr/yr to $80.33 bln; both metrics topped consensus with ease. Strength was well-balanced, illuminated by double-digit growth at both Optum, UNH's pharmacy benefit manager and health care provider, and UnitedHealthcare.
  • Business operations becoming more normalized was evidenced by UNH's medical care ratio -- the percentage of premiums used to cover claims -- continuing to decline to 81.5% in Q2, compared to 82.8% in the year-ago period and 82.0% last quarter. UNH has observed non-COVID care tick up as its relationship with COVID care activity continues to diverge.
  • However, UNH noted that certain areas still have yet to rebound back to pre-pandemic levels. For example, pediatrics and emergency services remain below pre-COVID levels. Furthermore, UNH is seeing rising COVID-related hospital admissions, albeit with a lower average length of stay stacked against earlier periods.
  • Notably, an encouraging comment from UNH is that thus far, it has not seen patterns in longer-term health impacts develop due to deferred care during the pandemic. UNH stated that it will continue to keep an eye on the situation.
  • UNH's strong Q2 results culminated in its improved FY22 earnings guidance. The company now expects adjusted EPS of $21.40-21.90, up from its previously raised forecast of $21.20-21.70.
There are still reasons to tread with caution. Although signs of negative impacts to longer-term health from deferred care have yet to pop up, it could still be some time before this situation entirely plays out. Additionally, UNH was not overly optimistic that it is out of the COVID-related woods yet, as COVID hospital admissions are ticking up. However, on the bright side, given that these hospital stays are shorter than prior COVID-related admissions, perhaps the disruption to more vulnerable industries, such as retail and foodservice, will not be as pronounced as earlier in the year.

Bottom line, UNH's Q2 earnings report highlights the steady tailwind ahead as COVID-19's grip on the economy eases considerably as its non-COVID care reverts to normalized levels, setting an upbeat tone for CNC and HUM.

Cintas ends FY22 with a healthy beat and decent guidance; benefitting from outsourcing trend (CTAS)
Updated: 14-Jul-22 15:21 ET

Cintas (CTAS +2%) is making a modest move higher despite a healthy Q4 (May) earnings beat. We like to keep an eye on Cintas because it is a window into how businesses see their near term prospects. Cintas is more than just the largest supplier of work uniforms in the US, it also gets more than half of its revenue from facility services (cleaning supplies, mops, first aid cabinets, fire extinguishers, alarms etc.)

  • One of the best things about Cintas is its consistency. The company has now posted 14 consecutive double-digit EPS beats and has not missed in any quarter in the past five fiscal years. Cintas also reported decent revenue upside, growing 13% yr/yr to $2.07 bln.
  • Maybe investors are nitpicking that the Q4 EPS beat was only half as large as the Q3 beat. Also, the FY23 guidance was a bit mixed with upside revenue, but the mid-point of the EPS guidance was below analyst expectations. That guidance pattern tells us demand is robust, but management is concerned about rising costs, and we think that is a prudent approach.
  • Cintas says its clients are having a difficult time finding labor, so they are increasingly outsourcing to Cintas to help them provide products and services better, so that clients can concentrate on their own businesses.
  • Cintas says its salesforce continues to add new customers, but at the same time cross-sell its existing base with more services. And that is why CTAS has been acquiring companies in recent years, so that it can leverage its close relationships with businesses and cross-sell them other services that go beyond uniforms.
  • As it kicks off FY23, Cintas says it likes the momentum it is seeing. If a recession occurs, then it plans to manage it appropriately which it has always done. Demand remains robust and CTAS says it is fully staffed to handle it.
Bottom line, this was a good quarter for Cintas. So why is the stock not up more? We think investors have gotten spoiled with monster beats from Cintas and this one was good, but did not quite measure up. And maybe the somewhat mixed guidance was a negative, but pricing in some potential higher costs makes sense. Also, the stock has made a strong move over the past month, so perhaps investors had already priced in a good result.

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