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Technology Stocks : Semi Equipment Analysis
SOXX 366.73-0.4%12:35 PM EST

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To: Return to Sender who wrote (88740)7/27/2022 4:26:17 PM
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Market Snapshot

Dow 32199.47 +436.05 (1.37%)
Nasdaq 12032.39 +469.85 (4.06%)
SP 500 4023.68 +102.56 (2.62%)
10-yr Note

NYSE Adv 2545 Dec 509 Vol 891 mln
Nasdaq Adv 2912 Dec 1089 Vol 4.5 bln

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

Weak: --

Moving the Market
-- Better-than-feared results and guidance from Alphabet and Microsoft

-- Upside leadership from mega caps

-- Better-than-expected durable goods orders for June

-- FOMC rate hike announcement and Fed Chair Powell's comments at his press conference

Closing Summary
27-Jul-22 16:25 ET

Dow +436.05 at 32199.47, Nasdaq +469.85 at 12032.39, S&P +102.56 at 4023.68
[BRIEFING.COM] On the heels of the earnings reports from Alphabet (GOOG 113.60, +8.16, +7.7%) and Microsoft (MSFT 268.74, +16.84, +6.7%), the stock market opened on a high note. The main indices stuck to a fairly narrow range as market participants waited for the FOMC decision. There was some whipsaw action immediately after the rate hike announcement but the market moved sharply higher during Chairman Powell's subsequent press conference. Each of the indices closed near session highs.

The strength in the early going was thanks to better-than-feared results and/or guidance from Alphabet and Microsoft, which was good enough for a market that seemingly priced in worse considerations during the selloff in the first half of the year.

The real upside momentum came after the FOMC announced its decision. The 75 basis point rate hike was as expected and the vote was unanimous. However, this was not the catalyst that sent the market on a sharp incline.

After listening to Fed Chair Powell's press conference, the market thinks that the pace of the Fed's rate increases may soon start to slow down given that the economy is slowing, too. Fed Chair Powell did not rule out another 75 basis point increase (or larger) at the September meeting, but he said the data will dictate that decision. Importantly for the market, he also said that, with the frontloading of rate hikes, it intuitively makes sense that slowing the pace of rate increases would be appropriate.

The stock market seems to have latched on to the latter admission as the post-FOMC rally catalyst, notwithstanding the added acknowledgment that it will be quite challenging for the Fed to achieve a soft landing and that the task has gotten even more challenging in recent months.

As was the case before the press conference, the mega caps led the upside moves. The Vanguard Mega Cap Growth ETF (MGK) closed up 4.3% versus a 2.6% gain in the S&P 500 and a 1.9% gain in the Invesco S&P 500 Equal Weight ETF (RSP).

The late-session rally left all 11 S&P 500 sectors in positive territory. Gains ranged from 0.1% (utilities) to 5.1% (communication services).

As for the Treasury market, there was very little immediate reaction to the Fed's 75-bps rate hike announcement, but most tenors rallied to fresh highs during Fed Chairman Powell's press conference. The 2-yr note yield fell four basis points to 3.00% while the 10-yr note yield fell five basis points to 2.73%.

Also, energy complex futures made big moves today. WTI crude oil futures rose 2.8% to $97.54/bbl. Natural gas futures fell 2.0% to $8.57/mmbtu. Unleaded gasoline futures rose 2.7% to $3.19/gal.

Ahead of Thursday's open, Altria (MO), American Tower (AMT), Comcast (CMCSA), Harley-Davidson (HOG), Hershey Foods (HSY), Honeywell (HON), Mastercard (MA), Merck (MRK), Northrop Grumman (NOC), Pfizer (PFE), Royal Caribbean (RCL), Southwest Air (LUV), Stanley Black & Decker (SWK), and STMicroelectronics (STM) headline the earnings reports.

Thursday's economic data is limited to:

  • 8:30 ET: Advance Q2 GDP ( consensus 0.5%; prior -1.6%), advance Q2 GDP Deflator ( consensus 7.1%; prior 8.2%), weekly Initial Claims ( consensus 253,000; prior 251,000), and Continuing Claims (prior 1.384 mln)
  • 10:30 ET: Weekly natural gas inventories (prior +32 bcf)
Reviewing today's economic data:

  • Weekly MBA Mortgage Applications Index -1.8%; Prior -6.3%
  • June Durable Orders 1.9% ( consensus -0.5%); Prior was revised to 0.8% from 0.7%; June Durable Orders, Ex-Transportation 0.3% ( consensus 0.3%); Prior was revised to 0.5% from 0.7%
    • The key takeaway from the report is that business spending remained on a positive trajectory. New orders for nondefense capital goods, excluding aircraft, increased 0.5% for the second consecutive month.
  • June Adv. Retail Inventories 2.0%; Prior was revised to 1.6% from 1.1%
  • June Adv. Wholesale Inventories 1.9%; Prior was revised to 1.9% from 2.0%
  • June Adv. Intl. Trade in Goods -$98.2 bln; Prior was revised to -$104.0 bln from -$104.3 bln
  • June Pending Home Sales -8.6% ( consensus -1.5%); Prior was revised to 0.4% from 0.7%
  • Crude oil inventories had a draw of 4.52 mln barrels
    • Prior week showed a draw of 446K barrels
  • Gasoline inventories had a draw of 3.30 mln barrels
  • Prior week showed a build of 3.50 mln barrels
  • Dow Jones Industrial Average: -11.4% YTD
  • S&P 400: -13.9% YTD
  • S&P 500: -15.6% YTD
  • Russell 2000: -17.6% YTD
  • Nasdaq Composite: -23.1% YTD

Market continues to climb after Powell's press conference
27-Jul-22 15:30 ET

Dow +561.76 at 32325.18, Nasdaq +517.98 at 12080.52, S&P +117.45 at 4038.57
[BRIEFING.COM] Fed Chair Powell wrapped up his press conference and the market continues to incline. The Nasdaq is leading the indices, up 4.4%.

After the close, Meta Platforms (META), Ford (F), Qualcomm (QCOM), Esty (ESTY), Lam Research (LRCX), O'Reilly Automotive, Inc. (ORLY), Teladoc Health, Inc. (TDOC), Upwork Inc. (UPWK) are the headline earnings reports.

Ahead of Thursday's open, Altria (MO), American Tower (AMT), Comcast (CMCSA), Harley-Davidson (HOG), Hershey Foods (HSY), Honeywell (HON), Mastercard (MA), Merck (MRK), Northrop Grumman (NOC), Pfizer (PFE), Royal Caribbean (RCL), Southwest Air (LUV), Stanley Black & Decker (SWK), and STMicroelectronics (STM) headline the earnings reports.

Thursday's economic data is limited to:

  • 8:30 ET: Advance Q2 GDP ( consensus 0.5%; prior -1.6%), advance Q2 GDP Deflator ( consensus 7.1%; prior 8.2%), weekly Initial Claims ( consensus 253,000; prior 251,000), and Continuing Claims (prior 1.384 mln)
  • 10:30 ET: Weekly natural gas inventories (prior +32 bcf)

Market makes sharp upside move
27-Jul-22 15:00 ET

Dow +401.04 at 32164.46, Nasdaq +435.03 at 11997.57, S&P +91.72 at 4012.84
[BRIEFING.COM] With Fed Chair Powell currently giving his press conference, the three main indices made sharp upside moves but have come off those levels. The S&P 500 currently trades above the 4,000 level.

The mega caps continue to lead with the Vanguard Mega Cap Growth ETF (MGK) up 4.2% versus a 1.7% gain in the Invesco S&P 500 Equal Weight ETF (RSP).

With the market on the rise, most of the S&P 500 sectors have entered positive territory. The lone laggard currently is the utilities sector, down 0.1%.

Treasury yields made sharp downside moves around the same time the stock market moved up. The 2-yr note yield is down two basis points to 3.03% while the 10-yr note yield is down four basis points to 2.74%.

FOMC unanimously votes to raise rates by 75 bps, as expected; spending and production have softened
27-Jul-22 14:25 ET

Dow +122.30 at 31885.72, Nasdaq +303.66 at 11866.20, S&P +55.86 at 3976.98
[BRIEFING.COM] The major averages jostled around after the FOMC's rate decision, though after shaking off their initial jitters, now stand little changed with the benchmark S&P 500 (+1.42%) still firmly in second place. Shortly, the Fed unanimously voted to raise the target range on the federal funds rate by 75 bps to 2.25% to 2.50%, while adding the caveat that ongoing increases in the target range will be appropriate. Commenting on market conditions the FOMC said that recent indicators of spending and production have softened.

Other key excerpts from the FOMC statement included that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

The FOMC also said that it was remaining highly attentive to inflation risks while also adding that it is still strongly committed to returning inflation to its 2 percent objective.

Yields across the curve remained lower following the FOMC decision with the yield on the benchmark 10-yr note still down about 3 bps to 2.772%.

Gold narrowly higher at midweek
27-Jul-22 13:55 ET

Dow +95.64 at 31859.06, Nasdaq +293.20 at 11855.74, S&P +54.09 at 3975.21
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (+2.54%) is still comfortably in the lead.

Gold futures settled $1.40 higher (+0.1%) to $1,719.10/oz, firmly off morning losses as equities fell off morning highs and treasury yields decline.

Meanwhile, the U.S. Dollar Index is up less than +0.1% to $107.20.

As a reminder, the FOMC will announce its rate decision at the top of the hour.

Sherwin-Williams' weak quarterly report paints a bleak picture on consumer spending strength (SHW)
Updated: 27-Jul-22 14:03 ET

Sherwin-Williams (SHW) is having trouble brushing over an unsightly 2Q22 earnings report that put a steep slowdown in demand from do-it-yourself (DIY) consumers under the spotlight. The huge earnings and revenue miss and downward revision to FY22 EPS guidance is catching investors off guard; optimism was building ahead of the print.

Buoyed by a better-than-expected report from PPG Industries (PPG) on July 21, expectations brightened for SHW. That was especially the case since PPG offered encouraging commentary regarding raw material availability improvements in 2H22. In the wake of PPG's report, SHW shares climbed higher by about 5%, continuing an upturn that began in late June. A good portion of those gains achieved over the past month are being washed out today, though, as a number of concerns materialized in SHW's report.

  • In the Consumer Brands segment, which sells paints, stains, and varnishes to distributors and retailers, net sales increased by just 0.9% to $737.9 mln. The main issue is that the anticipated rebound in North America DIY demand did not come to fruition, indicating that inflationary pressures are now impacting spending on home improvement projects.
    • Unfortunately, the headwinds aren't limited to the North America market. In Europe, demand is deteriorating faster than SHW expected, while sales in China have also not improved, despite the removal of COVID-related lockdown measures.
    • The raw material supply improvements that PPG noted have not appeared yet -- at least, not according to SHW. The company cited tight supplies in certain resins as another significant challenge in Q2.
  • Net sales in The Americas Group were a little stronger at +8.1%, with most of that increase related to price increases. However, higher professional architectural sales also helped. Healthy new home construction activity helped insulate the segment from the same sluggish DIY demand that dented the Consumer Brands business.
  • Solid demand from the industrial end markets, which pushed net sales for the Performance Group higher by 15%, enabled SHW to reaffirm its FY22 revenue guidance for high-single to low-double digit growth. The news isn't as promising for SHW's EPS outlook after it cut its guidance to $8.50-$8.80 from $9.25-$9.65 due to inflationary pressures.
    • Although feedstock costs have eased since last quarter, raw material costs have not decreased in a meaningful way yet. This is reflected in the profit margin contraction seen across SHW's core segments, including an 850 bps drop in the Consumer Brands segment.
The main takeaway is that inflationary pressures -- both on the consumer, and on SHW's cost structure -- weighed heavily on the business in Q2. The industrial and homebuilding markets were notable areas of strength, but the downturn in DIY business was too much for SHW to overcome.

Texas Instruments benefits from robust growth in the automotive and industrial markets in Q2 (TXN)
Updated: 27-Jul-22 13:03 ET

With business accelerating toward the back half of the quarter, as COVID restrictions in China began to ease, Texas Instruments (TXN +4%) was able to post sizeable earnings upside on strong revenue growth in Q2. As evidenced by upbeat results from titans in their respective industries, such as Taiwan Semi (TSM) and General Electric (GE), the automotive and industrial markets experienced robust demand, helping lift TXN's Q2 numbers.

  • Drilling deeper, TXN's 13.8% revenue growth yr/yr to $5.21 bln, which easily surpassed estimates, was fueled by over 20% growth in automotive and high single-digit growth in industrial. The solid top-line growth helped drive a 23% jump in adjusted EPS yr/yr to $2.45.
    • Gross margins were another positive standout, expanding 240 bps yr/yr to 70%, reaching TXN's long-term target of 70-75%.
  • One end-market that lagged in the quarter was personal electronics, TXN's second-largest market by revenue (24% in FY21), which grew by only low single digits. However, investors are mostly looking past this minor rough patch since semiconductor suppliers Intel (INTC) and Micron (MU) had already warned of slowdowns in personal electronic demand. Also, consumer electronics exhibited the weakest growth for TSM, growing just 5% yr/yr in Q2.
  • TXN is also adding additional capacity to keep its customers' inventories stable, with its two factories, RFAB2 and LFAB, coming online within the next three years.
    • This does lead to a concern about adding too much capacity if economic conditions sour. However, TXN is comfortable increasing inventory, stating that its supply goes to support products that not only sell to a vast set of customers but also have very long useful lives.
  • TXN's Q3 guidance was decent, guiding adjusted earnings and revs in-line with consensus. The company expects earnings of $2.23-2.51 and revs of $4.9-5.3 bln.
    • TXN does not typically provide additional color on its quarterly outlook unless there are specific outliers. Therefore, the company's mentioning of continual weakness in the personal electronics market is noteworthy and affirms what we heard from its peers in previous months.
Overall, TXN's Q2 results were sound, helping to keep its shares' past momentum alive today. Since setting YTD lows on July 1, the stock has gained nearly 13%. With industrial and automotive markets exhibiting strength, TXN is poised to continue its run, especially as factory automation and vehicle electrification continue to gain steam. Finally, TXN's solid Q2 numbers are a good sign for peer Analog Devices (ADI) when it reports Q3 (Jul) earnings on August 17.

Alphabet better positioned than Snap to deal with ad slowdown, sparking a rally (GOOG)
Updated: 27-Jul-22 11:17 ET

For the first time in many years, Google parent Alphabet (GOOG) missed EPS expectations in back-to-back quarters as revenue growth slowed to just 13% in 2Q22. The only time in the past five years that GOOG generated slower growth was in 2Q20, when revenue fell by 1.7% due to the COVID-related economic shutdown. Despite these blemishes, the stock has reacted favorably to a report that can be best described as better-than-feared.

Unquestionably, Snap's (SNAP) gloomy earnings report from last week significantly lowered the bar for GOOG, which slid lower by nearly 10% in the aftermath of those results. However, SNAP's report only served to amplify the existing weakness in GOOG shares. Since early April, GOOG has spiraled lower by over 25%. The main point is that a soft Q2 earnings report was already priced in, setting the stage for a buy-the-dip reaction following the report.

Drilling down on the actual results, GOOG's performance was mediocre-at-best in Q2.

  • While advertising revenue of $56.3 bln modestly beat analysts' estimates, growth slowed appreciably to 12% from 22% last quarter. To be fair, GOOG lapped a very challenging quarter in which advertising revenue surged by 69% in 2Q21. The problem, though, is that advertisers are slowing their spending and that the pullback isn't reversing higher.
    • The segment that's feeling the greatest impact from this decline in ad spending is YouTube. In Q2, YouTube ad revenue increased by a pedestrian 4.8% to $7.34 bln, missing expectations.
    • More so than GOOG's traditional search business, YouTube is prone to competitive pressures from short video platform provider TikTok. To answer this competitive threat, GOOG is focused on growing YouTube Shorts, which now has over 30 bln daily views. Monetizing YouTube Shorts is still a work in progress and will take more time to develop.
  • The deceleration in revenue growth isn't relegated to GOOG's advertising business. Google Cloud posted growth of 36%, representing a material drop off from the mid-40% growth that investors have become accustomed to.
    • This suggests that enterprises are also scaling back a bit on IT investments after a few years of rampant spending. GOOG still expects its Cloud segment to benefit from the digitization of businesses and the need for data analytics and security. Enterprises may be more judicious and tactical with their spending, though, as macroeconomic concerns mount.
  • Surprisingly, GOOG's expenses grew faster than its revenue, even as the company recently stated that it's slowing its hiring. Operating expenses were up by 24% to $20.1 bln, mainly driven by higher headcount, and increased spending on advertising. As a result, operating margin slipped by 3 percentage points yr/yr to 28%.
    • During the earnings call, CFO Ruth Porat reiterated that the company plans to slow the pace of hiring, so we should see a moderation in operating expenses in 2H22.
  • A recurring theme this earnings season is that foreign exchange effects are creating a top-line headwind. GOOG is not an exception as the strengthening dollar created a 3.7 percentage point headwind in Q2. Worse yet, the company expects an even larger FX headwind in Q3.
Financial highlights were few and far between for GOOG in Q2, but its results look much better when stacked up against SNAP's dismal performance. GOOG's significant exposure to the travel industry, combined with a more diversified business due to its Cloud segment, give it an edge over SNAP and other advertising-centric companies like Meta Platforms (META). It's difficult to get too excited about GOOG's results, however, since advertising spending is in a lull.

Microsoft trades higher despite rare EPS miss; bullish guidance was the main bright spot (MSFT)
Updated: 27-Jul-22 11:05 ET

Microsoft (MSFT +5%) is trading nicely higher despite reporting its first EPS miss in many years. Initially, we thought the market might react negatively to the Q4 (Jun) report, but the stock has held up nicely and actually popped higher during the call last night thanks to some decently bullish guidance for Q1 (Sep).

So, why the big miss?

  • FX had a big impact on results as the US dollar strengthened more quickly than expected. That clipped JunQ revenue and EPS by $595 mln and $0.04, respectively, beyond prior guidance. Recall that, on June 2, MSFT provided a rare intra-quarter update. It lowered guidance almost entirely caused by FX. And it turns out June saw a further strengthening in the dollar. If you back that out, MSFT almost reported in-line.
  • Another headwind was extended production shutdowns in China that continued through May. Also, a deteriorating PC market in June impacted Windows OEM revenue by more than $300 mln. Also, clients have pulled back on ad spending, which hurt results at LinkedIn as well as its search and news advertising segment. Another issue was that MSFT significantly scaled down operations in Russia, which were fairly large and led to an asset impairment charge. On this last point, it is frustrating that MSFT does not provide an adjusted EPS number. Things like an impairment charge should get backed out. It distorts the comparison to consensus.
  • Azure and other cloud services revenue grew 40% (+46% CC). That is below the last few quarters, but only a point lower than internal expectations, driven by a slight moderation in Azure consumption growth. MSFT expects Azure revenue growth in SepQ to be sequentially lower by roughly 3 points on a constant currency basis (+43% CC), which is better than feared. It is not surprising to see some moderation in growth as this segment gets larger. Also, MSFT says it is seeing larger and longer-term commitments for Azure and it won a record number of $100+ mln and $1+ bln deals this quarter.
Our overall thought here is that investors are giving a pass to MSFT for the miss because a lot of it was out of its control. MSFT faced severe FX headwinds with the rapid rise in the US dollar. The overall guidance was actually a bit below consensus. However, again, a lot of that shortfall appears to be FX-related. Based on the stock reaction, the guidance was actually a bright spot. Bigger downside guidance was certainly possible.

Finally, the stock has been in steady decline in 2022, which makes us think a lot of the negative items from this report were well known and priced in already: FX headwinds, China shutdowns, PC weakness, Azure slowing a bit, reduced ad spend (see SNAP's recent report) etc. We think investors are looking past these items and are pretty pleased with the guidance.

Chipotle Mexican Grill serves up robust comp growth in Q2 despite continual menu price hikes (CMG)
Updated: 27-Jul-22 10:55 ET

Shares of Chipotle Mexican Grill (CMG +12%) are looking mighty tasty today after the quick-service restaurant chain served up a double-digit earnings beat and +10.1% same-store sales growth in Q2. CMG also provided solid Q3 guidance, forecasting mid to high single-digit comp growth. Its Q3 guidance was appetizing given the numerous difficulties on its plate, including macroeconomic pressures, a relatively new workforce, and a return-to-normal summer seasonality for college-based locations, which make up ~15% of total restaurants, as well as planned price increases in August.

As inflation takes a considerable toll on the restaurant industry and consumers' budgets, investors were wary that ongoing price hikes by CMG would begin to have a materially adverse impact on its financials. McDonald's (MCD) may have also stoked concerns that CMG would struggle in Q2, noting that recession fears and ongoing inflation are dampening consumer sentiment, spurring a shift toward more value offerings and fewer combo meals.

Therefore, even though CMG came up short on sales estimates in Q2, registering just 17% growth yr/yr to $2.21 bln, its other numbers shined, demonstrating the company's strong pricing power and brand loyalty.

  • This pricing power is highlighted by CMG's restaurant-level margin expanding 70 bps yr/yr to 25.2%, helping to boost adjusted EPS 25% yr/yr to $9.30. It is excellent to see CMG hit its 25% restaurant-level margin target for Q2 after missing the mark in Q1.
  • CMG's ability to remain staffed at levels above where they were before the pandemic is another testament to its brand. Labor costs have continued to climb, increasing about 30 bps yr/yr in Q2 due to CMG's continual step-up in wages. However, given its staffing levels, this strategy is paying off. Furthermore, CMG's total costs of sales were virtually flat from the year-ago period, illustrating the effectiveness of CMG's menu price hikes.
  • Success in the US is also being seen internationally. In Canada, where CMG only has 29 locations, it sees room for several hundred down the road. Meanwhile, in Europe, CMG commented that it is gaining confidence the continent could be another layer to its future growth story.
Overall, CMG's Q2 numbers spotlight its pricing power and its ability to find success during a challenging economic period. With CMG and MCD cooking up robust comp growth and earnings beats despite a fierce inflationary environment, consumers are clearly still craving dining-out experiences. This bodes well for the fast-casual and quick-service food industry, including a slew of companies reporting earnings in the coming weeks, such as YUM, QSR, PTLO, SHAK, WEN, and EAT, to name a few.

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