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Technology Stocks : Semi Equipment Analysis
SOXX 366.34-0.3%3:31 PM EST

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To: robert b furman who wrote (88865)8/19/2022 10:14:52 PM
From: Return to Sender2 Recommendations

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Market Snapshot

Dow 33666.66 -334.26 (-0.98%)
Nasdaq 12691.66 -273.64 (-2.11%)
SP 500 4222.86 -60.95 (-1.42%)
10-yr Note

NYSE Adv 451 Dec 2649 Vol 879 mln
Nasdaq Adv 1027 Dec 3339 Vol 4.5 bln

Industry Watch
Strong: Health Care, Energy

Weak: Consumer Discretionary, Communication Services, Financials, Information Technology

Moving the Market
-- Pullback in cryptocurrencies and meme stocks indicating speculative froth is being taken out of the market

-- Monthly options expiration

-- Lingering feeling market is due for retreat after recent gains

-- Downside leadership from mega caps

Closing Summary
19-Aug-22 16:30 ET

Dow -292.30 at 33708.62, Nasdaq -260.13 at 12705.17, S&P -55.26 at 4228.55
[BRIEFING.COM] The market opened on a downbeat and never found its footing on this options expiration day. It was a risk-off trade following Germany's hot PPI data, which renewed inflationary concerns. Higher long-term rates acted as a headwind while price action in meme stocks, particularly Bed Bath & Beyond (BBBY 11.03, -7.52, -40.5%), offered a reality check for the market.

The S&P 500 was down 1.2% for the week; the Dow Jones Industrial Average was down 0.2% for the week; the Nasdaq Composite was down 2.6% for the week.

Bed Bath & Beyond fell sharply on news that Ryan Cohen's RC Ventures completed the sale of its stake in BBBY and a Bloomberg Law report that suggested the company hired Kirkland & Ellis to help address matters pertaining to the company's debt load.

Mega caps and growth stocks drove the market lower today. The Vanguard Mega Cap Growth ETF (MGK) fell 1.9% versus a 1.3% loss in the Invesco S&P 500 Equal Weight ETF (RSP). The Russell 3000 Growth Index (-1.7%) trailed the Russell 3000 Value Index (-1.2%).

Semiconductors were especially weak after Applied Materials' (AMAT 104.63, -3.64, -3.4%) cautious commentary that accompanied its earnings report. The PHLX Semiconductor Index fell 2.8%.

S&P 500 sector performance showed a risk-off trade. Countercyclical sectors, utilities (-0.1%), consumer staples (-0.4%), and health care (+0.3%), closed ahead of the broader market. Notably, utilities and consumer staples were two of only three sectors to close the week with gains, up 1.2% and 1.9%, respectively. The other week-to-date gainer was energy, up 1.0%.

The advance-decline line heavily favored decliners. Decliners led advancers by a nearly 6-to-1 margin at the NYSE and a 10-to-3 margin at the Nasdaq.

Germany's hotter-than-expected PPI reading affected Treasury market action. The 2-yr note yield rose three basis points to 3.25% and was unchanged for the week. The 10-yr note yield, flirting with the 3.00% level, rose 11 basis points on the day and 14 basis points for the week to 2.99%.

There was no U.S. economic data of note today.

Dow Jones Industrial Average: -7.4% YTD
S&P 400: -9.2% YTD
S&P 500: -11.3% YTD
Russell 2000: -12.8% YTD
Nasdaq Composite: -18.6% YTD

Market moving sideways into the close
19-Aug-22 15:25 ET

Dow -290.07 at 33710.85, Nasdaq -259.50 at 12705.80, S&P -55.11 at 4228.70
[BRIEFING.COM] Heading into the close, the major indices are stuck in a narrow trading range.

WTI crude oil futures are down 0.1% to $90.03/bbl. Natural gas futures are up 0.9% to $9.28/mmbtu.

The 2-yr note yield rose three basis points to 3.25% and was unchanged week-to-date. The 10-yr note yield, flirting with the 3.00% level, rose 11 basis points on the day and 14 basis points week-to-date to 2.99%.

Separately, the CBOE VIX Index is up 7.2%, or 1.41, to 20.97.

Looking ahead to Monday, there's no notable U.S. economic data on the docket.

Market continues to sink
19-Aug-22 15:00 ET

Dow -334.26 at 33666.66, Nasdaq -273.64 at 12691.66, S&P -60.95 at 4222.86
[BRIEFING.COM] The stock market sunk lower in the last half hour. The Russell 2000 is the top laggard, down 2.13%.

Earlier, the Department of Transportation told airlines to improve customer service or the agency will issue new rules, according to NBC News. Airlines are suffering heavy losses today with American Airlines (AAL 14.12, -0.71, -4.8%), JetBlue (JBLU 8.38, -0.32, -3.7%), and Delta Airlines (DAL 33.21, -1.28, -3.7%) showing some of the steepest losses. The Global Jets ETF (JETS) is down 3.4%.

On a related note, the aforementioned stocks are weighing on the Dow Jones Transportation Average, down 1.8% currently.

Dating apps Match, Bumble underperform on Friday
19-Aug-22 14:30 ET

Dow -279.54 at 33721.38, Nasdaq -261.62 at 12703.68, S&P -53.48 at 4230.33
[BRIEFING.COM] The benchmark S&P 500 (-1.25%) is ensconced in second place to this point on Friday.

S&P 500 constituents Etsy (ETSY 106.45, -8.00, -6.99%), Match Group (MTCH 61.24, -3.80, -5.84%), and Advanced Micro Devices (AMD 95.55, -4.89, -4.87%) pepper the bottom of the index. MTCH and peer Bumble (BMBL 28.05, -3.37, -10.73%) are underperforming despite a lack of corporate news, while AMD is weaker alongside chip peers in light of cautious commentary from Applied Materials (AMAT 103.95, -4.32, -3.99%).

Meanwhile, Occidental Petroleum (OXY 70.88, +6.00, +9.25%) has pushed to the top of the index in recent trading after news that Federal Energy Regulatory Commission (FERC) had approved Berkshire Hathaway's (BRK.B 297.88, -6.39, -2.10%) request to increase stake in OXY to 50%.

Gold slides on Friday, week, as dollar and yields firm up
19-Aug-22 14:00 ET

Dow -220.34 at 33780.58, Nasdaq -249.96 at 12715.34, S&P -48.32 at 4235.49
[BRIEFING.COM] With about two hours remaining on Friday the tech-heavy Nasdaq Composite (-1.93%) is still the worst-performing index.

Gold futures settled $8.30 lower (-0.5%) to $1,762.90/oz, finishing lower by about -2.90% on the week, pressured by a rising dollar and treasury yields.

Meanwhile, the U.S. Dollar Index is up about +0.6% to $108.10.

Deere running lower after missing earnings expectations as supply chain issues crop up again (DE)

Ahead of Deere's (DE) Q3 earnings report, shares were plowing higher, rallying by 25% since mid-July in a reflection of budding optimism regarding its business prospects. That positive sentiment was bolstered by solid earnings beats from competitors Caterpillar (CAT) and AGCO (AGCO) a few weeks ago. While both companies struggled with lingering supply chain constraints, strong demand for equipment supported their price increases, mitigating the impact from lower sales volumes. A similar scenario was anticipated to play out for DE, but the company badly missed EPS expectations and lowered the midpoint of its FY22 net income outlook.

As expected, the same supply chain issues that inhibited CAT's and AGCO's ability to meet demand also hindered DE's results. However, DE's revenue growth of 24.8% easily outpaced the 10.5% and 2.3% growth for CAT and AGCO in their most recent quarters. It's worth pointing out that both DE and CAT lapped growth of 29% in the year-earlier period, so DE didn't benefit from an easier comp. The same can't be said for AGCO, which generated an increase of 44% last year, but it's evident that the demand environment for DE is quite healthy relative to its peers.

Although commodity crop prices, such as corn, wheat, and soybeans, have fallen recently, they were very strong for most of the quarter. Consequently, farming incomes improved, providing the impetus for farmers to upgrade and buy new equipment. This is illustrated by DE's Production & Precision Agriculture segment reporting a 43% surge in revenue to $6.1 bln, which is by far the strongest growth among its divisions. Small Agriculture & Turf fared pretty well, too, posting an increase of 16% as demand for riding lawn equipment and utility tractors remained firm.

The question, then, is this: Why did DE fall considerably short of EPS estimates if sales were so strong?

  • Despite implementing price increases across its product lines, operating margin still slipped in two of the three main operating segments. Supply chain disruptions created production inefficiencies, particularly in the Small Agriculture & Turf business, where operating margin decreased by 330 bps yr/yr to 15.2%.
    • Construction & Forestry experienced a 30 bps improvement to 15.7%; as the company's smallest business, the modest bump had little impact.
  • Total expenses jumped by 23% to $11.6 bln, as compared to a 7% increase in AGCO's operating expenses. While inflationary pressures afflicted both companies, foreign exchange headwinds due to a stronger dollar are having an outsized effect on DE's expense line.
    • The unfavorable impact from foreign exchange also played a roll in DE cutting its FY22 net income guidance to $7.0-$7.2 bln from $7.0-$7.4 bln.
On the positive side, DE CEO John May stated that demand is still strong, and that early-order programs are encouraging as farming fundamentals remain healthy. If the company has success in streamlining its supply chain, then it should be poised for improved earnings performance, especially if input costs continue to ease.

Foot Locker sweeps investors off their feet after many highlights in Q3, including a new CEO (FL)

Foot Locker (FL +19%) is sweeping investors off their feet following a double-digit earnings beat in Q2 (Jul), reiterated FY22 comp guidance, and appointing former Ulta (ULTA) CEO Mary Dillon as its CEO, effective September 1. While FL was not immune to inflationary pressures plaguing the retail industry, its upbeat numbers within its core banners, encouraging back-to-school sales, and its strategic pivot away from malls fueled solid JulQ results.

  • One item that jumped out immediately was high single-digit growth in FL's core banners, which excludes NIKE (NKE) sales. Recall NKE's ongoing shift toward bolstering its direct-to-consumer (DTC) channels, forcing FL's Nike Brand concentration to drop from 75% in FY21 to an expected 60% in FY23. As a result, investors are shrugging off FL's total comps falling 10.3% in Q2.
  • FL mentioned that inflation negatively affected consumers as the quarter progressed, particularly amongst lower-income buyers. However, beginning toward the end of July, demand started to pick up meaningfully, especially within FL's earliest back-to-school markets. The company also saw accelerating sales momentum within its performance-based assortment, similar to Kohl's (KSS), where active apparel outperformed overall growth in JulQ.
    • On a side note, accelerating momentum in active footwear bodes well for Hibbett (HIBB), which derived over 60% of FY22 sales from footwear. HIBB reports JulQ earnings on August 25.
  • Although management was cautiously optimistic about back-to-school sales, stating that it still sees increased uncertainty, this area will likely act as a solid tailwind for FL. For instance, encouraging back-to-school demand has been a recurring theme amongst many retailers lately, including Walmart (WMT), Target (TGT), and KSS, to name a few.
  • Pivoting locations away from malls has been a smart move for FL. It continues to see conversion (consumers who leave the store with a purchase) and average ticket "well above" company average at these stores. For 2022, FL plans to open 40 off-mall community and power stores.
Overall, FL is performing relatively well in an environment where consumers are spending less on discretionary items as essentials, like food, continue to jump in price. However, FL still expects comps to fall 8-9% in FY22 and noted that it is likely to perform toward the lower end of that range, as the back half of the year will be softer than initially forecasted, echoing the outlook provided by shoe brand Crocs (CROX) earlier this month.

Still, we like FL for the long term, especially after appointing Mary Dillon as CEO in the wake of current CEO Richard Johnson's planned retirement. Also, footwear is demonstrating its resilience during the current inflationary environment. This is backed up by companies like Ross Stores (ROST), which noted yesterday that shoes were amongst its strongest merchandise areas in JulQ. Additionally, Adidas AG (ADDYY) saw footwear launches sell out in just a couple of days in 1H22, while Deckers' (DECK) HOKA brand saw sales surge in JunQ. Lastly, footwear sales during the latest quarters from Under Armour (UAA) and NKE were amongst their few bright spots.

Applied Materials' Q3 EPS beat is overshadowed by its gloomy commentary on the chip industry (AMAT)

Applied Materials (AMAT -3%), a manufacturing equipment and services provider for the semiconductor industry, applied itself in Q3 (Jul), posting sizeable beats on its top and bottom lines. However, AMAT's continual wider-than-usual quarterly outlook and cautious statements on the near-term global economic backdrop are spurring an unfavorable reaction today.

  • As has been the case for much of FY22, AMAT has widened its earnings guidance for the upcoming quarter to incorporate an elevated level of economic uncertainty. For Q4 (Oct), AMAT expects adjusted EPS of $1.82-2.18, a range three times wider than its quarterly forecasts during FY21. Meanwhile, the company's sales outlook ranges from $6.25-7.05 bln, roughly twice as wide as its quarterly sales guidance last year. Although these numbers were in-line with consensus, the expanded ranges are not helping alleviate concerns of near-term softness.
  • AMAT's comments on the state of its industry are also raising concerns about slowing chip demand going forward, especially on the consumer side, which echoes remarks from numerous semiconductor manufacturers as of late. AMAT noted that memory spending will likely be lower yr/yr in FY23 due to weakness in consumer electronics, prompting some of its customers to defer capacity additions.
    • Memory and storage product supplier Micron (MU) highlighted the struggles within the PC and smartphone markets earlier this month with its negative free cash flow prediction for 1Q23 (Oct), a massive drop from the positive $671 mln of FCF the company posted in 1Q22.
    • Around the same time, a couple of MU's peers, Western Digital (WDC) and Seagate (STX), also provided a bearish quarterly outlook.
Nevertheless, there were still many bright spots in Q3. For one, despite lapping +41% revenue growth, AMAT still grew revs 5.2% yr/yr to $6.52 bln, putting it toward the high-end of its prior forecast of $5.85-6.65 bln. Likewise, adjusted EPS of $1.94 topped estimates by double-digits, a solid reversal from AMAT's earnings miss last quarter. Also, gross margins may have contracted 180 bps yr/yr in Q3 to 46.2%, but AMAT anticipates incremental improvements in subsequent quarters.

Furthermore, AMAT's supply chain improved incrementally in the quarter as the company stepped up its investments to resolve bottlenecks. Supply chains are also becoming regionalized, providing a slight tailwind beginning in late FY23. Outside of the consumer market, demand remains robust, especially in the auto and industrial markets, reiterating what we have seen from many chip makers lately, like Taiwan Semi (TSM), as electric vehicles and industrial automation keeps picking up steam. Also, chip manufacturers are securing long-term capacity agreements within these areas, bolstering AMAT's backlog.

Bottom line, despite AMAT's guidance and gloomy commentary, numerous positives still occurred during the quarter, helping the company remain on track for its longer-term targets. Lastly, FY22 may have been rife with headwinds. However, AMAT's long-term view of the industry remains unchanged as secular trends, such as an increase in the number of chips used per application, are expected to drive the semiconductor and wafer fab equipment markets structurally higher. in receipt of some sizable gains after delivering strong beat-and-raise report (BILL)

Unprofitable growth stocks with rich valuations may not be at the top of many investors' wish lists right now, but (BILL) is winning plenty of favor this morning after the cloud software company posted a very strong beat-and-raise 4Q22 report. BILL's triple-digit revenue growth of 156% immediately jumps off the page, helping to justify a frothy 1-year forward P/S of about 18x.

What's really catching investors' attention, though, is the company's FY23 EPS guidance of $0.23-$0.38, which blew away analysts' expectations. In fact, the street was projecting that BILL would still be far from profitable in FY23. In a market that prizes bottom-line performance, this potential swing to profitability is providing a potent catalyst for the stock.

A key secular trend and a couple company-specific factors are fueling BILL's remarkable growth and rapidly improving earnings performance.

  • The company provides software that simplifies, digitizes, and automates back-office finance and accounting operations, primarily for SMBs. Many SMBs have been using outdated manual processes that are inefficient and time-consuming, draining a company's resources. When the pandemic hit, the digital transformation pushed SMBs to modernize their workflows to become more competitive.
  • Last year, BILL executed a pair of notable acquisitions that reshaped and expanded its product suite. Specifically, it purchased spend management company Divvy for $2.5 bln, followed by a $625 mln acquisition of accounts receivable software provider Invoice2go. The additions created more cross-selling opportunities, while enhancing BILL's platform as a one-stop-shop for back-office automation software.
    • Divvy and Invoice2go are significant contributors, generating combined revenue of nearly $80 mln (40% of total revenue) in Q4.
    • The company offers card payment solutions through its organic platform, and through the Divvy platform. For the quarter, BILL processed 18.2 mln payments, including 7.3 mln Divvy card transactions, facilitating a 201% surge in transaction revenue to $139.6 mln.
    • Furthermore, CFO John Rettig stated during the earnings call that card payment margins were slightly higher exiting FY22 compared to a year ago.
  • A higher mix of payment revenue (70% of total) relative to subscription revenue (28% of total) pushed non-GAAP gross margin higher by seven percentage points yr/yr to 84%. Combined with the strong top-line growth, the substantial margin expansion nearly pushed Q2 non-GAAP EPS to the breakeven point.
  • Speaking to the massive greenfield opportunity in front of it, BILL continues to add new customers at a rapid pace. During the quarter, the company added 11,200 net new customers for a total of about 400,000. By business line, this includes 157,800 organic customers, 20,700 Divvy businesses, and 221,600 Invoice2go subscribers.
  • Once a customer signs on with BILL, they find more value on the platform and adopt additional solutions. This is illustrated by BILL's impressive and rising net dollar-based retention rate of 131% in FY22, compared to 124% in FY21, and 121% in FY20.
One concern is that CEO Rene Lacerte commented that the macro environment began impacting spending patterns, especially in the advertising vertical, towards the end of Q4. Consequently, transaction payment volume growth rates moderated a bit in July and into August. However, the company is still experiencing strong customer acquisition and retention rates, as reflected in the Q1 and FY23 guidance that easily topped expectations. Overall, BILL's earnings report solidified its position as a top-flight growth stock.

Ross Stores slightly higher despite weak guidance, tells us a lot of negativity is priced in

Ross Stores (ROST -2%) is hanging in there pretty well following some fairly disappointing headline numbers with its Q2 (Jul) earnings report last night. ROST beat handily on EPS, but revenue and comps were a bit light. Also, EPS guidance for Q3 (Oct) was well below analyst expectations.

  • ROST readily admits its sales were impacted by mounting inflationary pressures its customers face, as well as an increasingly promotional retail environment. Also, it believes that EPS came in above guidance primarily due to lower incentive costs resulting from the below planned top line performance. So even the EPS beat was not as impressive as we thought it was at first glance.
  • Comps in Q2 came in at -7%, which was below the -6% to -4% prior guidance. Granted, ROST was lapping its strongest comp quarter of 2021 at +15%, but that was already known. ROST still fell below expectations. Comp guidance for Q3 is expected at -9% to -7% and then -7% to -4% in Q4 (Jan). Before you get too excited about that Q4 improvement, ROST concedes that is mostly caused by lapping easier comps in Q4 (+9%) than it will in Q3 (+14%).
  • So, what is going on here? It sounds like ROST is going to discount more heavily in OctQ, whereas other retailers like TGT and WMT went through this pain in JulQ. On the call, ROST said it is projecting higher markdowns in Q3 to right-size its inventory levels heading into the Q4 holiday season.
  • As such, ROST is guiding to Q3 operating margin of just 7.8-8.7%, well below the 11.4% year ago number. It also a big sequential decline from 11.3% in Q2, which had already dropped from 14.1% in 2Q21. It is not just higher markdowns, higher ocean freight is also expected to compress merchandise margins.
So, why is the stock holding up so well? Frankly, we are a little surprised that it is holding up this well. We think investors understand that ROST is known for conservative guidance. And we agree with that and there is a good chance that ROST will report upside next quarter. However, that is some pretty big downside guidance. Another factor may be that a lot of negativity is priced in already. Granted, the stock has moved nicely higher since early July on reports of inflation peaking. However, it is still well below the $120 area it was trading at in November.

Our initial thought was that these off-price value retailers would perform better in an inflationary environment as consumers trade down. However, the reality is lower income consumers are squeezed the most by inflation and that is ROST's core customer. It also hurts that ROST does not sell groceries, a category that has been booming and is helping TGT and WMT offset the decline in discretionary purchases. ROST focuses heavily on apparel and home goods, but with tight wallets, consumers can do without new outfits for now.

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