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Technology Stocks : Semi Equipment Analysis
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Market Snapshot

Dow 30770.22 -193.63 (-0.63%)
Nasdaq 11411.73 -140.59 (-1.22%)
SP 500 3865.09 -36.33 (-0.93%)
10-yr Note 0/32 3.46

NYSE Adv 805 Dec 2203 Vol 3.3 bln
Nasdaq Adv 1314 Dec 2890 Vol 7.1 bln

Industry Watch
Strong: Consumer Staples, Real Estate

Weak: Industrials, Materials, Energy

Moving the Market
-- FedEx big earnings warning

-- Lingering inflation, rate hike, and growth concerns following slate of economic data this week

Closing Summary
16-Sep-22 16:25 ET

Dow -139.40 at 30824.45, Nasdaq -103.95 at 11448.37, S&P -28.02 at 3873.40
[BRIEFING.COM] The stock market logged decent losses on this options expiration day following the big earnings warning from FedEx (FDX 161.02, -43.85, -21.4%). The major indices all closed near session highs, but failed to climb out of negative territory. This marks the fourth losing week out of the last five weeks.

The S&P 500 closed down 2.1% on the week; the Nasdaq Composite closed down 5.5% on the week; the Dow Jones Industrial Average closed down 2.2% on the week.

FedEx issued a bleak earnings warning for its fiscal first and second quarters, which set the tone for the whole session. The company cited worsening macroeconomic conditions, both internationally and in the U.S, as the reason for the warning. This added to existing concerns about inflation, rising interest rates, and a potential hard landing that have been weighing on index performance all week.

Selling was broad in nature, but stocks similar to FedEx were disproportionately affected. The Dow Jones Transportation Average closed down 5.1% as every component suffered losses.

Nine of the 11 S&P 500 sectors closed in the red, only consumer staples (+0.3%) and real estate (+0.03%) could squeeze out a gain. There was a risk-off mentality as the defensive-oriented health care (-0.3%) and utilities (-0.4%) sectors closed with some of the slimmest losses. On the flip side, energy (-2.2%) and industrials (-2.1%) sank to the bottom of the pack.

Notably, small and mid cap stocks sold off more than their peers as the Russell 2000 (-1.5%) and S&P Mid Cap 400 (-1.4%) showed the steepest losses.

Semiconductor stocks were one bright spot today. The PHLX Semiconductor Index closed up 0.5%.

Energy complex futures settled mixed. WTI crude oil futures rose 0.3% to $85.40/bbl while natural gas futures fell 6.2% to $7.80/mmbtu.

Treasury yield didn't move much on the day, but made sizable upside moves on the week. The 2-yr note yield fell two basis points today, but rose 28 basis points on the week to 3.85%. The 10-yr note yield fell one basis point today, but rose 13 basis points on the week to 3.45%.

Looking ahead to Monday, economic data is limited to the September NAHB Housing Market Index ( consensus 48; prior 49) at 10:00 a.m. ET.

Reviewing today's economic data:

  • The preliminary September University of Michigan Index of Consumer Sentiment checked in at 59.5 ( consensus 60.0) versus the final reading of 58.2 for August. In the same period a year ago, the Index of Consumer Sentiment stood at 72.8.
    • The key takeaway from the report is that consumer sentiment has stopped deteriorating, aided by the drop in gasoline prices; however, the report indicates that the uncertainty over short-run inflation is the highest it has been since 1982.
  • July Net Long-Term TIC Flows was $21.4 billion; prior was $121.8 billion
Dow Jones Industrial Average: -15.2% YTD
S&P 400: -16.3% YTD
S&P 500: -18.7% YTD
Russell 2000: -19.9% YTD
Nasdaq Composite: -26.8% YTD

Market trends toward intraday highs
16-Sep-22 15:30 ET

Dow -185.96 at 30777.89, Nasdaq -131.79 at 11420.53, S&P -35.63 at 3865.79
[BRIEFING.COM] The stock market still trades in negative territory, but the major indices lifted towards session highs.

Semiconductor stocks are trending higher into the close. The PHLX Semiconductor Index is up 0.1%.

Energy complex futures settled mixed. WTI crude oil futures rose 0.3% to $85.40/bbl while natural gas futures fell 6.2% to $7.80/mmbtu.

Looking ahead to Monday, economic data is limited to the September NAHB Housing Market Index ( consensus 48; prior 49) at 10:00 a.m. ET.

Market climbs off lows
16-Sep-22 14:55 ET

Dow -193.63 at 30770.22, Nasdaq -140.59 at 11411.73, S&P -36.33 at 3865.09
[BRIEFING.COM] The major indices climbed in the last half hour but remain buried in negative territory.

The S&P 500 consumer staples sector (+0.2%) is alone in the green with the majority of its components showing gains. Notably, the sector shows one of the "smallest" weekly losses at 3.6%.

Energy, health care, and utilities logged the smallest weekly losses of 2.3%, 2.5%, and 3.4%, respectively.

The 2-yr note yield is near its low for the day, down one basis point to 3.85%. The 10-yr note yield is down one basis point to 3.45%.

Int'l Paper grabs downgrade, stock sinks in S&P 500
16-Sep-22 14:30 ET

Dow -253.98 at 30709.87, Nasdaq -170.76 at 11381.56, S&P -49.65 at 3851.77
[BRIEFING.COM] The benchmark S&P 500 (-1.27%) is in the middle of the major averages to this point on Friday.

S&P 500 constituents Int'l Paper (IP 34.80, -4.88, -12.30%), Celanese (CE 100.89, -6.31, -5.89%), and Ingersoll-Rand (IR 46.56, -2.75, -5.58%) pepper the bottom of today's standings. IP slips after catching a Jefferies downgrade this morning, while CE and IR display general weakness alongside materials and industrials.

Meanwhile, gold miner Newmont Goldcorp (NEM 43.85, +1.45, +3.42%) outperforms owing to gains in the yellow metal.

Gold higher a day after falling to 2-year lows
16-Sep-22 14:00 ET

Dow -362.92 at 30600.93, Nasdaq -210.45 at 11341.87, S&P -60.23 at 3841.19
[BRIEFING.COM] With about two hours to go on Friday afternoon the tech-heavy Nasdaq Composite (-1.82%) remains at the bottom of the major averages.

Gold futures settled $6.20 higher (+0.4%) to $1.683.50/oz, grinding higher a day after falling to 2-year lows.

General Electric encountering supply chain turbulence in Aerospace segment, hurting EPS outlook (GE)

In the aftermath of the pandemic, General Electric (GE) has contended with persistent supply chain disruptions, so it didn't come as a surprise when Bloomberg reported last night that the industrial conglomerate is still dealing with parts and components shortages. What's different now, though, compared to last quarter, is that these supply chain bottlenecks have worsened in GE's Aerospace segment, which makes jet engines and other parts for commercial and defense aircraft customers. This is especially problematic because the Aerospace segment has been such a bright spot for GE, as illustrated by the 29% order growth over the first six months of 2022.

The recovery in corporate and leisure air travel is fueling strong demand for GE's engines, aircraft parts, and aircraft maintenance and repair services. While Aerospace is facing stiff inflationary headwinds, pricing actions and an upswing in higher-margin commercial services have more than offset those cost pressures. In Q2, segment margin skyrocketed by 1,510 bps yr/yr to 18.7% for Aerospace, resulting in a 550% surge in segment profit to $1.15 bln. However, based on comments from CFO Carolina Dybeck Happe at a Morgan Stanley conference, which were the basis for Bloomberg's report, it now appears that Aerospace's margins, profits, and free cash flow will take a hit as jet engine deliveries get pushed out.

  • Like other companies in the aviation industry, including Boeing (BA), GE is having trouble securing parts from its suppliers. According to Dybeck Happe, this will have a negative impact on profits and free cash flow. Specifically, she stated that Q3 free cash flow will be roughly in line or slightly better than the $162 mln GE generated in Q2.
    • During the Q2 earnings conference call, CEO Larry Culp noted that about $1.0 bln in free cash flow is likely to be pushed out due to weak renewable energy orders and supply chain disruptions. That estimate may prove to be too low, though, as the Aerospace segment struggles to fulfill orders.
  • Struggling to fulfill orders has been a common theme for GE's Healthcare unit. Although demand has been solid for its Imaging and Ultrasound products, revenue growth (+1% in Q2) has been constrained by supply chain issues. Inflationary headwinds have compounded the problem. Consequently, GE lowered its FY22 segment profit outlook to approximately $3.0 bln, which is slightly below its initial guidance.
  • Strength in Aerospace has mitigated the troubles that GE's Renewable Energy segment has experienced. Revenue in Renewable Energy plunged by 23% in Q2, and segment margin dove by 1,110 bps yr/yr to (13.5)%.
    • Orders for wind turbines have been soft, partly due to uncertainty regarding future tax credits for wind generation. Unfortunately, GE doesn't expect to see a meaningful rebound in this business in FY22.
    • With the Aerospace segment now dealing with its own supply chain setbacks, the lack of a recovery for Renewable Energy is especially damaging.
      Last quarter, Culp reiterated that GE is still trending toward the lower end of its FY22 EPS outlook, which called for EPS of $2.80-$3.50 and organic revenue growth in the high-single-digit range.
  • Although Dybeck Happe didn't provide an update on that projection, it's possible that EPS is now trending below the low end of that range.
The one clear bright spot for GE is now succumbing to intensifying supply chain issues, negating the positive demand-related tailwinds emanating from the commercial airline industry. GE Aerospace has really carried the company over the past several quarters, but that base of support is becoming increasingly unsteady. As a result, GE's earnings and cash flow expectations are being revised lower, while macroeconomic risks also rise.

Roblox's pricey valuation puts the microscope on its slowing bookings growth in August (RBLX)

Roblox (RBLX -9%) is selling off today after the video game company's August metrics showed a couple of rough patches. Today's disappointing markets are also adding to RBLX's sizeable downward move.

In August, average bookings per daily active user (ABPDAU) fell 14-16% yr/yr and slightly from July to $3.89-3.96. Although the dip month/month is expected, due to students returning to the classroom (ages 9-12 is RBLX's most popular cohort), the double-digit drop yr/yr was a surprise. It was also a surprise to see bookings growth continuing to decelerate. In August, the figure grew just 5-7% yr/yr, a meaningful slowdown from +8-10% growth in July. This trend is also present on a quarterly basis, with Q2 bookings dropping 4% yr/yr to $639.9 mln, a slight deterioration from a 3% dip yr/yr in Q1.

On the plus side, DAUs continue to climb, jumping 24% yr/yr to 59.9 mln in August. However, with bookings growth cooling off considerably while DAUs maintain a healthy expansion, it is no wonder that ABPDAU remains in a downward trend for much of the year. The metric has now seen at least a 20% tumble yr/yr in February, April, May, and July.

There are still positives on the horizon that management discussed during Investor Day toward the end of close yesterday.

  • Brands will be a significant component of RBLX's business over the next 3-5 years. Although RBLX does not break out its advertising revenue, it's a key piece of bookings revenue. For example, as users buy in-game currency (Robux), with RBLX earnings around half as profit, they use it to purchase customization features like clothes and accessories. Alongside creators being paid for designing these items, RBLX can also strike licensing deals with brands, such as Gucci, so that users can purchase authentic-looking shirts, shoes, etc., for their in-game avatars.
    • This 3D advertising is a unique differentiator from ad-based social media platforms like Snap (SNAP) and Meta Platforms (META), which have started seeing some softness in advertising spending.
    • RBLX's long-term vision is to replicate the real world through its brand partnerships instead of dabbling in the non-fungible token (NFT) marketplace.
  • Expanding RBLX's popularity to an older cohort of 17-24-year-olds is another critical focus area. Currently, RBLX is seeing this age range grow at a 41% clip yr/yr in August. At just over 13 mln DAUs, this cohort is RBLX's second-largest, and for management to achieve its 1 bln DAU goal, having this group of users overtake its largest 9-12 cohort is vital.
RBLX remains a healthy player for the long run, as gaming trends remain higher than before the pandemic. However, in the short run, bookings growth may continue to soften. Game publishing titan Activision Blizzard (ATVI), which is to be acquired by Microsoft (MSFT), has seen video game spending fall yr/yr every month this year. As a result, RBLX may continue facing short-term selling pressure, especially given its pricey valuation of ~9x forward sales.

Uber's strong week hits a speed bump after cyber-attack, but fundamentals unchanged (UBER)

It's been an impressive week for Uber (UBER) with shares exhibiting notable relative strength (+4% vs. -6% for Nasdaq), but the stock is making a U-turn today after The New York Times reported that the company suffered a significant cybersecurity attack last night. UBER has since confirmed the incident, tweeting that it's responding to the breach and that it's working with law enforcement. According to various reports, the hacker gained access to an employee's Slack account and convinced that employee to share a password, allowing the hacker to infiltrate many of UBER's internal IT systems. Salesforce (CRM), which owns the Slack workplace collaboration platform, is also trading lower, although that stock's weakness is probably more a function of the broad-based sell-off in the market.

Apparently, UBER's accounts that reside on Google (GOOG) Cloud and on Amazon (AMZN) Web Services were compromised, prompting the company to temporarily shut down its communications and engineering systems. Perhaps most concerning, though, is that the hacker also broke into UBER's "HackerOne" program, allowing the attacker to potentially download all of UBER's vulnerability reports. This puts UBER at risk of sustaining another cyber-attack down the road.

As bad as this breach is, it's important to note that there hasn't been any disruption to UBER's mobility or delivery businesses. We'd also point out that rival Lyft (LYFT) is also trading sharply lower today. This tells us that the market may be more concerned about a slowdown in rideshare growth due to macroeconomic factors, rather than the cybersecurity incident. The ugly guidance from FedEx (FDX), which is viewed as a barometer for the broader economy, isn't an encouraging data point for UBER or LYFT since the companies rely on healthy corporate and consumer spending levels.

At this point, however, UBER is not experiencing a downturn in its business. In fact, UBER's strength earlier this week can be tied to a bullish update from CEO Dara Khosrowshahi at a Goldman Sachs conference on September 12.

  • Despite rising interest rates, high inflation, and geopolitical issues, Khosrowshahi stated that the business is operating on all cylinders. In the Mobility segment, August trip volume was consistent with July, and the Labor Day bump it experienced this year is on par with 2019 levels.
    • Even better, he expects rideshare volume to remain strong, predicting that Mobility will have its "best week ever coming up" with kids back in school and with employees increasingly returning to offices.
    • On the driver supply side, he characterized the environment as "constructive", adding that Mobility reached post-pandemic highs for drivers last month. While UBER is still under-supplied by 5-10% versus where it needs to be, the number of active drivers on the platform continues to increase.
  • Looking ahead, premium services, such as Uber Comfort and Reserve, will play a major role in UBER's growth strategy.
    • Reserve, which has a higher reliability rate and a driver waiting for the passenger 5-15 minutes ahead of time, is already a $2+ bln business for UBER on an annual basis.
    • With consumer spending shifting from retail to services, Khosrowshahi believes that the core UberX business and these up-and-coming premium services will continue to grow rapidly.
The cyberattack unleashed a wave of negative headlines and it's certainly a concerning development for UBER. However, from a fundamental standpoint, we don't believe the event carries too much weight since UBER's business operations were unaffected. On that note, UBER shares are already trading well above the opening lows. With another high-profile cyber-attack in the news cycle, the spotlight may turn towards cybersecurity stocks like Crowdstrike (CRWD), Zscaler (ZS), Palo Alto Networks (PANW), and Okta (OKTA). So far, though, those stocks haven't budged as the tech sector remains under pressure.

FedEx under pressure; economy barometers FedEx and Nucor have guided sharply lower in past week(FDX)

FedEx (FDX -23%) is under pressure today after guiding Q1 (Aug) EPS well below consensus while revenue guidance was slightly below expectations. Perhaps more troubling, FDX also guided Q2 (Nov) EPS well below expectations. It is rare to see a company guide for two quarters out, but that is a signal that management sees some big headwinds. To top it all off, FedEx also is withdrawing its FY23 EPS guidance and a number of firms are downgrading the stock today.

  • The company is citing global volume softness that accelerated in the final weeks of the quarter, both internationally and in the US. We always gets spooked when weakness accelerates late in a quarter. It is bad enough for weakness early in a quarter then perhaps it improves later. But when it's late in a quarter, that is worse because you have to assume it will spill into the next quarter and beyond. You also do not know how long it will last.
  • The volume weakness was broad among its segments. FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a $500 mln revenue shortfall. FedEx Ground was a bit better, but not great as FDX expects revenue to be about $300 mln below company forecasts.
  • We have to say this precipitous volume decline was a surprise in light of FedEx's upside guidance for FY23 last quarter. However, FDX's comments on the call did portend that weakness may be coming. The main concern was that, while consumers will keep spending, their spending is tilting towards services and away from goods, which is not great for FDX. Also, consumers are returning to stores which should pressure B2C volumes.
  • When Amazon (AMZN) started shutting down distribution centers in recent months, we thought maybe that was a one-off. We thought AMZN just got a bit too overzealous with its expansion after being deluged with too many orders during the pandemic. However, we now think AMZN's actions are likely a blend of overexpansion plus industry-wide volume softening.
Overall, this clearly is disappointing news for FDX but we think it goes beyond that. Peers UPS -5% and AMZN -4% are likely to report similar conditions when they report results next month. Or maybe they guide down before then. It is also just a bad sign for the economy also.

What strikes us: Both steel giant Nucor (NUE) and now FedEx have guided sharply lower in just the past week. We understand that these two industries could not be more different. However, they are similar in one key way: they are both a reflection of the broader economy. Steel is the key input for so many products and FedEx delivers for every industry. These companies are great barometers for the health of the economy generally, so this is not a great sign. It certainly makes us nervous heading into earnings season next month.

Danaher's plan to spin-off EAS segment purifies company's path to higher growth (DHR)

The idea of streamlining operations to drive improved efficiency and to sharpen a company's focus on its top growth opportunities continues to gain popularity among corporate executives. Yesterday, life sciences and diagnostics company Danaher (DHR) announced plans to spin-off its Environmental & Applied Solutions (EAS) segment into a separate publicly traded company. The maneuver comes from the same playbook that Johnson & Johnson (JNJ), General Electric (GE), 3M (MMM), and Kellogg (K) have leaned on as each of those companies are in line to spin-off business segments in the coming year.

Investors have generally applauded this approach in the recent past, and the reaction to DHR's plans is no different. Given that DHR's Life Sciences and Diagnostics segments serve similar end markets (labs, hospitals, pharmaceutical companies, research institutions, etc.) that are considerably different from the EAS segment (utilities, industrial companies), splitting EAS off does make sense. Relatedly, capitalizing on the growth drivers that underlie EAS, including rising demand for clean drinking water, requires substantial resources that could take away from other parts of DHR's business. By spinning off EAS, the company can fully home in on the growth opportunities for Life Sciences and Diagnostics.

While DHR is a large company with a market cap north of $207 bln, it isn't necessarily a well-known name. However, DHR's profile was lifted when the pandemic hit because Cepheid, a business it acquired in 2016, received Emergency Use Authorization from the FDA for its Xpress SARS-CoV-2 molecular diagnostic test. That event put DHR on the map and created a major growth catalyst, as illustrated by its revenue growth of 58% in 1Q21 and 36% in 2Q21. Growth has since moderated (+7% in 2Q22) as demand for COVID-19 testing and vaccines decelerates, but DHR has other growth drivers in the mix. In fact, core revenue in the non-COVID business for Life Sciences (which helped with vaccine development) was up by more than 20% in Q2.

  • By spinning-off EAS, the company can focus on generating growth at customers that previously paused programs during the pandemic. On that note, DHR stated during the Q2 earnings call that its Life Sciences backlog is very healthy as its customer continue transitioning away from COVID-19 vaccines. Accordingly, DHR said it still anticipates achieving high-single to low-double-digit core growth in its bioprocessing business for FY22, despite COVID-19 vaccine revenue dropping to an estimated $1.0 bln in 2022, compared to $2.0 bln in 2021.
  • Similarly, the Diagnostics segment generated respiratory testing revenue of $750 mln in Q2, well above DHR's expectation of $400 mln, even as testing for COVID-19 slowed. Market share gains for its 4-in-1 combination test, and higher incidences of other respiratory infections, such as RSV and flu, helped drive a 9.5% core revenue increase in the Diagnostics segment.
  • For EAS, the company is forecasting mid-single-digit core revenue growth over the long term, with 55% recurring revenue. With the segment contributing about $5 bln in revenue, dis-synergies could total about $0.15 per DHR share on an annual basis.
Overall, a spin-off of EAS looks like a win-win scenario. DHR's razor/razor blade business model, that features recurring revenue of 75% of the total business, should benefit as more resources are freed up to fuel growth in areas like genomic medicines, biologics, and vaccines. Meanwhile, EAS will be able to build its business through organic means and through acquisitions, which the company anticipates will play a significant role in its future.

Meanwhile, the U.S. Dollar Index is up less than +0.1% to $109.79.

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