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Technology Stocks : Semi Equipment Analysis
SOXX 407.10-0.6%Jan 27 4:00 PM EST

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To: Return to Sender who wrote (89005)9/19/2022 4:43:57 PM
From: Return to Sender2 Recommendations

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Market Snapshot

Dow 30856.41 +31.96 (0.10%)
Nasdaq 11488.07 +39.70 (0.35%)
SP 500 3879.82 +6.42 (0.17%)
10-yr Note -25/32 3.49

NYSE Adv 1753 Dec 1300 Vol 913 mln
Nasdaq Adv 1932 Dec 2468 Vol 4.1 bln

Industry Watch
Strong: Consumer Discretionary, Industrials, Materials, Financials

Weak: Health Care, Real Estate

Moving the Market
-- S&P 500 testing, and finding support at, Friday's low

-- Rising Treasury yields continue to pressure investor sentiment

-- Hesitation ahead of FOMC meeting and rate hike decision later this week

-- Ability to bounce back from early losses

Closing Summary
19-Sep-22 16:30 ET

Dow +197.26 at 31021.71, Nasdaq +86.62 at 11534.99, S&P +26.56 at 3899.96
[BRIEFING.COM] Follow-through selling interest sent the stock market sliding at the open before the S&P 500 flirted with Friday's low (3,837) and found support there. The main indices danced around the unchanged mark for most of the afternoon before catching a bid in the final hour of trade, helped primarily by an uptick in the mega cap stocks and other issues. The S&P 500 broke out of a narrow trading range but found resistance at the 3,900 level, closing a whisker shy of that important level.

There was some hesitation in play ahead of the September 20-21 FOMC meeting and subsequent rate hike decision. In addition, rising Treasury yields were a focal point that pressured stocks early. However, stocks rebounded as Treasury yields fell back from their highest levels of the morning.

The 2-yr and 10-yr note yields reached their highest levels since 2007 and 2011, respectively. The 2-yr note yield reached 3.97% before settling at 3.94% and the 10-yr note yield reached 3.51% before settling at 3.49%.

The major averages squeezed out decent gains by the close, but market breadth still painted a mixed picture. Decliners outpaced advancers by a 4-to-3 margin at the Nasdaq while advancers led decliners by a roughly 3-to-2 margin at the NYSE.

Only two S&P 500 sectors closed with a loss, health care (-0.5%) and real estate (-0.2%). The gainers were led by materials (+1.6%) and consumer discretionary (+1.3%).

Consumer discretionary was boosted by its homebuilder components after KeyBanc upgraded a number of individual names today. The SPDR S&P Homebuilder ETF (XHB) closed up 1.8% and the iShares U.S. Home Construction ETF (ITB) closed up 2.3%. This came as participants awaited the August Housing Starts and Building Permits report tomorrow at 8:30 a.m. ET, and followed the NAHB Housing Market Index release today.

Energy complex futures settled in a mixed fashion with WTI crude oil futures falling 0.5% to $84.96/bbl while natural gas futures rose 0.1% to $7.81/mmbtu.

Today's economic data was limited to the September NAHB Housing Market Index, which came in at 46 ( consensus 48) after the prior reading of 49. A number below 50 for this report is indicative of declining confidence.

Looking ahead to Tuesday, market participants will receive the August Housing Starts ( consensus 1.448 million; prior 1.446 million) and Building Permits report ( consensus 1.610 million; prior 1.674 million) at 8:30 a.m. ET.

Dow Jones Industrial Average: -14.6% YTD
S&P 400: -15.2% YTD
S&P 500: -18.2% YTD
Russell 2000: -19.3% YTD
Nasdaq Composite: -26.3% YTD

Market pushes to best levels of the session
19-Sep-22 15:30 ET

Dow +72.63 at 30897.08, Nasdaq +157.89 at 11606.26, S&P +22.28 at 3895.68
[BRIEFING.COM] The major indices pushed to fresh session highs ahead of the close. The S&P 500 is testing, and finding resistance at, the 3,900 level.

Energy complex futures settled in a mixed fashion with WTI crude oil futures falling 0.5% to $84.96/bbl while natural gas futures rose 0.1% to $7.81/mmbtu.

Looking ahead to Tuesday, economic data is limited to August Housing Starts ( consensus 1.448 million; prior 1.446 million) and Building Permits ( consensus 1.610 million; prior 1.674 million) released at 8:30 a.m. ET.

Major indices move sideways
19-Sep-22 15:00 ET

Dow +31.96 at 30856.41, Nasdaq +39.70 at 11488.07, S&P +6.42 at 3879.82
[BRIEFING.COM] The major indices are moving sideways right around the unchanged mark.

Strength in mega cap stocks is boosting the broader market. The Vanguard Mega Cap Growth ETF (MGK) is up 0.3% while the S&P 500 trades flat.

The advance-decline line favors decliners by an 11-to-10 margin at the NYSE and a 3-to-2 margin at the Nasdaq.

Separately, the CBOE Volatility Index turned negative on the day, down 0.9% (or 0.24) to 26.06.

Midday Summary
19-Sep-22 13:05 ET

Dow +8.68 at 30833.13, Nasdaq +39.35 at 11487.72, S&P +3.31 at 3876.71
[BRIEFING.COM] The stock market opened to follow-through selling interest, with the major indices sliding between 0.8% and 1.0%. The S&P 500 flirted with Friday's low (3837), where it found support, before lifting into positive territory midmorning. The major indices have since come off their highs and move sideways near the flat line currently. Rising Treasury yields are weighing on investor sentiment and there's likely some hesitation, too, ahead of the September 20-21 FOMC meeting and rate hike decision.

The 2-yr note yield reached its highest level since 2007 (3.97%), currently sitting at 3.94%. The 10-yr note yield, which reached its highest level since 2011 overnight (3.51%), sits at 3.47%.

It's a bit of a mixed market today. While the major indices dance around the unchanged mark, mid caps outperform their peers. The S&P Mid Cap 400 (+0.5%) has maintained a modest gain for most of the session.

Price action for the S&P 500 sectors also paints a mixed picture today as roughly half of the 11 sectors trade up. Materials (+0.8%) and industrials (+0.8%) sit atop the leaderboard while health care (-1.2%) and real estate (-0.8%) bring up the rear.

Homebuilders are one bright spot in the market today after KeyBanc upgraded a number of homebuilder names, including PulteGroup (PHM 40.57, +1.22, +3.1%) and D.R. Horton (DHI 72.41, +1.29, +1.8%). This comes as participants await August Housing Starts and Building Permits tomorrow at 8:30 a.m. ET and August Existing Home Sales at 10:00 a.m. ET on Wednesday, which follows the NAHB Housing Market Index release today.

Energy complex futures saw a reversal of early price action, lifting well off their lows. WTI crude oil futures, which were down below $83.00/bbl, are up 0.5% to $85.15/bbl. Natural gas futures, which dropped below $7.50/mmbtu, are down 0.4% to $7.73/mmbtu.

Today's economic data was limited to the September NAHB Housing Market Index, which came in at 46 ( consensus 48) after the prior reading of 49. A number below 50 for this report is indicative of declining confidence.

Market moves sideways
19-Sep-22 12:35 ET

Dow -39.36 at 30785.09, Nasdaq -54.00 at 11394.37, S&P -9.11 at 3864.29
[BRIEFING.COM] The major indices are little changed in the last half hour.

The Dow Jones Transportation Average is outpacing the market by a big margin, up 1.1%, with nearly every component trading up. Airline stocks like Alaska Air (ALK 45.84, +1.48, +3.3%) and American Airlines (AAL 14.16, +0.41, +3.0%) show the biggest gains.

The US Global Jets ETF (JETS) is up 1.7%.

Separately, the CBOE Volatility Index is near session lows, up 1.4% (or 0.3.7) to 26.68.

NetApp is positioned for solid upside as supply chain issues begin to ease in FY23 (NTAP)

NetApp (NTAP -1%) is trading lower today after catching a downgrade at Susquehanna, just the second in the past five months. Shares of the hybrid cloud data services organization, which helps businesses construct and optimize their cloud transformations, remain down over 25% on the year, recently sliding by around 15% since August 25.

Although NTAP has fallen victim to supply chain constraints this year, notes that the worst of NTAP's woes are mostly in the past.

  • NTAP recently reported upbeat Q1 (Jul) results and reiterated its FY23 earnings and revenue guidance despite a few headwinds.
  • Recall in Q3 (Jan), NTAP endured component supplier de-commits, requiring the company to purchase components at high premiums. As a result, product margins were expected to take a hit in Q4 (Apr). However, operating margins still reached record levels in the quarter, as NTAP's sales team focused on capturing recent price increases, mitigating part of the component cost headwinds. This momentum carried into Q1, helping achieve solid earnings growth.
  • Even though component cost hikes are expected to persist in FY23 (Apr), NTAP forecasted gross margins to remain around 66-67%, representing no more than a 140 bp hit at the midpoint compared to the previous three years.
  • Assisting NTAP's solid FY23 gross margin outlook is a continued easing of supply chain constraints. In late August, NTAP noted that it saw early signs of supply availability relief and was cautiously optimistic that conditions would improve further in the second half of FY23.
  • During a presentation last week, the company touched on supply chains again, stating that the main challenge surrounds analog components primarily due to a combination of low investment and China-related lockdowns. However, the good news is that the premiums NTAP paid during Q3 have stabilized. Going forward, NTAP is transitioning toward being less dependent on these types of components, although the benefits from this will likely not be seen in the near term.
Overall, light is beginning to appear at the end of a supply-constrained tunnel for NTAP. Additional lockdowns and supply chain disruptions remain risks that could eat into NTAP's FY23 guidance. However, we believe that the worst of NTAP's woes are behind it, and the company can return to highlighting its improving growth profile illuminated by consistent 65+% Public Cloud growth.

Jacobs Solutions has the answer for some gains today after reaffirming guidance (J)

Fresh off announcing a leadership succession plan, Jacobs Solutions (J) reaffirmed its 4Q22 guidance this morning, forecasting EPS of $1.75-$1.95, and adjusted EBITDA of $340-$360 mln. With President and COO Bob Pragada taking the helm as CEO, effective January 24, 2023, the consulting, engineering, and project management company is in healthy shape and is doing well to withstand the macroeconomic headwinds. Unfortunately, Jacobs didn't provide any color commentary regarding current market trends while reaffirming its outlook in today's SEC filing. However, there are a few likely factors that continue to support Jacobs' business.

  • When Jacobs reported better-than-expected Q3 earnings on August 1, the company highlighted the recurring and reimbursable nature of its revenue base. Specifically, the company stated that approximately 90% of its revenue typically comes from repeat clients. Furthermore, Jacobs discussed how the diversity of its business, both from a geographic and service offerings standpoint, allows it to grow under varying macroeconomic conditions.
  • The company's unique set of capabilities are particularly evident in its Critical Mission Solutions segment. Within this segment, Jacobs provides space debris management services that are vital for the protection of satellites. The contracts that Jacobs wins in this arena are not only substantial, but they also have long durations with predictable revenue streams.
    • As a key example, Jacobs was recently awarded a $3.9 bln 10-year rebid contract from NASA that will be added to its backlog in Q4. Under this contract, which represented a $1.0 bln increase from its existing contract, Jacobs will provide "multidisciplinary technical services to support the future of human space exploration."
  • Jacobs is also heavily involved in the buildout of 5G infrastructure, conducting network optimization and technical services for leading telecom companies like AT&T (T), Verizon (VZ), and T-Mobile (TMUS). During the Q2 earnings conference call, Jacobs disclosed that it won several new 5G-related awards that totaled more than $150 mln, adding that the rollout of 5G infrastructure is still early in the ramp-up phase.
  • The downside of Jacob's geographic diversification -- 34% of its revenue comes from outside the U.S. -- is that it has high exposure to foreign exchange impacts. On that note, FX impacts have reduced Jacobs' FY22 revenue outlook by about $320 mln, and its EPS outlook by nearly $0.20, compared to its initial forecast from last November.
The main takeaway is that while Jacobs isn't completely immune to macroeconomic risks, including supply chain disruptions and rising interest rates, some favorable characteristics of its business model do help to mitigate those risks. This is reflected in a 13% increase in bookings last quarter, on a constant currency basis. With over a third of its revenue being generated overseas (including 21% in the U.K), FX headwinds will continue to weigh on Jacobs. From an operational point of view, though, Jacobs is performing well as it prepares to hand the reins to Pragada, who joined Jacobs sixteen years ago. computes a big gain as activist investor increases stake, just what the stock needs (WIX) (WIX +11%) is computing a nice gain on news that activist firm Starboard has increased its stake in WIX to 9%, up from around 2.8% from its last disclosure. helps people and small businesses set up and operate websites, but it has been struggling in recent quarters. But clearly Starboard sees some value here and that is making investors take notice today.

  • WIX was doing well before the pandemic and the stock rose nicely in 2018 and 2019. However, the pandemic led to a massive surge in new customers as individuals and small businesses raced to set up online businesses. WIX helped customers generate income while their offline income was brought to a standstill, especially for small businesses. This also led to a surge in hiring by WIX to keep up with the huge demand.
  • However, now that the pandemic has subsided, new user metrics have returned to 2019 levels. Also, people have shifted more to in-store purchases and customers are buying less in general due to inflation and macro concerns. This means that many of WIX's customers are selling less which lowers WIX's GPV. This is not unique to WIX as many internet companies feel it. However, WIX was consistently profitable pre-pandemic, but has not turned a profit in the past ten quarters.
  • It was not just the pandemic, competition has also gotten more fierce. WIX deserves credit for making website creation easy, including innovations like drag-and-drop, mobile design and AI. However, WIX concedes these enhancements are now commonplace among its competitors. In its defense, the company introduced a new Wix Editor in July, which the company says was its most significant update in many years and should lead to increased conversion.
So what does this Starboard investment mean? For one thing, Starboard is a sophisticated investment firm with a great track record for finding value buys. They clearly see value down here with the stock trading in the $60-80 range since May. That is well down from its $350 level as recently as early 2021. It also means Starboard is likely to push management to make changes. WIX recently announced a $150 mln annualized cost reduction plan, focused on workforce and hiring reductions. But Starboard will likely push for more changes. We assume seeing a return to profitability will be a high priority for Starboard.

Overall, we are fans for activist investors prodding management to make changes. Sometimes an outside perspective is just what is needed to turn a company's fortunes around or maybe they persuade the company to be acquired. We are putting WIX on our radar and will watch to see what comes of this. But we think this is a positive development for investors.

AutoZone shares reverse despite strong earnings and comp growth in AugQ (AZO)

AutoZone (AZO -3%) shares reversed course in early action today despite continuing to kick things into higher gear, posting its 18th consecutive earnings beat in Q4 (Aug) on accelerating same-store sales growth. As the new and used retail auto market remains supply-constrained, costly, and less attractive to finance, auto parts retailers like AZO are capturing the tailwind these trends are producing as car owners drive their current vehicles for longer.

However, AZO has remained a step ahead of its competition, evidenced by its shares up around 5 pts on the year, while O'Reilly Automotive (ORLY) and Advance Auto Parts (AAP) trade either flat or in the red during the same period, as well as consistently more substantial quarterly results, furthered by multiple highlights from Q4.

  • AZO's 13.4% jump in adjusted EPS yr/yr to $40.51 may have exceeded analyst estimates by less than in Q3 (May). Still, it represented a decent acceleration from the 11.5% yr/yr increase last quarter.
  • The slimmer earnings beat in Q4 compared to Q3 can be partly attributed to a slightly larger contraction in gross margins than last quarter. Margins fell 73 bps yr/yr to 51.5% in the quarter, driven by accelerated growth in AZO's Commercial business, which tends to be a lower margin business due to volume discounts.
  • Still, a lift in AZO's Commercial business may be coming at the expense of AAP, which expected sales softness in its Professional business in the back half of FY22 due to the elimination of unprofitable discounts. This bodes well for AZO over the long haul as it builds upon and enhances customer loyalty, even if it comes at a price of slightly lower margins in the short run.
  • AZO registering comp growth of +6.2% in Q4 was another positive stand out and represented a solid acceleration from the +2.6% comps posted in Q3. The Commercial side was the fuel behind the robust comps in Q4, registering +22% growth in the quarter. Retail comps were also positive, a reversal from the negative comps posted in Q3.
Overall, AZO's Q4 earnings report highlighted the continuation of advantageous trends such as a recovery in miles driven and heightened focus on DIY repairs, despite elevated fuel and auto parts inflation. It is worth repeating the comments from ORLY in Q2 that little of the demand in the automotive aftermarket is genuinely discretionary, with necessary repairs only being able to be deferred for so long. Even though the production of new autos and a cooling off of used auto prices may take some wind out of AZO's sails, we think its long-term future remains bright. We also like that the company remains aggressive in its share buybacks, repurchasing $1.0 bln during Q4, bringing the total in FY22 to $4.4 bln, or around 9% of shares outstanding.

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.

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