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Technology Stocks : Semi Equipment Analysis
SOXX 242.57+1.7%3:59 PM EDT

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To: Return to Sender who wrote (89096)10/5/2022 5:23:32 PM
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Market Snapshot

Dow 30352.75 +34.40 (0.11%)
Nasdaq 11159.91 -16.35 (-0.15%)
SP 500 3793.44 +2.44 (0.06%)
10-yr Note -31/32 3.76

NYSE Adv 940 Dec 2132 Vol 929 mln
Nasdaq Adv 1576 Dec 2778 Vol 4.0 bln


Industry Watch
Strong: Energy, Information Technology, Health Care

Weak: Utilities, Real Estate, Communication Services, Consumer Discretionary


Moving the Market
-- OPEC+ announcing production cut, sending oil prices surging

-- Selling pressured eased somewhat in Treasury market

-- Resilience to early selling efforts acting as its own catalyst; leadership from mega cap and semiconductor stocks boosting index performance







Closing Summary
05-Oct-22 16:30 ET

Dow -42.45 at 30275.90, Nasdaq -27.77 at 11148.49, S&P -7.65 at 3783.35
[BRIEFING.COM] Today's trade started on the defensive, bringing into question the durability of the October rally. The stock market waged a comeback effort that matched up neatly with a lack of follow through selling in the Treasury market after the 2-yr note and 10-yr note tested Friday's settlement levels. The market's ability to turnaround from early lows became its own catalyst with influential upside leadership from mega cap and semiconductor stocks.

The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite ultimately closed just a whisker below the unchanged mark after recovering from losses of 1.8%, 1.4%, and 2.4%, respectively at today's lows. The S&P 500 tested, and found resistance at, the 3,800 level today after setting a new low for 2022 (3586.47) on Friday.

Early action in the stock and Treasury markets reflected participants questioning the Fed rate hike narrative after buying into the idea of a softer approach coming soon. Starting around midmorning, stocks pared earlier losses coinciding with an abatement of selling pressure in the Treasury market. The 2-yr note yield tested the 4.20% level earlier and settled the session up five basis points to 4.13%. The 10-yr note yield tested the 3.80% level earlier and settled the session up 14 basis points to 3.76%.

Mega cap stocks proved to be an important upside driver today. The Vanguard Mega Cap Growth ETF (MGK) closed up 0.01% versus a 0.2% loss in the S&P 500 and a 0.4% loss in the Invesco S&P 500 Equal Weight ETF (RSP).

Another bright spot for the market was semiconductor stocks. The PHLX Semiconductor Index closed with a 0.9% gain. TSMC (TSM 74.48, +1.67, +2.3%) was a winning standout for the group after Morgan Stanley named the stock as a top pick.

Most of the S&P 500 sectors closed with a loss while energy (+2.1%) led the outperformers. Utilities (-2.3%) and real estate (-1.9%) brought up the rear.

Energy was boosted by WTI crude oil futures rising 1.5% to $87.64/bbl after OPEC+ agreed to a 2 million barrel per day production cut starting in November.

Looking ahead to Wednesday, market participants will receive the weekly Initial Claims (Briefing.com consensus 203,000; prior 193,000) and Continuing Claims (prior 1.347 mln) at 8:30 a.m. ET. The weekly natural gas inventories (prior +103 bcf) will be out at 10:30 a.m. ET.

Reviewing today's economic data:

  • Weekly MBA Mortgage Application Index showed a 14.2% decline compared to last week's 3.7% decline
  • September ADP Employment Change totaled 208,000 (Briefing.com consensus 198,000) after the prior revised total of 185,000 (from 132,000)
  • U.S. trade deficit narrowed to $67.4 billion in August (Briefing.com consensus -$67.9 billion) from an upwardly revised -$70.5 billion (from -$70.6 billion) in July
    • The key takeaway from the report is that it does point to some softening in global economic activity as both imports and exports were less than they were in July.
  • September IHS Markit Services PMI final reading came in at 49.3 following the prior 49.2 reading.
  • September ISM Non-Manufacturing Index fell to 56.7% (Briefing.com consensus 56.0%) from 56.9% in August
    • The key takeaway from the report is that business activity for the non-manufacturing sector held pretty steady in September and was stronger than expected. While a slightly lower reading versus August connotes some slowing, the slowdown for the largest sector of the economy isn't significant enough to fuel a belief that the Fed is about to pivot soon with its monetary policy.
Dow Jones Industrial Average: -16.7% YTD
S&P Midcap 400: -17.5% YTD
S&P 500: -20.6% YTD
Russell 2000: -21.5% YTD
Nasdaq Composite: -28.7% YTD


Market comfortably in the green
05-Oct-22 15:30 ET

Dow +99.60 at 30417.95, Nasdaq +12.89 at 11189.15, S&P +9.62 at 3800.62
[BRIEFING.COM] The market made a notable comeback from morning lows. The three main indices are comfortably in positive territory heading into the close.

Many stocks pared earlier losses coinciding with an abatement of selling pressure in the Treasury market. The 2-yr and 10-yr note tested Friday's settlement levels and found renewed buying interest there. The 2-yr note yield tested 4.20% earlier but settled at 4.13% and the 10-yr note yield tested 3.80% earlier but settled at 3.76%.

Energy complex futures settled the session higher. WTI crude oil futures rose 1.5% to $87.64/bbl and natural gas futures rose 1.5% to $6.93/mmbtu.


Dow and S&P 500 flirt with positive territory
05-Oct-22 15:00 ET

Dow +34.40 at 30352.75, Nasdaq -16.35 at 11159.91, S&P +2.44 at 3793.44
[BRIEFING.COM] The major averages inched back towards session highs in the last half hour. The Dow Jones Industrial Average and S&P 500 flirt with positive territory.

The S&P 500 health care (+0.5%) and information technology (+0.4%) sectors joined energy (+2.3%) in positive territory.

Small and mid cap stocks are lagging their larger peers. The Russell 2000 (-0.9%) and S&P Mid Cap 400 (-0.2%%) show the steepest losses for the major ndices.


Schlumberger, oil names outperform in S&P 500
05-Oct-22 14:25 ET

Dow -19.04 at 30299.31, Nasdaq -58.47 at 11117.79, S&P -7.22 at 3783.78
[BRIEFING.COM] The S&P 500 (-0.19%) is probing session highs in recent trading, still firmly in second place among the major averages.

S&P 500 constituents Enphase Energy (ENPH 254.77, -33.48, -11.61%), Carnival (CCL 7.27, -0.49, -6.31%), and General Motors (GM 34.49, -1.31, -3.66%) dot the bottom of the index. Solar stocks fall hard on Wednesday, though no specific catalyst has yet appeared, while rallies in names like CCL and GM cooled off at midweek.

Meanwhile, Texas-based oil&gas name Schlumberger (SLB 41.39, +2.27, +5.80%) is today's top performer amid gains in crude oil futures.


Gold lower, dollar and yields higher in familiar story
05-Oct-22 14:00 ET

Dow -73.36 at 30244.99, Nasdaq -69.53 at 11106.73, S&P -13.99 at 3777.01
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-0.62%) sits at the bottom of the standings.

Gold futures settled $9.70 lower (-0.6%) to $1,720.80/oz, pressured by a familiar foe -- rising yields and a stronger greenback.

Meanwhile, the U.S. Dollar Index is up about +1.1% to $111.30.



Lamb Weston's gains are no small potatoes as price increases drive strong earnings growth (LW)


Potato producer Lamb Weston (LW) has not been sheepish about acknowledging the challenging macro environment that's in front of it, but the company continues to serve up solid results despite the inflationary and supply chain related headwinds.

The company, which provides fries to McDonald's (MCD), and to many other major restaurant chains and retailers, easily surpassed 1Q23 earnings expectations as EPS surged by 315% yr/yr to $0.75. Bolstered by its strong performance, LW said that it's now tracking towards the high end of its FY23 guidance for EPS of $2.45-$2.85, and revenue of $4.70-$4.80 bln.

At the core of LW's earnings beat and bullish outlook is the company's effective pricing strategy. Over the past fifteen months, LW has increased product pricing multiple times in its Foodservice and Retail segments to counter rising input and transportation costs. Additionally, in the Global Segment (large quick-serve and full-service restaurant chains), LW benefited from price escalators that are included in multi-year contracts, as well as from some price adjustments made outside of those contracts.

Overall, price/mix increased by 19%, fueling a 900 bps surge in gross margin to over 24%. While LW capitalized on previous price hikes in Q1, the company also implemented new pricing actions during the quarter. Consequently, the company expects the pricing tailwinds to gradually build throughout 1H23.

Outside of the positive developments regarding pricing, the news is much more mixed.

  • Similar to other packaged food companies, like General Mills (GIS) and Conagra (CAG) -- which reports earnings before the open tomorrow morning -- LW continues to experience declining volumes. Following a 1% drop last quarter, volume declined by 5% in Q1, due to softer casual dining and full-service restaurant dining in the U.S. Persistent supply chain disruptions compounded the issue.
    • During the earnings conference call, LW commented that it's seeing a trade-down effect take place in the restaurant industry as a result of high inflation. Specifically, quick-serve restaurants, like MCD, are benefiting at the expense of pricier casual dining and full-service restaurants.
    • Meanwhile, in the Retail segment, the company is unable to fully meet demand because its production is constrained. Supply chain issues, including commodity and labor shortages, are limiting its volume.
  • LW doesn't anticipate that the macro environment will improve much in 2023, causing demand trends to remain uneven and volatile. However, the company noted that it saw similar restaurant traffic trends during the financial crisis of 2008-2009, and that its business remained resilient during that turbulent time. According to LW, consumers are currently ordering fries at restaurants at a rate above pre-pandemic levels, illustrating this resiliency in demand.
Buoyed by its impressive earnings growth, LW has exhibited remarkable relative strength this year, gaining 30% compared to a loss of 21% for the S&P 500. With additional pricing actions underway, the company is poised to deliver solid bottom-line growth in the quarters ahead, which may translate into further outperformance for the stock.




SMART Global is smarting as softness in Brazil and weakness in LED unit tarnish results (SGH)


SMART Global (SGH), a semiconductor provider that's transforming itself into a more diversified technology company, reported mixed 4Q22 results that included a 6.4% yr/yr drop in revenue. This was the company's first quarterly revenue decline since the pandemic-affected quarter of 2Q20. Based on SGH's downside EPS and revenue guidance (at the midpoint) for 1Q23, it doesn't appear that the company is expecting a major turnaround soon.

SGH is primarily known as a semiconductor company with significant exposure to Brazil. In fact, SGH is Brazil's largest in-country manufacturer of memory products, with the country representing 30% of the company's total sales in FY21. In recent years, though, SGH has reshaped its business through acquisitions in order to diversify its product and geographic mix. Two of the most transformative acquisitions include SGH's addition of Penguin Computing in 2018, and its purchase of Cree's LED business in 2021. While these acquisitions have lessened SGH's exposure to Brazil, which accounted for 44% of revenue in FY19, the overall performance of the new businesses has been mixed.

  • The LED Solutions segment in particular continues to weigh SGH down. In Q4, revenue plunged by 32% to $83.1 mln as COVID-related restrictions in China compounded preexisting supply chain constraints. Making matters worse, demand is also softening in the U.S. and Europe. Consequently, SGH expects LED revenue to decrease sequentially in Q1.
  • In the core Memory Solutions segment (~48% of Q4 revenue), the story isn't much better. During last quarter's earnings conference call, CEO Mark Adams warned that consumer demand for smartphones and PCs in Brazil was weakening, and that the weakness would persist into Q4. That prediction came to fruition as revenue for the segment fell by 15% yr/yr to $209.8 mln.
    • There were some pockets of strength, particularly for specialty memory and flash memory products from enterprise customers in the networking, telecom, and storage end markets.
  • By far, the standout was SGH's Intelligent Platform Solutions (IPS) segment, which consists of Penguin Computing and Penguin Edge. Revenue jumped by 48% to $144.7 mln, fueled by new project rollouts and strong growth of 59% for services. IPS specializes in providing high-performance computing (HPC), artificial intelligence (AI), and machine learning (ML) technologies to hyper-scale, financial, and government customers.
    • Once these systems are implemented, SGH provides high-margin services, including system management, DevOps, and HPC/AI optimization. These service agreements with Penguin are typically longer-term and provide recurring revenue streams.
    • SGH further bolstered its IPS segment with its $225 mln acquisition of Stratus in late June. Stratus, which develops Edge and cloud offerings for large scale enterprises in the data center, is expected to add more than $150 mln in annual revenue, while improving SGH's gross margin profile and adding to non-GAAP EPS.
Softening consumer spending in Brazil continues to weigh on SGH's memory business. It's strategy to lessen its exposure to Brazil should be working in its favor, but the avenue it took to diversify its business is looking questionable. Specifically, SGH's decision to buy the struggling LED unit from Cree is coming back to haunt the company. Unless business conditions improve in Brazil and for the LED business, the strength in the IPS segment will continue to get lost in the shuffle.




Helen of Troy's second cut to its FY23 outlook spurs a sell-the-news reaction (HELE)


By trimming its FY23 guidance for the second-straight quarter, Helen of Troy (HELE -1%) showed its Achilles heel, spurring a sell-off despite the houseware and beauty product supplier posting top and bottom line upside in Q2 (Aug). The problem facing HELE was the same that led to a guidance cut last quarter: softening consumer demand.

Rising inflation and interest rates dampened consumer sentiment in Q2, adversely affecting HELE's premium segments. Meanwhile, major retail partners continued adjusting their inventories. HELE is not seeing this issue fade away soon, forcing it to slash its FY23 outlook again. The company now expects FY23 EPS of $9.00-9.40 and revs of $2.00-2.05 bln, well below consensus and HELE's initial earnings and sales projections of $12.73-13.03 and $2.38-2.42 bln, respectively.

HELE also announced an official restructuring plan, dubbed Project Pegasus, which it estimates will produce annualized savings of $75-85 mln. Project Pegasus is an extension of HELE's global efficiency initiatives it announced last quarter, which included further enhancements to its distribution network, as well as utilizing automation and employing IT upgrades to increase labor efficiency. HELE expects its efforts to result in a stronger platform for operating margin expansion. However, with adjusted operating margins contracting 320 bps yr/yr in Q2 and HELE expecting a slightly worse decline in FY23 than its forecast last quarter, its restructuring plan may have come later than it should have. Still, we like seeing HELE take the necessary steps to return to margin expansion, which is no small feat in the current inflationary-plagued environment.

  • This inflationary environment continued to cause headaches for HELE in Q2. Outside of a few good numbers, such as adjusted EPS sliding by less than analysts expected and revs still growing 9.7% yr/yr to $521.4 mln, many other results looked rather dim.
  • Beauty sales falling 15.4% yr/yr to $100.3 mln was a bit of a surprise, especially given the strength of the beauty category lately, illustrated by excellent results from Sephora (LVMH), Ulta Beauty (ULTA), and Coty (COTY). HELE's weak Beauty sales are likely explained by the fact that more discretionary beauty appliances comprise a greater percentage of its Beauty revenue.
  • HELE's other segments, Home & Outdoor and Health & Wellness, both saw positive sales growth in Q2, helping fuel the company's overall revenue expansion. However, these bright spots are tempered by operating margins falling in both segments.
The main takeaway is that HELE continues to be a victim of an ongoing slowdown in discretionary spending. Nevertheless, HELE's brands remain strong, and its acquisitions like Osprey, which is on track to achieve the company's sales forecast of $180-185 for FY23, and Curlsmith give it an even stronger foundation. Like we heard from competitor Hamilton Beach Brands (HBB), certain trends, such as eating-at-home and heightened focus on home upgrades, should provide long-lasting tailwinds. HELE is highlighting the benefits these tailwinds are already bringing, as some of its brands' sell-through remains well ahead of pre-pandemic levels.




Schnitzer Steel heads lower on weak guidance; hurt by a sharp decline in recycled metal prices


Schnitzer Steel (SCHN -7%) is heading lower today after providing some pretty disappointing guidance for Q4 (Aug). The company expects adjusted EPS of just $0.42-0.47. There is limited analyst coverage on SCHN, so we do not put a lot stock in the consensus. However, this guidance came in well below analyst expectations so we thought it was pretty notable.

  • Ever since Nucor's (NUE) sharp downside guidance last month, we have been bracing for some weak guidance from other steelmakers. In a bit of a surprise, Steel Dynamics (STLD) guided Q3 EPS above consensus and the mid-point of US Steel's (X) Q3 EPS guidance was slightly above consensus. And now SCHN came in well below.
  • In fairness, Schnitzer is a bit different than most other steel producers. For one thing, it is based in Portland, OR while most steelmakers are in the Midwest, near the automotive manufacturers. The other thing is that SCHN is more of a metals recycler than a steel producer although it does make some steel. It primarily buys scrap from auto salvage yards, industrial manufacturers, and metals brokers. It then processes the scrap and sells it to other steelmakers so they can make steel or SCHN uses it in its own steelmaking operations.
  • As a scrap recycler, the accounting is a bit different than other steelmakers. Most notably, SCHN was hurt by a sharp decline in selling prices for recycled metals in AugQ, which is expected to lead to both a compression in metal spreads and an adverse impact from average inventory accounting. But lower scrap prices are good for steelmakers as it is a key input, especially for mini-mills like NUE and STLD.
Overall, this was some rough guidance from SCHN, but we think investors are not overly surprised given that scrap prices have been declining. Also, SCHN's stock price has been weak lately. That seems to be why the stock is not down more. And interestingly, SCHN's struggles are actually somewhat good news for the other steel producers because prices on a key input remain depressed. Finally, to SCHN's credit, it has been pretty active with share buybacks, including repurchasing 500K shares in Q4, which brings total FY22 repurchases to 3.5% of shares outstanding. So management does see some value down here.



Blackbaud solidly in the green today after Clearlake Capital discloses large ownership stake (BLKB)


Blackbaud (BLKB), a provider of cloud-based products for educational institutions and non-profit organizations, is launching higher after Clearlake Capital Group disclosed an 18.4% ownership stake in the company in an SEC filing. According to the filing, Clearlake initially established a position in BLKB solely for investment purposes. However, the firm's motivation has recently changed, and it's now in communication with BLKB's executives and board members regarding the evaluation of strategic alternatives. It is this detail that has lit a fire under the stock, sparking hopes that BLKB will gauge the interest level from possible suitors who may consider acquiring the company.

A review of strategic alternatives could also mean that Clearlake pushes BLKB to initiate other plans, such as cutting costs, divesting assets, restructuring, or buying back more stock. Whatever path is chosen, the end goal is to generate stronger returns for shareholders, which is music to investors' ears after the stock has crated by nearly 45% this year.

  • Looking at BLKB's recent financial results, it's evident that the company isn't firing on all cylinders. While the company generated mid-teens revenue growth during the past two quarters, it greatly benefited from favorable yr/yr comparisons.
    • Specifically, revenue declined by 2.0% in 1Q21, and increased by a paltry 3.3% in 2Q21. BLKB's mediocre performance is best illustrated by its average quarterly growth rate of just 6% over the past five years.
  • Furthermore, BLKB cut its FY22 EPS and adjusted free cash flow guidance last quarter, partly due to soft bookings for its ESG-focused EVERFI business, which it acquired this past January for $750 mln. Foreign exchange headwinds and higher interest payments due to rising rates were also to blame.
  • Interestingly, Clearlake's disclosure comes just a couple weeks after BLKB extended CEO Mike Gianoni's employment contract for three more years. Gianoni, who has been with the company since January 2014, has set a goal for BLKB to reach the Rule of 40 within the next three years. The Rule of 40 is a principle that a SaaS company's combined revenue growth rate and its profit margin should exceed 40%. In Q2, the company achieved 32% on the Rule of 40 on a constant currency basis, pacing above the midpoint of its full year guidance of roughly 30%.
  • If Clearlake and BLKB agree that the most efficient and effective way to boost shareholder value is through selling the company, then its progress on the Rule of 40 could become a selling point. Additionally, the resiliency of its business model is an attractive attribute, especially in light of current macroeconomic conditions. During BLKB's Q2 earnings conference call, Gianoni highlighted this quality, noting that revenue still grew through the financial crisis (2008-2010), even though its recurring revenue was a much smaller percentage of total revenue compared to now. Today, approximately 95% of BLKB's revenue is recurring.
  • With a reasonable 1-year forward P/E of 16x, BLKB could look like a good bargain to a larger software company. The company lists Salesforce (CRM), Oracle (ORCL), and Microsoft (MSFT), as companies it competes with in certain areas of its business.
Clearlake Capital has amassed a very significant stake in BLKB, providing it with plenty of influence. How that influence ultimately plays out remains to be seen, but investors seem to be betting that a for sale sign is in the company's near future.



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