Morning Bites - May 19, 2023

🔮 Welcome back to Finsights, fellow financial wizard. Let’s get you up to speed on the market with a flick of your finger! 🪄

• 🕺US up, HK down, Commodities up!

• 🐻 The bears are going to file for unemployment

• 💸 John Deere, Foot Locker and RBC Bearings earnings

📈Market Levels: US equity futures are grinning ear-to-ear with extended gains: S&P +7.5 points (0.18%), Dow +41 points (0.12%), and Nasdaq +29 points (0.21%). Across the pond, the major Eurozone indices are up by 0.7-0.8%, with gains shared widely. Leading the pack are autos, industrials, basic resources, chemicals, and tech 🚀, while the safe-haven groups play catch-up (telecoms, healthcare, real estate, utilities). Banks are lagging behind. Meanwhile, Asia gave mixed signals on Friday: TPX +0.18%, NKY +0.77%, Hang Seng -1.4%, HSCEI -1.81%, SHCOMP -0.42%, Shenzhen +0.12%, Taiwan TAIEX +0.45%, Korea KOSPI +0.89%, Australia ASX 200 +0.59%, and India, up ~0.25-0.30%. Hong Kong got the blues from tech stocks 📉 (Alibaba -6%, JD.com -4.7%, Baidu -4.4%, Meituan -3.7%, etc.). Treasuries got a small pat on the back after their recent slump, with yields down 1-3bp across the curve. The year-end Funds Rate is now projected at 4.62%, down ~0.02% vs Thursday. The DXY is seeing slight profit-taking after the recent rally, with a ~0.23% pullback. Brent is up ~0.5%, while US natural gas trades flat (after a ~9% spike on Thursday). Gold sparkles with a ~0.4% rise, and bitcoin bounces 0.6% to $26.88K.

🗞️What's Happening: Germany's PPI chilled a bit more in April, while Japan's CPI remains above the BOJ's inflation target (though BOJ seems unphased). The G7 headlines shouldn't ruffle US equity trading much. Washington is still humming a hopeful tune about a debt ceiling deal, despite the grumbles from extremists in both parties. Friday's main event is Powell's 11amET panel discussion, where we'll watch for a thumbs up to Logan's "June hike" sentiment from Thursday. And let's not forget the pre-open earnings reports below (Deere, Foot Locker, RBC Bearings). 🏦 

🔍Our Market Thoughts: The earnings scene stays bullish overall, even with some softness in US discretionary spending (a combo of cyclical and secular - consumers face macro pressures, but also a return to pre-COVID behavior). The debt ceiling drama keeps moving towards a resolution, and the risk of a breach is low (this topic's falling down the macro concerns list). For the same trio of reasons - strong earnings, the end of the Fed rate hike cycle, and favorable technical factors - we remain bullish 🐂.

We increasingly feel the SPX will soon shake off its range-bound pattern with a sustained break above 4200. The index's flirtation with this level, coupled with solid momentum, is making the bear camp 🐻 pretty anxious. Lately, a popular question is what "catalyst" will push stocks beyond 4200. But bulls don't need a change – the "status quo" is enough for the SPX to keep climbing 🧗‍♂️.

It's the bears who need a catalyst, and it's telling that even major events, like aggressive tightening or a wave of bank failures, couldn't swing things their way. While a Fed rate hike on 6/14 isn't necessary, it wouldn't spell doom for stocks if it happened. The bear camp's recent narrative that "the Fed will hike next month because the economy is too hot" is losing some credibility, especially as many of these voices were warning of a hard landing just a few days ago 🎢. Valuations aren't compelling enough to prompt a stock-buying spree, but they aren't prohibitive either, especially if we use 2024 estimates as the benchmark. One concern is the market's breadth, as tech carries most of the weight 🏋️‍♂️, but overall, we remain cautiously optimistic.

🚜 DE (Deere), the heavyweight champ of the agricultural machinery world, just tossed a haymaker in its FQ2. It reaped a robust EPS of 9.65, outpacing the Street's 8.55 estimate, and generated net revenue of a staggering $16.079B, that's over a cool billion more than what Wall Street wizards predicted at $14.85B.

All three segments of Deere's operations have delivered a bumper crop. The most massive of the trio, Production & Precision Agriculture, saw its revenue grow by a solid 53%, and it's not just about the sales - operating income jumped up a whopping 105%. The secret sauce? A combo of strong demand, savvy pricing, and a supply chain that's as smooth as a freshly ploughed field.

Deere is not one to rest on its laurels. The company's ratcheting up its full-year net income forecast, raising the bar from the previous $8.75-9.25B range to a new goal of $9.25-9.5B. However, while the outlook for Production & Precision Agriculture remains unchanged at a healthy growth rate of ~20%, Deere is predicting that the Small Agriculture & Turf and Construction & Forestry sectors will nudge up towards the top-end of the earlier projections.

Now, Deere's report is as impressive as a shiny new tractor. But, there are murmurs in the field. Some folks are scratching their heads about the new guidance - the net income projection's midpoint has only shifted up by about ~$370MM, which essentially mirrors the Q2 beat. Additionally, the full-year revenue forecast is only getting a slight boost, with the Production & Precision Agriculture sales outlook remaining static despite its Q2 triumph. So, while Deere is charging ahead in full throttle, it might be wise to keep an eye on these potential bumps in the road. Onward, team green! 🌾💸🌽

👟 FL (Foot Locker), the sneaker emporium of the mall, seems to be tripping over its shoelaces. It's reported a letdown in results and is slashing its outlook for the year. Their new EPS projection is a paltry 2.00-2.25, a sizeable downgrade from the previous forecast of 3.35-3.65.

Foot Locker's comps fell by 9.1% in FQ1, even steeper than the Street's prediction of -8%. The culprit behind the drop? A nasty cocktail of macroeconomic challenges - think lower income tax refunds in the US and an ill-timed shift in vendor mix - mixed with some brand-specific hiccups like repositioning of Champs Sports.

Adding salt to the wound, their gross margin took a hit, declining by 400 basis points compared to last year. A witches' brew of higher markdowns, occupancy deleverage, and a surge in theft-related shrink played the villains here. Earnings per share of 70c missed the Street's 77c forecast, adding another layer to the growing pile of woe.

Inventory woes? They have 'em too. As of the end of April, Foot Locker's merchandise inventory totalled a whopping $1,758 million, a 25% increase compared to the same time last year. In their words, they've had to take more "aggressive markdowns" to drum up demand and keep their inventory in check.

So, what's the lay of the land here? If Walmart was the star quarterback of the week's retailer reports, Foot Locker would be the waterboy. As several retailers have highlighted, demand for discretionary goods in the US has taken a dive. And just like Target, Foot Locker is also reeling from shrink/theft-related troubles. However, it's worth noting that Foot Locker is not just a victim of a grim retail climate - it's also grappling with its own demons, like a changing vendor mix that's upended its operations. In particular, Nike's recent pivot to selling more products directly has proven to be a hurdle. In the face of these challenges, it's certainly not game over for Foot Locker, but it looks like they're gonna have to work on their footwork. 🏀👎💸

🔧 RBC (RBC Bearings) may not be the flashiest name on the block, but don't let its low profile fool you. This under-the-radar supplier of bearings to industrial, aerospace, and defense customers is a crucial cog in the machine. Their Q4 earnings delivered an unexpected twist - and in a good way.

RBC revved up its revenue by a respectable 9.9% to $394.4MM, comfortably ahead of the Street's forecast of $381MM. In the meantime, gross margins cruised to 42.2%, surpassing the Street's expectation of 41.5%. Earnings per share followed suit, accelerating by 10.4% to 2.13 and leaving the Street's estimate of 1.97 in the dust.

The company's backlog as of April 1, 2023, stood at a hefty $663.8 million, a bump up from the $603.1 million seen on April 2, 2022, and the $613.6 million recorded as of December 31, 2022. When it comes to future projections, RBC's looking robust, with revenue guidance for Q1 coming in ahead of the Street's consensus at around $385MM.

While management described the current landscape as "dynamic" (which, let's face it, is just a polite way of saying unpredictable and fast-changing), they managed to not just meet, but beat expectations. How, you ask? They credit the robust growth in both the Industrial and Aerospace/Defense sectors. Especially impressive was the Aerospace/Defense segment, where revenue soared by a whopping 16%. Looks like RBC Bearings is truly rolling with the punches and keeping the wheels of industry spinning! 🚀💼💹

🌯 Wrap for earnings. Have a fantastic day! 🌯

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