Weekly Update - October 9, 2022

Selected highlights of the week

By: Teni Nyca Antenor

Goldman Sachs Upgrades Wells Fargo, Downgrades Citi Ahead Bank Earnings

Q3 earnings season for banks is coming. On October 14, 2022, big banks like Citi, JPMorgan Chase, Morgan Stanley, PNC Financial, U.S. Bancorp, and Wells Fargo will be issued. The week after, more of the financial sector will follow, such as Bank of America and Goldman Sachs Group.


“Bank earnings could give clues about a downturn,” reported Barron’s.


Ahead of the release of bank earnings, Goldman Sachs upgraded Wells Fargo. Analyst Richard Ramsden raised WFC price target to $48 (from $46) and the rating to Buy (from Neutral).


“In a recessionary scenario, we see WFC as having less credit risk downside than peers given below average loan growth in recent years and less credit card skew,” Ramsden said in a note to his clients.


“Richard’s been covering this industry forever. So I’m hesitant to push back too much, but you don’t normally see an upgrade on Wells Fargo. They have been putting up some very difficult quarters. I will note– call this out too as part of Richard’s call on Wells Fargo, “I see further idiosyncratic expense rationalization.” What does that mean in plain English? Basically, he sees Wells Fargo cutting more expenses to help improve their bottom line in coming quarters,” Yahoo Finance Live anchor Brian Sozzi discussed.


On the flip side, Ramsden downgraded Citigroup‘s rating to Neutral (from Buy). The analyst wrote, “Despite substantial progress in 2Q22, C still needs to build capital, which delays the resumption of buybacks into 2023E and also potentially could impact revenue, as C limits RWAs (risk-weighted assets), growth.”


Buy Box, Sell DocuSign Calls Morgan Stanley


Morgan Stanley increased Box Inc‘s price target to $34 (from $32) and upgraded the rating to Overweight (from Equalweight). “Morgan Stanley’s target price suggests a potential upside of 39.40% from the stock’s previous close,” MarketBeat reports.


“Recent results demonstrating higher net retention, lower churn, and strong large deal momentum, with consistent execution across geographies, customer sizes and verticals, suggest Box’s Suite selling and expanding product capabilities are allowing customers to more easily realize the value of the full Box platform,” wrote analyst Josh Baer in a research note. However, the technology stock’s “challenging macro” environment still remains a risk.


On the other hand, DocuSign received a downgrade from the Morgan Stanley analyst who slashed DOCU price target to $47 (from $73) and lowered his rating to Under Weight from Equal Weight.


“Uncertain, difficult transition ahead” was the rationale behind the downgrade.


“Key risks, such as post-COVID demand normalization, sales force productivity challenges, and leadership turnover, are already reflected in DOCU shares (down 64% YTD). However, the analyst sees several other headwinds facing DOCU, including Intensifying competition, e-signature commoditization, and pricing pressure,” added market reporter Senad Karaahmetovic.


Favorable Nitrogen Market Outlook Drives CF Industries


Strong nitrogen fertilizer demand is driving CF Industries‘ stock price up. Higher crop commodity prices are contributing to global demand.


CF Industries, “on its second-quarter call, said that it sees the global nitrogen supply-demand balance to remain tight for the foreseeable future, supported by resilient agricultural-led demand and uncertainty about global production and export supply availability. Energy spreads between low-cost producers and marginal production in Europe and Asia also expected to remain historically wide.


CF Industries expects nitrogen demand for industrial use in North America to be supported by mining activity. It also envisions India to tender on a regular basis into 2023 as higher domestic production is unlikely to fully meet increased demand as growers boost grain production. The company also envisions urea consumption in Brazil to remain strong this year, backed by high crop prices, expected high planted corn acres and improved farm incomes.


The company is also benefiting from higher nitrogen prices on the back of lower supply resulting from reduced operating rates globally due to higher energy prices. Higher nitrogen prices are driving its sales as witnessed in the last-reported quarter. The positive pricing environment is expected to continue moving ahead. Global nitrogen supply is expected to remain challenged due to higher energy prices and geopolitical factors,” reported Zacks.


RBC analyst Andrew Wong backs the earnings call, citing a favorable nitrogen outlook and strong operations. Wong raised CF price target to $135 (from $110) and upgraded the rating to Outperform (from Sector Perform).


Citi also called for a raise on CF price target to $120 (from $117). Analyst P.J. Juvekar reiterated a Buy rating. Despite the raise, the analyst believes consensus estimates need to be adjusted lower.


“The analyst does not anticipate chemicals to outperform at least until next spring, when the energy price scenario “could be more benign” after the winter and high inventories of plastics could have worked down due to lowering of operating rates,” covered TheFly.


Other competitors in the basic materials sector also benefited from the strong nitrogen fertilizer demand, such as YARIY, SMG, and SQM.


Used Car Industry Slowing Down Plunges CarMax


Last week, CarMax Inc‘s Q2 earnings missed estimates. CarMax president and chief executive officer Bill Nash said the result was due to “widespread pressure the used-car industry is facing.”


Following the news, Stephens analyst Daniel Imbro downgraded KMX to Equal Weight (from Overweight) and reiterated a price target of $64.


“Used vehicle demand trends have been softening, and the update last week was largely in-line with our expectations; however, the expense backdrop is higher than anticipated, and with minimal expected improvement in the near term, it is difficult to see upside to near-term numbers even after the steep reset,” Imbro expressed in a note.


Morgan Stanley analyst Adam Jonas slashed the price target to $90 (from $124) and reiterated an Overweight rating. According to Jonas, “KMX may be ‘first in’ on feeling the impact of used car decline, but we expect the entire auto retail (franchise dealers) and auto credit complex to follow.”


Other auto retailer stocks like HTZ, CVNA, and CAR will soon announce their earnings. Yahoo Finance Live’s Brian Sozzi expects their results to show a similar decline as KMX.


Kamuda Trial Loss Will Have A Material Negative Impact On SHC Says Citi


Citi cut Sotera Health‘s price target to $9 (from $25) and downgraded the rating to Neutral (from Buy). Analyst Patrick Donelly based the downgrade on a recent jury verdict linked to carcinogenic ethylene oxide emissions.


In September, Sue Kamuda was awarded $363M in Illinois. Kamuda had filed a lawsuit against SHC’s Sterigenics units. She claimed that emissions from the company’s plant caused her breast cancer.


According to ABC, 700 more others could potentially sue the company.


“Citi analyst Patrick Donnelly said the loss of the Kamuda trial appeal and subsequent trial losses would have a materially negative impact on the company’s balance sheet and liquidity position going ahead,” reported on STL News.


United Airlines Halts All Services At JFK Airport


United Airlines Holdings will suspend all their services at New York’s John F. Kennedy International Airport effective October 29.


“Given our current, too-small-to-be-competitive schedule out of JFK — coupled with the start of the winter season where more airlines will operate their slots as they resume JFK flying — United has made the difficult decision to temporarily suspend service at JFK,” United Airlines wrote in a memo. UAL currently has four flights per day out of JFK and it had earlier hoped to expand there. However, talks with Federal Aviation Administration had fallen through.


Raymond James analyst Savanthi Syth reiterated her $48 price target and Outperform rating.


“It appears there is greater demand recovery among large corporates and in the Northeast in particular, which along with gradual reopening of long-haul international markets likely places UAL and DAL in a relatively stronger position in terms of revenue recovery,” Syth commented in a client note.


Offshore Drilling Market Looks Rewarding For Transocean


Transocean received a double upgrade from Barclays analyst David Anderson who raised RIG price target to $5 (from $3.5) and upgraded the rating to Overweight (from Underweight). Despite debt balance remaining a concern, Transocean is “significantly more attractive at current valuation levels.” Anderson based this on significant pricing increase for high-spec offshore rigs in the past quarter.


In September, RIG secured drilling contracts from Norway-based firms. The company will be drilling 17 wells offshore Norway. The firms also signed an exclusive partnership with Transocean for any additional wells from 2023 to 2027.


According to Anderson the offshore drilling market has “improved materially.” “The analyst believes the market will remain tight over at least the next three years,” reported on TheFly.