SAVE - Wall Street Lunch: Spirit Not Giving Up On Merger

2024-01-19 13:10:00 ET

Summary

• Spirit Airlines updates guidance and says it plans to complete its merger with JetBlue.
• Consumer sentiment hits a 2.5-year high, with inflation expectations falling.
• Meta plans to purchase 350,000 Nvidia AI chips for data centers and continues work on its own artificial general intelligence.

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Spirit Airlines confirms commitment to merger along with upbeat guidance. (0:15) Consumer sentiment hits a 2-1/2 year high . (1:59) Meta buying up Nvidia AI chips. (4:46)

The following is an abridged transcript:

Our top story so far

Shares of Spirit Airlines ( SAVE ) rallied as the embattled carrier issued guidance and stuck to its guns on completing a merger with JetBlue (JBLU).

Spirit said it disagrees with the recent U.S. District Court’s ruling against the merger on antitrust grounds and continues to believe that a combination is the best opportunity to increase much-needed competition and choice.

The carrier said total revenue for Q4 is expected to be at the high end of the initial guidance range, as bookings for the peak travel period over Christmas and New Year were strong.

Operating expenses are estimated to come in better than expected primarily due to lower fuel costs driven by fuel efficiency, lower airport costs and other items.

Adjusted operating margin guidance for Q4 was revised up from negative -15% to -19% to -12% to -13%.

On the balance sheet, Spirit disclosed that it had $1.3 billion of liquidity, including unrestricted cash and cash equivalents, short-term investment securities and $300 million of liquidity under the company’s revolving credit facility. The company said it took several steps to shore up its liquidity in Q4.

In today’s trading

The broader market is battling to finish the week at record levels. The S&P ( SP500 ) is up +0.5% and got within 10 points of an all-time high in trading just before noon ET.

The renewed enthusiasm for tech stocks continues, although more tempered. The Nasdaq ( COMP.IND ) looks assured to finish with an up week.

Tony Pasquariello, the head of hedge fund coverage at Goldman Sachs, notes that “US equities generate really healthy returns in about four of every five years,” adding “I would bet that we will chop around a lot this year, and I’m sure there will be some ugly turns along the way, but I also don’t want to lose sight of the natural arc of the market.”

Rates continued to edge higher in the face of positive economic news: this time a strong jump in consumer sentiment to a level not seen in 2-1/2 years. The 10-year Treasury yield ( US10Y ) rose above 4.15%.

The January University of Michigan Consumer Sentiment Index rose to 78.8 , topping the consensus of 70 and up from 69.7 in December. It’s the best reading since July 2021.

Inflation expectations also fell. Year-ahead expectations dropped to 2.9% from 3.1% and 5-year forecasts dipped to 2.8% from 2.9%.

Joanne Hsu, the director of consumer surveys, notes: "Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended."

"Sentiment has now risen nearly 60% above the all-time low measured in June of 2022 … and is just 7% shy of the historical average since 1978," she added.

Kieran Clancy, economist at Pantheon Macro says the surge "largely reflects the fall in gas prices and rise in stock prices towards the end of last year.”

“The key number, in the survey is the expectations index, because it has been a decent guide to growth in real consumption spending. If the rise in the January expectations index, to 75.9 from 67.4, is sustained through the first quarter, it will be consistent with another strong real consumption print, following the likely rise of around 2.5% in the fourth quarter."

But he adds: "This won’t prevent the Fed from starting to ease soon, though, because the trigger for lower rates will be the increase in real rates as inflation falls, rather than fears over the pace of economic growth."

Meanwhile, existing home sales in December posted a surprise drop . Sales fell to an annual rate of 3.78 million. Economists had expected them to stay steady at 3.82 million.

Among active stocks

Blackstone ( BX ) said that its unit is set to acquire all outstanding shares of real estate operating company Tricon Residential ( TCN:CA ) for about $3.5 billion.

Blackstone Real Estate Partners X, together with Blackstone Real Estate Income Trust, will pay $11.25 (~C$15.17) per share in cash, representing a premium of 30% to Tricon's closing price on Jan. 18.

Goldman Sachs reinstated its Buy rating on Broadcom ( AVGO ) with a 12-month price target of $1,325. Analysts expect strong double-digit revenue growth in the company's AI-related businesses.

The Senate Committee on Health, Education, Labor, and Pensions has scheduled a vote on Jan. 31 to decide whether to summon the CEOs of Johnson & Johnson (JNJ and Merck ( MRK ) to obtain their testimonies on drug pricing. The CEOs have so far refused invitations to testify on the cost of prescription drugs.

In other news of note

Meta ( META ) CEO Mark Zuckerberg say the social media giant plans to buy 350,000 Nvidia ( NVDA ) chips designed for data centers by the end of the year. The H100 chips are key for AI computing.

The company's infrastructure will contain "almost 600K H100 equivalents of compute if you include other GPUs," Zuckerberg said in an Instagram post.

The H100 is being sold by Nvidia for around $25,000-$30,000, but it sells for more than $40,000 on eBay. Meta would likely spend more than $9 billion.

Meta has been working on its own artificial general intelligence, with plans to open it up to developers.

"Our long term vision is to build general intelligence, open source it responsibly, and make it widely available so everyone can benefit," Zuckerberg added in his post.

In the weekly Seeking Alpha Dividend Roundup

This week saw payouts from Schlumberger ( SLB ) and J.B. Hunt Transport Services ( JBHT ) as well as declarations from companies like Costco ( COST ) and Target (TGT).

Next week, Dell (NYSE: DELL ) and Pfizer (NYSE:PFE), among others, will see ex-dividend dates.

And in the Wall Street Research Corner

The is still a buy-the-dip stock market , according to BofA strategist Michael Hartnett.

In his weekly Flow Show note, Hartnett conceded negatives to a lightly positioned market. Those include bond yields moving back up on the labor market (with US unemployment claims at 50-year lows), deficits & politics and the 10-year Treasury yield aiming to top 4.25%, along with U.S. dollar strength.

But he added that the market is still pricing in 140 basis points of Fed cuts in 2024 and the zeitgeist is "firmly buy-the-dip as ( THE ) Powell pivot means H1 upside (is) bigger than downside."

Growth stocks, AI and the Magnificent 7 will benefit, but banks, REITs and small-caps will struggle.

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