Alphabet

• GOOGL-Nasdaq

Buy • Price $122.21 on July 26

by Needham

Alphabet reported strong second-quarter 2023 results, with revenue of $74.6 billion (up 7% year over year and 3% above our estimate), operating income of $21.8B (up 12% Y/Y and 17% above our estimate), and earnings per share of $1.44 (up 19% Y/Y and 14% above our estimate). Since the November 2022 launch of ChatGPT, we have been critical of Alphabet’s “product problem.”

OpenAI’s existential threat to Alphabet’s Search business has awakened the sleeping giant, as evidenced by the facts that a) co-founder Sergey Brin is back, working on generative AI; b) the second-quarter earnings call was held from London, home of Alphabet’s Deep Mind AI division; and c) 90% of the CEO’s second-quarter comments related to generative AI. We’re raising our price target from $115 to $140.

Meta Platforms

• META-Nasdaq

Buy • Price $119 on July 26

by UBS

We raise estimated 2024 GAAP earnings per share to $19 (from $16.75) and bull case EPS to $20.21 (from $19.07) and our price target to $400 (from $335), predominantly based on higher EPS plus a one-turn increase in target multiple to 21 times.

We now model ex-foreign exchange ad revenue growth of 16% in the third quarter (up from 12% previously), 20% in the fourth quarter (14% previously), and 18% growth in 2024 (13% previously), supported by continued improvement in Reels adoption and monetization, other new ad formats, solid engagement growth, and a healthier macro environment.

We see the September Meta Connect event as a likely positive catalyst, with new generative-AI product announcements helping validate our optimism in the next leg to the bull case.

Sherwin-Williams

• SHW-NYSE

Outperform • Price $275.96 on July 25

by Baird

While the recent path toward volume/margin normalization has been tortuous, driven in part by enormous macroeconomic and supply-chain complexity, second-quarter results (and a conservative outlook) are indicative of Sherwin’s ability to effectively raise prices and position the company for a multiquarter margin expansion phase—which has just begun.

To us, earnings power of $12-plus is realistic, noting that our raised, $300 price target is based on 25 times the latter. Specifically, we note that lower raw material costs are starting to catalyze margins higher (second-quarter 2023 gross margins are at 46%, versus targeted range of 45%-48%), with healthy backlogs driving volume growth consistency throughout first-half 2023, despite weaker existing-home sales.

Boeing

• BA-NYSE

Buy • Price $232.80 on July 27

by BofA Securities

While we, along with the broader market, maintain some reservations around execution, it appears as though the worst may behind Boeing. We are currently in the midst of the post-Covid commercial recovery, with passenger demand emerging back to prepandemic levels. On the military side, both domestic and international demand continues to accelerate, with investment outlays at new peak levels.

As such, we are raising our price objective to $300 from $225 on improved free-cash-flow expectations and upgrading Boeing to Buy from Neutral. We still expect some execution volatility at Boeing Defense, Space & Security, which has struggled to maintain schedule on development programs.

RTX

• RTX-NYSE

Buy • Price $84.24 on July 25

by Vertical Research Partners

RTX [formerly Raytheon] reported its second-quarter results, with adjusted EPS of $1.29 coming in ahead of the consensus estimate of $1.18. The earnings call was dominated by the latest issue that the Pratt & Whitney unit has discovered with the GTF [airline] engine.

A quality issue with internally sourced powdered metal is requiring that disks on the High Pressure Turbine need inspecting sooner than expected. This means that 1,000 engines that are flying on A320s need to come in for shop visits for the HPT to be inspected. While RTX sized the 2023 cash impact at $500 million, it doesn’t have all the information available at the moment to quantify the overall cash impact.

With the shares down 14% on July 25, some investors are clearly throwing in the towel on RTX. While the latest GTF issue could be the last straw for some investors, we suspect that the negative response is overdone (if understandable). New engine families do have reliability issues, while the aero supply-chain problems are well known—the fact that this latest issue is all internal arguably makes it worse, but it has been spotted and should be addressed over the next year or so.

FS KKR Capital

• FSK-NYSE

Buy • Price $20.16 on July 27

by B. Riley Securities

We are initiating coverage of FS KKR Capital [a business development company, or BDC] with a Buy rating and $21 price target. We see the risk/reward profile as favoring reward, given the deep price/net-asset-value discount that should likely limit downside, the supportive earnings backdrop, a dividend yield of 14% based on projected dividends, an attractive capital structure, and sufficient liquidity.

FS KKR is the second-largest publicly traded BDC by market cap and by assets, with a $16 billion balance sheet. KKR Credit is responsible for FS KKR’s investment portfolio and is a subsidiary of KKR & Co., a global investment firm with $510 billion of assets under management.

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