Morning Watchlist: Friday Edition
A quick note from Behind the Markets
We're closing out the week. The Fed held on Wednesday — a 10-2 vote, with two members pushing for a hike — and then the real exam started after the bell, when the two biggest landlords in artificial intelligence handed in their papers on the same night.
The market graded them in opposite directions, and we think it misread one. Meanwhile the quieter tape delivered a claimed missile strike on the world's oil kitchen, two cash buyout offers in a single day, and a perfect report card marked down 10%.
Four stories this morning. Four pairings.
Let's get into it.
1) Two Report Cards, One Construction Site
On Wednesday night, Microsoft beat everything — revenue up 19% to $92.3 billion, Azure cloud growth of 48%, earnings of $4.89 a share — and rose 4% after hours. Alphabet grew total revenue 25%, more than doubled its cloud business to $30.7 billion, and fell 10%.
Read Alphabet's miss closely before you join the selling. Earnings came in at $2.12 a share against roughly $3 expected — but 55 cents of the gap was a paper markdown on its SpaceX stake, an $8.7 billion accounting entry. The business itself booked a cloud backlog of $561 billion — work sold and waiting to be delivered.
Here's the number nobody graded wrong: between them, the two companies poured nearly $97 billion into data centers and equipment in thirteen weeks, and Alphabet's CFO said capital spending will "increase significantly" next year. Wednesday morning you could watch those checks being cashed: Vertiv, which builds power and cooling for data centers, reported sales up 61% and orders more than doubled, raised its full-year forecast, and jumped 17%.
Every dollar of that spending eventually becomes heat. A data center is a building-sized radiator problem, and Modine has been making radiators since 1916.
The pairing: Modine (MOD) — Buy
A ledger note first. We bought Modine on September 2nd, and the comparison to that price is no longer clean: in early October it handed its old vehicle-parts business to Gentherm, so shareholders now hold two stocks where they held one. What remains under the MOD ticker is the part we wanted all along — the pure climate company, where data-center cooling sales grew 90% last quarter and the full-year plan calls for 60% to 80% more.
At Tuesday's close of $136.51 — it jumped toward $146 early Wednesday on Vertiv's coattails — the slimmed-down company is a roughly $7 billion business priced near 19 times next year's expected earnings. The S&P 500: 21. The wart, honestly: cooling margins slipped last quarter on labor and supply shortages, and management promised a recovery. The exam is Tuesday, when Modine reports. The kill: hyperscalers cutting capex, or that margin recovery slipping a second time.
2) The Cash Buyers Came Shopping
Private-equity firms are the people who buy the whole garage sale to flip it. They never pay sticker. On Wednesday, two of them paid over sticker — in cash, before lunch.
Nelson Peltz's Trian offered $7.35 a share, about $1.4 billion, to take Wendy's private — a 20% premium for a chain that has lost 65% of its value in two years through six straight quarters of falling same-store sales. The same day, Monomoy Capital offered $101 a share in cash for LCI Industries, the RV-components maker — gatecrashing LCI's pending all-stock merger with its fellow supplier Patrick Industries.
At Patrick's recent price near $69, the agreed stock deal values LCI around $86 a share. A buyer whose entire business is paying less than things are worth just offered $101. When the professional bargain hunters start outbidding the market, the shelf price is wrong.
The pairing: Patrick Industries (PATK) — Watch
Patrick is the other table at the same garage sale: a $2.2 billion maker of components for RVs, boats, and manufactured housing, near its 52-week low at about 15 times next year's expected earnings, paying a 2.7% dividend, with analysts' average target up at $99. Heads, the merger survives and Patrick buys an asset a cash bidder already validated at $101. Tails, LCI walks, and the aisle has a fresh cash comp anyway.
So why Watch? Because Patrick handed in its own report card Thursday morning, after we went to press, and because deal fights are messy: a bidding war could force Patrick to pay up, regulators are studying a combination of the two biggest RV suppliers, and the demand slump that made this aisle cheap is real. The entrance: Thursday's print showing margins holding, plus clarity on who ends up owning LCI. The kill: the RV and housing slump deepening into next year.
3) Somebody Shot at the Oil Kitchen
On Tuesday, Yemen's Houthis said they put a missile into Saudi Arabia's biggest refinery — a 550,000-barrel-a-day facility. By Wednesday, Brent crude traded at $115 and U.S. crude at $101, and OPEC+ was expected to hold output steady at Sunday's meeting, with most members already pumping below their targets.
Notice what the market did the day before: prices fell nearly $2 on hopeful Middle East headlines. That's the pattern all month — the war premium breathes in and out, but the floor keeps rising. Yet the companies that drill the wells, frack the rock, and service the pumps are still priced for the old world. A producer at $100 crude is a farmer in a bumper harvest — sooner or later the barn gets expanded, and somebody gets paid to build it.
The pairing: Halliburton (HAL) — Buy
Halliburton is the biggest name in oilfield services this side of SLB, and at about $35 it costs roughly 13 times next year's expected earnings. The S&P 500: 21. Last week's quarter beat on revenue and profit, operating margins jumped to 10.9% from 6.4% a year ago, and CEO Jeff Miller called the international businesses the strongest "they have been in many years." The part we like most: management's own forecast assumes North American fracking stays flat — nobody is paying for a drilling recovery, so if $100 oil finally cracks shale's discipline, that's free upside. Analysts' average target: $43.68. (Our Valero Watch stays a Watch — refiners carry Washington policy risk the toolmakers don't.) The honest risks: revenue grew just 2% last quarter, and this stock answers to the oil price. The kill: a Gulf ceasefire plus an OPEC+ production push sending crude back toward $80 before any spending cycle starts.
4) The Fitting Room Went On Sale
On Tuesday we wrote down an entrance for FormFactor, the probe-card maker we've called the fitting room of the chip industry — every newly designed memory chip needs its custom test card before it ships. The entrance: a print confirming record demand, with the stock still under $110.
Wednesday night, both halves arrived at once. Record revenue of $280.5 million, up 38%. Earnings of $1.04 a share against an 86-cent estimate. Next quarter guided above Wall Street's numbers. And the stock's reward — a 10.5% markdown after hours, to $99.35, below even our August 26th flag of $108.
A miss you can buy is worth more than a beat you have to chase. This was better: a beat the market put on sale anyway.
The pairing: FormFactor (FORM) — Buy
We've watched this one twice — August 26th and again Tuesday — waiting for exactly this tape. At about $99, FormFactor costs roughly 24 times next year's pace for a business growing revenue 38% in a memory boom its customers say runs to 2030. The honest risks: inventories ticked up last quarter, and the chip aisle is marking down perfect papers on reflex — it can stay twitchy. The kill is unchanged since August: a genuine memory downturn.
Before You Go
That's the watchlist. Two landlords writing $97 billion of checks and a radiator maker catching them, cash buyers paying over sticker at the garage sale, a missile aimed at the oil kitchen with the toolmakers priced for calm, and a fitting room marked down on record numbers. One theme this morning: the crowd keeps grading the quarter; we keep reading the spending.
Two report cards from our own ledger. Flex, our October 23rd Buy, beat and raised with its cloud and power unit up 54% — the stock rose 9.5% Wednesday. And Antero, Tuesday's comp-on-the-street Buy, delivered record production with earnings of $1.19 a share, well past estimates. Thursday's GDP reading and last night's Amazon and Intel reports landed after we went to press — we'll grade what matters in the coming editions. Today brings Exxon, Chevron, Cboe, and Magna's first exam as Wednesday's Buy.
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Written by Behind The Markets