Market Snapshot
briefing.com
| Dow | 35320.88 | -309.71 | (-0.87%) | | Nasdaq | 13999.10 | -285.21 | (-2.00%) | | SP 500 | 4520.30 | -57.70 | (-1.26%) | | 10-yr Note | -4/32 | 4.076 |
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| | NYSE | Adv 582 | Dec 2291 | Vol 479 mln | | Nasdaq | Adv 1142 | Dec 3212 | Vol 4.5 bln |
Industry Watch
| Strong: Health Care, Consumer Staples, Utilities |
| | Weak: Information Technology, Communication Services, Consumer Discretionary, Financials |
Moving the Market
-- Nagging sense that the market is due for a pullback
-- 10-yr note yield moving up, approaching its March high
-- Reacting to the news that Fitch Ratings downgraded its U.S. credit rating to AA+ from AAA
-- Weak mega cap stocks weighing on broader market
-- Reacting to earnings news
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Market turns lower ahead of close
02-Aug-23 15:30 ET
Dow -399.29 at 35231.30, Nasdaq -336.65 at 13947.66, S&P -70.59 at 4507.41
[BRIEFING.COM] The market turned lower recently.
McKesson (MCK), MetLife (MET), Qualcomm (QCOM), Occidental Petro (OXY), C.H. Robinson (CHRW), MGM Resorts (MGM), DXC Technology (DXC), DoorDash (DASH), Clorox (CLX), and Etsy (ETSY) are among the companies reporting earnings after the close today.
The economic calendar on Thursday will include:
- 8:30 a.m. ET: Q2 Productivity-Prelim (Briefing.com consensus 1.7%; prior -2.1%) and Q2 Unit Labor Costs-Prelim (Briefing.com consensus 2.7%; prior 4.2%); Weekly initial (Briefing.com consensus 225,000; prior 221,000) and continuing (prior 1.690 million) jobless claims
- 9:45 a.m. ET: July S&P Global US Services PMI - Final (prior 54.4)
- 10:00 a.m. ET: July ISM Non-Manufacturing Index (Briefing.com consensus 53.0%; prior 53.9%); June Factory Orders (Briefing.com consensus 2.0%; prior 0.3%)
- 10:30 a.m. ET: Weekly EIA Natural Gas Inventories (prior +16 bcf)
JPM CEO comments on Fitch downgrade; energy complex falls
02-Aug-23 15:05 ET
Dow -320.23 at 35310.36, Nasdaq -285.56 at 13998.75, S&P -58.65 at 4519.35
[BRIEFING.COM] The major indices are trolling along near their lows.
JPMorgan Chase CEO Jamie Dimon said in a CNBC interview that the Fitch downgrade "doesn't matter much." He added that the economy is pretty good, but there are still "economic storm clouds" down the road.
Energy complex futures settled lowered. WTI crude oil futures fell 1.9% to $79.80/bbl and natural gas futures fell 2.9% to $2.49/mmbtu. On a related note, the S&P 500 energy sector (-1.5%) remains near the bottom of the pack.
BorgWarner, Devon Energy dip on earnings
02-Aug-23 14:30 ET
Dow -309.71 at 35320.88, Nasdaq -285.21 at 13999.10, S&P -57.70 at 4520.30
[BRIEFING.COM] The S&P 500 (-1.26%) is in second place, having moved mostly sideways over the previous half hour.
S&P 500 constituents BorgWarner (BWA 43.09, -3.38, -7.27%), Devon Energy (DVN 49.74, -3.94, -7.34%), and Enphase Energy (ENPH 140.44, -9.88, -6.57%) dot the bottom of the standings. BWA and DVN reported earnings over the last 24 hours, while ENPH is down in sympathy to SolarEdge Technologies' (SEDG) print.
Meanwhile, Illinois-based CDW (CDW 199.60, +12.27, +6.55%) is today's top gainer following earnings.
Gold modestly lower after Fitch U.S. rating cut
02-Aug-23 14:00 ET
Dow -287.79 at 35342.80, Nasdaq -298.99 at 13985.32, S&P -57.99 at 4520.01
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-2.09%) is just this side of 300 points lower.
Gold futures settled $3.80 lower (-0.2%) to $1,975.00/oz, coming off overnight gains as the dollar and yields firmed up during the session; earlier today the ratings firm Fitch downgraded United States to "AA+" from "AAA", reflecting expected fiscal deterioration over the next three years, growing government debt, and erosion of governance related to peers.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $102.51.
Intel, Microsoft underperform in DJIA at midweek
02-Aug-23 13:30 ET
Dow -272.13 at 35358.46, Nasdaq -292.63 at 13991.68, S&P -56.04 at 4521.96
[BRIEFING.COM] The Dow Jones Industrial Average (-0.76%) is near lows of the session, down about 272 points.
A look inside the DJIA shows that Intel (INTC 34.54, -1.26, -3.52%), Microsoft (MSFT 328.07, -8.27, -2.46%), and Boeing (BA 232.53, -5.48, -2.30%) are among today's top laggards.
Meanwhile, Walgreens Boots Alliance (WBA 30.33, +0.76, +2.57%) is outperforming.
The DJIA is now down about -0.46% w/w.
Fitch Ratings downgrade of U.S. has stocks on track for lower open
Market participants were already contending with the nagging notion that the stock market was overbought on a short-term basis and due for a pullback. It didn't necessarily need another excuse to continue with a consolidation trade, yet Fitch Ratings provided one after Tuesday's close when it downgraded its U.S. credit rating to AA+ from AAA.
Currently, the S&P 500 futures are down 26 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 122 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down 147 points and are trading 0.4% below fair value.
The Fitch Ratings downgrade was attributed among other things to expected fiscal deterioration over the next three years, growing government debt, and erosion of governance related to peers. The timing of the downgrade has been called into question by some pundits and it drew a rebuke from Treasury Secretary Yellen, who said she strongly disagrees with the decision, calling it arbitrary and based on outdated data.
Judging by the initial reaction of the Treasury market, it would appear that market participants either agreed with Secretary Yellen or reverted to the 2011 approach following the downgrade by Standard and Poor's where Treasuries, ironically, were viewed as a safe-haven. The thinking being that the U.S. Treasury market is still the biggest, most liquid government bond market in the world and that, as holder of the world's reserve currency, the U.S. won't default on its debt.
The 2-yr note yield, which settled at 4.91% yesterday, and the 10-yr note yield, which settled at 4.05%, traded down to 4.84% and 4.01%, respectively, in overnight action. They have since moved higher to 4.89% and 4.06% for a reason that is easier to comprehend at first blush: the ADP Employment Change Report for July was much stronger than expected.
According to ADP, private-sector payrolls increased by 324,000 in July (Briefing.com consensus 185,000) following a downwardly revised 455,000 (from 497,000) in June. The reversal in yields hasn't been more extreme for several reasons:
- Market participants are cognizant that the huge gain in June was not corroborated by the June Employment Situation Report, which showed a much smaller 149,000 increase in nonfarm payrolls.
- A large portion of the gains in July came from the leisure/hospitality industry (201,000).
- ADP also reported that job stayers saw their lowest year-over-year pay increase (6.2%) since November 2021.
This report followed on the heels of a huge batch of earnings news, which was overshadowed somewhat by the Fitch Ratings action news. Adv. Micro Devices (AMD), Starbucks (SBUX), CVS Health (CVS), Yum Brands (YUM), Kraft Heinz (KHC), Pinterest (PINS), and DuPont (DD) were among the headliners in a huge show of earnings since yesterday's close.
Time and space won't permit coverage of the results here, but Briefing.com's Earnings Results page will provide the full rundown.
In brief, most reports were better than expected, but, even if Fitch Ratings didn't catch the market's headline attention like it did, that might not have mattered in terms of triggering a distinctly bullish bias knowing that a lot of expected good earnings news (in relative and absolute terms) had already been priced into most stocks during the summer rally that has featured a broadening out of the buying interest.
The stock market at this juncture is in store for a negative start, but more germane to investor sentiment is how the market closes today.
-- Patrick J. O'Hare, Briefing.com
Pinterest's more subdued outlook disappoints, but expansion into shopping gaining traction (PINS)
In the wake of last week's strong earnings reports from Meta Platforms (META) and Google parent Alphabet (GOOG), expectations were ratcheted higher for Pinterest's (PINS) Q2 results and outlook. Buoyed by an improving environment for ad spending, an expansion into shopping, and tight cost controls, PINS followed suit and exceeded EPS and revenue expectations. However, the company's outlook wasn't quite as rosy, especially when compared against META's upside Q3 guidance that called for revenue growth of about 20%, creating some disappointment among investors.
- For Q3, PINS is forecasting yr/yr revenue growth in the high single-digit range, representing a modest acceleration from Q2's growth of 6.3%. That projected growth rate is roughly in line with analysts' estimates.
- Following META's impressive beat-and-raise performance, optimism regarding improving trends in the ad market climbed much higher. PINS, though, caused participants to dial back those high hopes with newly appointed CFO Julia Donnelly commenting that the ad market remains somewhat choppy, and that the recovery is uneven with pockets of strength and weakness.
Despite the relatively more subdued demand outlook, we believe there were plenty of positives regarding PINS' earnings report and management's updates about the business.
- Most notably, the company made significant strides in profitability as EPS grew by 91% yr/yr to $0.21. Adjusted EBITDA, a favored profitability metric for PINS, increased to $107 mln from $27 mln last quarter, and adjusted EBITDA margin improved by twelve percentage points yr/yr to 16%.
- As a result of the substantial expansion of adjusted EBITDA margin in Q2, PINS upwardly revised its expectations for FY23. Specifically, the company previously stated that it anticipated adjusted EBITDA margin to increase by a couple hundred basis points yr/yr. Now, mainly thanks to its lower-than-expected expenses, PINS believes it can double that gain.
- Non-GAAP expenses were up by just 5% in Q2 as the company identified additional cost efficiencies after implementing a workforce reduction last quarter.
While the cost-cutting measures and stronger margins are certainly welcomed, what investors really want to see is a meaningful reacceleration in PINS growth.
- On that note, the company is pinning its hopes on its expansion into shopping as it looks to diversify its revenue stream. PINS is only in the early innings of this expansion effort, but the results so far have been encouraging. For instance, CEO Bill Ready commented that shopping ads revenue has grown "multiples of our total revenue growth."
- PINS move into shopping received a major boost in May when it announced an advertising partnership with Amazon (AMZN), allowing advertisers to link to their products hosted on Amazon.com through PINS' platform.
- Mr. Ready noted that a partnership of this scale will be a multi-quarter implementation with the most meaningful revenue impact likely hitting in early 2024. He also believes that more partnerships like this will materialize down the road.
Overall, PINS results and guidance show that business is improving -- just not as strongly as some had hoped. Still, its improving engagement metrics and less confrontational platform environment should work in its favor as ad spending continues to recover.
Starbucks strong recovery in China gives an otherwise lethargic Q3 performance a boost (SBUX)
A strong recovery in China and improved operating efficiencies provided Starbucks' (SBUX) 3Q23 earnings with enough of a jolt to edge past expectations, but traffic slowed at its stores in North America as consumers pulled back on discretionary spending. Consequently, for the second time in the past three quarters, the coffee chain operator fell just short of revenue estimates with North American same-store sales also slightly missing the mark.
- SBUX outlook for the remainder of its fiscal year (ending September) indicates a continuation of current trends. Like last quarter, the company reaffirmed its FY23 revenue and same-store sales guidance, forecasting revenue growth of 10-12% and global comp growth near the high end of 7-9%.
- During the earnings call, CFO Rachel Ruggeri commented that revenue pressures are expected to continue in Q4, mainly due to softness in the at-home coffee business with revenue anticipated to be flat in that channel on a yr/yr basis.
- Customers in North America and the U.S. are also making fewer trips to SBUX stores. In Q3, comparable transactions in North America were only up 1%, down from last quarter's increase of 6%.
- The good news is that customers are spending more when they do visit a store, attaching food to their orders or adding extras to their drinks. This is reflected in a 6% increase in average ticket size in North America and the U.S.
- Price increases across the menu, which also drove average ticket higher, combined with improved operating efficiencies to expand non-GAAP operating margin by 50 bps yr/yr to 17.4%.
- Recently appointed CEO Laxman Narasimhan has prioritized improving the shopping experience and employee satisfaction levels by increasing worker incentives.
- Lower employee turnover, along with investments in new store equipment and improved store designs, is leading to productivity gains and, ultimately, to stronger profits.
- On that note, SBUX narrowed its FY23 earnings growth guidance to +16-17% from +15-20%, equating to an EPS range of $3.43-$3.46 that edged past expectations.
- The modest upside EPS guidance probably isn't the main driver behind the stock's rally today. Rather, the sharp recovery in China -- SBUX second largest market -- is likely fueling the gains as participants anticipate a FY24 growth catalyst unfolding.
- China comparable store sales surged by 46%, topping expectations, after collapsing by 44% in the year-earlier quarter. COVID-related restrictions hammered SBUX's business in China last year.
- When the Chinese government lifted its zero-COVID policy late last year, virus cases soared higher, creating another major headwind there. Now, however, business is rebounding, and momentum is building in China, positioning SBUX for an upswing in growth.
The main takeaway is that it was another mixed performance for SBUX, but expectations were muted heading into the earnings report, setting the stage for a bounce higher.
Advanced Micro trades lower following lackluster Q2 report and guidance (AMD)
Advanced Micro (AMD -6%) is trading lower today after reporting only slight EPS and revenue upside for Q2 and guiding Q3 revenue in-line. We think investors are happy there was not a guide down given some headwinds in some segments.
- Data Center is AMD's most closely watched segment. In Q2, DC revenue fell 11% yr/yr but rose 2% sequentially to $1.32 bln primarily due to lower 3rd Gen EPYC processor sales as Enterprise demand was soft and Cloud inventory levels were elevated at some customers. While macro uncertainty caused weak demand within its Enterprise vertical, sales of EPYC processors for Enterprise servers grew sequentially as AMD closed multiple wins. AMD expects EPYC revenue to grow double-digits sequentially in Q3, fueled by the expanding fourth Jen EPYC CPU ramp.
- Its weakest segment in Q2 by far was Client, which saw revenue slashed 54% yr/yr to $998 mln, due to reduced processor shipments resulting from a weaker PC market and a significant inventory correction across the PC supply chain. The silver lining is that Client sales grew 35% sequentially as Ryzen 7000 series CPU sales grew significantly led by launches of new notebooks from the largest OEMs. AMD also said PC market conditions improved in Q2 vs Q1. We think the market is reacting favorably to this sequential growth/commentary. AMD noted that more than 100 AMD powered commercial PC platforms are on track to launch this year from HP, Lenovo and other leading OEMs. Also, 2H is seasonally stronger for Client, so that bodes well.
- Gaming segment revenue fell 4% yr/yr and 10% sequentially to $1.58 bln. While semi-custom revenue grew yr/yr, that was more than offset by lower gaming graphics revenue. The only growth area was its Embedded segment, which saw 16% yr/yr revenue growth to $1.46 bln, driven by strength in the Industrial, Vision and Healthcare, Automotive and Test and Emulation markets. However, AMD expects Embedded revs to decline in 2H23 as lead times normalize and some customers reduce their inventory levels.
- In 2H23, AMD expects the PC market to grow seasonally with more normalized inventory levels across the supply chain. In Data Center, AMD sees a mixed environment as AI deployments are expanding. AMD is seeing softer cloud spend outside of AI as some cloud vendors are optimizing their cap-ex. Enterprise customers remain cautious with new deployments. But overall, AMD is expecting a large ramp in 2H for its DC segment, weighted more toward Q4.
- For Q3, AMD expects a return to yr/yr growth for its Client segment, while Data Center should be flattish. Gaming and Embedded segments are expected to decline. Sequentially, AMD expects Client and DC segments to each grow double-digits and the Gaming and Embedded segments to decline. Non-GAAP gross margin in Q3 is expected at approx 51%, a slight increase from 50% in Q2.
Overall, we think this Q2 report was a bit of a letdown. The upside was very modest and the mid-point of Q3 revenue guidance was below analyst expectations. There was also some cautious commentary. It was not all bad as AMD expects its Client and DC segments to each grow double-digits sequentially in Q3. It also sounds like 2H has some pockets of strength. However, there was just not a lot to excited about with this report.
CVS Health stays healthy despite cutting its FY24 EPS target and withdrawing FY25 EPS guidance (CVS)
CVS Health (CVS +4%) has had many ups and downs today following its better-than-expected Q2 report. After initially jumping +2% higher, shares started to pull back during the earnings call when the retail pharmacy giant withdrew its previous FY24 and FY25 earnings targets. After reports swirled yesterday that CVS was restructuring (CVS confirmed this news today), eliminating approximately 5,000 roles, the stock received a jolt since it would result in cost-savings to preserve longer-term earnings targets despite the numerous headwinds facing the company, including a cut to its Star Rating, spending over $18.0 bln on M&A, and general macroeconomic slowdown.
However, CFO Shawn Guertin noted that given the emergence of multiple headwinds, including uncertainty in Medicare Advantage (MA), a weakening consumer environment, reduced contributions from COVID, and the company's plans to accelerate Oak Street clinic growth, its FY24 EPS target of $9.00 would no longer be attainable. Instead, CVS targets flat EPS growth yr/yr, projecting FY24 earnings of $8.50-8.70, the same range as its FY23 forecast. Meanwhile, CVS stated that investors should not rely on its FY25 EPS target of $10.00 but did not provide a replacement estimate, commenting that details will be released during its Investor Day in December.
- Diving deeper, the uncertainty in MA was likely already expected after prominent U.S. health insurers, like UnitedHealth Group (UNH) and Humana (HUM) touched on rising medical costs due to an uptick in deferred care over the past two months. CVS saw costs rise meaningfully in MA during the quarter, reflected by its medical benefit ratio (MBR) in its Health Care Benefits segment (30% of Q2 revs), climbing 350 bps yr/yr to 86.2%. CVS anticipates its FY23 MBR to land at the high end of its prior guidance of 84.7%, give or take 50 bps.
- In Pharmacy & Consumer Wellness (32% of Q2 revs), consumer demand continued to wane, an unfavorable development rival Walgreens Boots Alliance (WBA) discussed during its MayQ earnings call in June. At the same time, COVID-19-related volumes continued to drop off, taking around a 140 bp chunk out of total prescription volume growth in the quarter.
- Still, same-store sales growth was relatively healthy, increasing +10.9%, comprised of a +14.3% improvement in pharmacy comps and a -0.3% decline in front-store comps. The robust pharmacy comps reflect resilience in CVS's Health Services segment (52% of Q2 revs), which the company expects will continue throughout the year.
Following a disappointing Q1 report in May, CVS cautioned that recent developments could start to weigh on its bottom line going forward. It never helped that consumer demand remains pressured by sticky inflation. On the bright side, these trends set realistic expectations, illuminated by shares of CVS tumbling around 20% on the year ahead of today's Q2 figures. Meanwhile, many of the headwinds that led to its reduced guidance were already discussed by peers. As a result, the stock is holding up well today.
Bottom line, CVS is amid significant challenges. However, we think its acquisitions will strengthen its already-sturdy positioning in the healthcare sector. Once economic conditions let up, CVS is poised for considerable upside.
ZoomInfo slashes its FY23 revenue forecast as software firms choose profitability over growth (ZI)
ZoomInfo (ZI -25%) plummets to all-time lows today after delivering an alarming outlook on near-term demand. The SaaS firm, focused on disrupting the traditional customer relationship management (CRM) space by pulling info from unique sources, did deliver decent headline results in Q2. However, management did not have many encouraging remarks about the current state of the economy. ZI discussed that a reduction in customer spending hindered its Q2 numbers. Even worse, the company does not expect challenges to ease over the near term.
As a result, ZI slashed its FY23 revenue outlook, projecting $1.225-1.235 bln, down from $1.275-1.285 bln, translating to just +12% yr/yr growth from +17%, which was already a substantial drop-off from the +47% jump posted in FY22.
- What happened? Because ZI's customers are disproportionately in the software vertical, where spending remains suppressed given the current low-growth environment, the shift toward profitability from growth at all costs weighed considerably on ZI's results.
- ZI pointed to one example of an organization in the $100K cohort that removed 80% of its sales team -- where ZI's software is embedded -- overnight to focus on profitability over new business.
- ZI did not offer up much of a silver lining, stating that after Q2's performance, it no longer believes that current budgetary pressures clipping renewals will ease over the near term. Small and medium-sized businesses (SMBs) are amongst the worst hit, evidenced by a perpetual climb in write-offs for smaller customers
- With software companies putting their growth plans on hold, the percentage of total revenue from the software vertical dropped to 35% from 40% in the year-ago period.
However, there were a few pockets of strength in the quarter. Total revenue still edged 15.5% higher yr/yr to $308.6 mln, driven by some of ZI's most prominent customers, illuminated by a 40% increase in sales from its $1 mln plus cohort. ZI also witnessed a 20% bump in sales from its customer base outside of software, where the company is intentionally seeking to grow given the less negative impact of the current high-interest rate environment.
ZI is also rolling out several initiatives to contend with the numerous headwinds it faces over the near term. Founder and CEO Henry Schuck mentioned that the company would increase its matching and phone number coverage, decrease application load times and search latency, and adjust staffing levels. Generative AI will also become more rooted in its software. As a result, ZI continues to target a 40% margin despite the drop in sales for FY23.
Bottom line, it was a tough three months for ZI. Sales teams are contracting, and growth is stalling, setting the stage for a weak rest of the year. Although there were some bright spots, ZI's shares will likely continue tracking lower unless spending starts to turn around.
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