Market Snapshot
| Dow | 39566.85 | -240.52 | (-0.60%) | | Nasdaq | 16396.83 | +17.37 | (0.11%) | | SP 500 | 5243.77 | -10.58 | (-0.20%) | | 10-yr Note | -32/32 | 4.33 |
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| | NYSE | Adv 977 | Dec 1813 | Vol 815 mln | | Nasdaq | Adv 1638 | Dec 2685 | Vol 4.8 bln |
Industry Watch
| Strong: Communication Services, Energy, Information Technology |
| | Weak: Health Care, Real Estate, Utilities, Consumer Discretionary, Industrials, Financials |
Moving the Market
-- Digesting a slate of economic data, which showed some sticky inflation data and stronger than expected ISM Manufacturing data
-- Rising Treasury yields in response to the data keeping the stock market in check
-- Gains in some mega caps and relative strength in the semiconductor space
-- New inflows at the start of Q2
| Closing Summary
01-Apr-24 16:25 ET
Dow -240.52 at 39566.85, Nasdaq +17.37 at 16396.83, S&P -10.58 at 5243.77
[BRIEFING.COM] Today's session featured a mostly negative bias. It was the first trading day of the new quarter following a stellar start to the year for many stocks, which contributed to the overall negative vibe. Declining issues outpaced advancing issues by a roughly 2-to-1 margin at both the NYSE and at the Nasdaq.
The Russell 2000, which outperformed other major indices last week, dropped 1.0% today. The S&P 500 and Dow Jones Industrial Average fell 0.2% and 0.6%, respectively. The Nasdaq Composite, meanwhile, eked out a 0.1% gain thanks to gains some mega caps and relative strength in the semiconductor space. The PHLX Semiconductor Index (SOX) jumped 1.2%.
The downside pressure seen elsewhere in the stock market was in response to a sharp increase in market rates. The 10-yr note yield jumped 12 basis points to 4.33% and the 2-yr note yield rose 10 basis points to 4.72%.
Treasuries were reacting to some economic data that didn't exactly corroborate the market's thinking in terms of rate cuts by the FOMC. The February Personal Spending and Income report, released Friday when markets were closed, showed some sticky inflation figures and this morning's ISM Manufacturing data was stronger than expected.
Eight of the 11 S&P 500 sectors settled with losses, but only one sector fell more than 1.0%. The rate-sensitive real estate sector was the top laggard, dropping 1.8% in response to the activity in Treasuries. Meanwhile, gains in Meta Platforms (META 491.35, +5.77, +1.2%) and Alphabet (GOOG 156.50, +4.24, +2.8%) helped propel the communication services sector to a 1.5% gain.
The energy sector was another top performer today, gaining 0.8%. It benefitted from positive action in Chevron (CVX 159.08, +1.34, +0.9%) and Exxon Mobil (XOM 116.99, +0.75, +0.7%), along with commodity prices. WTI crude oil futures settled 0.8% higher at $83.94/bbl and natural gas futures jumped 5.1% to $1.85/mmbtu.
- S&P 500:+9.9% YTD
- Nasdaq Composite: +9.2% YTD
- S&P Midcap 400: +8.8% YTD
- Dow Jones Industrial Average: +5.6% YTD
- Russell 2000: +3.7% YTD
Reviewing today's economic data:
- The S&P Global US Manufacturing Index dropped to 51.9 in the final March reading from 52.2.
- The March ISM Manufacturing Index checked in at 50.3% (Briefing.com consensus 48.5%), up from 47.8% in February. That is the first reading above 50.0% since September 2022, which equates to a manufacturing sector operating in an expansion mode.
- The key takeaway from the report is that it contained all the reasons why the Fed believes it can be patient before cutting rates: business activity is expanding, prices are sticking at higher levels, and employment conditions remain reasonably good.
- Total construction spending decreased 0.3% month-over-month in February (Briefing.com consensus 0.6%) following an unrevised 0.2% decline in January. Total private construction was flat month-over-month while total public construction was down 1.2% month-over-month. On a year-over-year basis, total construction spending was up 10.7%.
- The key takeaway from the report is that new single-family construction remains an important prop for overall construction spending, but the pickup there in February wasn't enough to offset a decent-sized decline in nonresidential spending in both the private and public sectors.
Looking ahead, Tuesday's economic calendar features February Factory Orders and the February JOLTS - Job Openings at 10:00 ET.
Rising commodity prices boosts energy sector
01-Apr-24 15:30 ET
Dow -268.92 at 39538.45, Nasdaq -10.94 at 16368.52, S&P -15.21 at 5239.14
[BRIEFING.COM] The major indices are holding near session lows heading into the close.
Looking ahead, Tuesday's economic calendar features February Factory Orders and the February JOLTS - Job Openings at 10:00 ET.
Elsewhere, WTI crude oil futures settled 0.8% higher at $83.94/bbl and natural gas futures jumped 5.1% to $1.85/mmbtu. This price action helped propel the S&P 500 energy sector higher today, which trades up 0.9% now. Most of the energy sector's components are trading higher, including Chevron (CVX 159.35, +1.61, +1.0%) and Exxon Mobil (XOM 117.07, +0.83, +0.8%).
Financials underperform
01-Apr-24 15:05 ET
Dow -268.77 at 39538.60, Nasdaq -7.61 at 16371.85, S&P -15.12 at 5239.23
[BRIEFING.COM] There hasn't been much up or down movement at the index level over the last half hour. The S&P 500 is down 0.3% and the Nasdaq Composite is down 0.1%.
The S&P 500 financial sector is underperforming the index today, down 0.6%. Component Citigroup (C 63.40, +0.17, +0.3%) is trading higher and will eliminate 430 jobs, according to Reuters.
Separately, Treasuries are near intraday high yields. The 10-yr note yield is up 12 basis points to 4.33% and the 2-yr note yield is up nine basis points to 4.71%.
Universal Health dented in S&P 500 after subsidiary fined $535 mln; Wynn Resorts up on Macau data
01-Apr-24 14:30 ET
Dow -257.80 at 39549.57, Nasdaq -8.68 at 16370.78, S&P -16.39 at 5237.96
[BRIEFING.COM] The S&P 500 (-0.31%) is in second place on Monday afternoon, down about 16 points.
Elsewhere, S&P 500 constituents Universal Health (UHS 173.19, -9.27, -5.08%), Etsy (ETSY 65.59, -3.13, -4.55%), and Align Tech (ALGN 315.60, -12.32, -3.76%) dot the bottom of the standings. UHS slides after news that its Pavilion Behavioral Health System subsidiary was fined $535 mln total by a Illinois court, while ETSY and ALGN fall despite a dearth of corporate news.
Meanwhile, Wynn Resorts (WYNN 107.03, +4.80, +4.70%) is one of today's best performers. WYNN moves higher after March Macau casino revenue numbers hit over the weekend.
Gold higher following weekend inflation readings
01-Apr-24 14:00 ET
Dow -274.64 at 39532.73, Nasdaq -14.36 at 16365.10, S&P -17.56 at 5236.79
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (-0.09%) is the shallowest declining average.
Gold futures settled $18.70 higher (+0.8%) to $2,257.10/oz, jumping higher as investors gauged Friday's PCE readings for indications that the Fed would cut rates in June.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $104.98.
Bill.com drops on an analyst downgrade today; long term offers compelling upside (BILL)
Negative sentiment surrounding Bill.com (BILL -6%) continues today following a downgrade to "Underweight" from "Equal Weight" at Wells Fargo. The rating change marks the second downgrade at Wells Fargo in just two months, underscoring a deteriorating view that the provider of financial automation software for small and medium-sized businesses (SMBs) will enjoy a meaningful turnaround anytime soon.
Briefing.com notes that shares of BILL have struggled to reverse course since late 2021, enduring an extended period of weak demand from its core SMB end market. Although the near-term backdrop may not look very rosy, as a cautious macroeconomic view creates hesitancy among business owners from engaging in a comprehensive digital transformation, the long-term demand associated with an underpenetrated market shifting to digital payments could produce a substantial tailwind for BILL, potentially harkening back to pandemic-level growth.
- Revenue growth has held up despite careful spending by SMBs, showcasing the steady demand for BILL's services. While growth is expected to cool in FY24 (Jun) -- BILL projects roughly 17% yr/yr at the midpoint of its $1.226-1.251 bln forecast -- the company is still lapping periods of considerable yr/yr growth. To put into perspective how quickly demand shot up over the past several years, BILL went from registering around $150 mln in annual sales before the pandemic to well over $1.0 bln by FY23.
- There is still significant untapped potential in the SMB space. Even after enjoying rocketing revenue growth, supported by an over four-fold uptick in customers to around 470,000, there are approximately 6 mln SMBs in the U.S. meeting BILL's checklist, i.e., not sole proprietorships, giving the company plenty of room to reignite revenue growth.
- Many of these businesses continue to pay bills with paper checks, typically at an additional cost by the supplier, making the switch to digital payments a meaningful cost-saving measure. In an elevated inflationary environment where SMBs have fewer levers to pull compared to larger enterprises when taking cost-cutting actions, moving off of paper checks can be an effective method to preserve margins.
- Speaking of margins, even though BILL's top line has weakened in recent quarters, its profitability has continuously improved, primarily due to aggressive cost-cutting initiatives. For instance, in December, BILL reduced its workforce by 15%. Its attention to controlling what it can during a difficult selling environment has led to Q2 (Dec) adjusted EPS of $0.63, well above the $0.14 posted in its first quarter of profitability in 1Q23.
It may prove more challenging than BILL anticipates converting SMBs from paper payments to digital payments, especially given the uncertain economic landscape and highly fragmented industry. However, the stock has likely priced in much of BILL's near-term headwinds, dropping by over 40% in just the past six months. Meanwhile, the Federal Reserve potentially lowering interest rates this year could provide a boost for BILL. Lastly, AI could generate another near-term tailwind as businesses begin to turn toward more automated operations.
NIO's deliveries picked up a bit in March, but Chinese EV market has lost much of its charge (NIO)
Following a sluggish start to 2024, the Chinese EV market perked up in March as fresh incentives and new vehicle launches helped spark demand. Earlier this morning, NIO (NIO), Li Auto (LI), and XPeng (XPEV) reported March deliveries that generally exceeded expectations with each company generating solid double-digit yr/yr growth. Specifically, NIO's deliveries increased by 14.3% in March to 11,866, while LI and XPEV achieved growth of 39% and 29%, respectively.
- The better-than-expected deliveries are providing a much-needed boost to this beaten down group. On a year-to-date basis, shares of NIO are down by about 50%, while LI and XPEV have skidded lower by 19% and 47%, respectively. Those losses are mainly tied to a steep downturn in the Chinese EV market as macroeconomic headwinds and an accompanying price war that was instigated by Tesla (TSLA) last year weigh on the industry's growth and profitability.
- On that note, recall that last week, NIO lowered its Q1 delivery outlook to approximately 30,000 vehicles from its prior guidance of 31,000-33,000 vehicles. On a combined basis, deliveries in January and February fell by about 12% yr/yr. This news came on the heels of a disappointing Q4 earnings report in early March in which NIO missed EPS and revenue expectations.
- Similar to TSLA, which is expected to release its Q1 deliveries report tomorrow morning, NIO's margins have been squeezed by price cuts and incentives. In Q4, gross margin slipped to 7.5% from 8.0% in Q3, while vehicle margin of 11.9% fell short of estimates.
- To mitigate the impact of slowing sales, NIO implemented a workforce reduction plan last November, laying off about 10% of its employees. That initiative didn't have much of an impact on its Q4 results as NIO's adjusted loss from operations increased by about 1% yr/yr to RMB(6.06) bln, but it should have a greater effect in Q1 and 2H24.
- NIO, which focuses on the premium side of the EV market, is also banking on new 2024 models of its vehicle lineup to jumpstart demand. In Q2, deliveries of the 2024 ES7, ET7 and ET5 models will begin. Furthermore, like LI and XPEV, NIO is looking to expand into new markets outside of China, including plans to launch a new affordable brand called Firefly into Europe sometime next year.
The main takeaway is that EV demand accelerated a bit in March for Chinese EV makers, but it will take more than one better-than-expected month of deliveries to really turn the tide on this out-of-favor group.
Semtech jumps despite mild JanQ results; remains in the early stages of a broader turnaround (SMTC)
Semtech (SMTC +6%), a provider of high-performance semiconductor systems, continued navigating through globally high inventories during Q4 (Jan), resulting in mild earnings and sales performance. However, the company reiterated that it is in the early stages of a broader recovery, supporting its sustained upward climb today despite tepid quarterly results.
When first stepping into the CEO role in June 2023, Paul Pickle had plenty on his plate as inflationary pressures clashed with demand weakness, prompting cost-saving measures and a cautious outlook. However, since then, the demand backdrop has gradually improved, helping reenergize investor confidence; SMTC's shares have surged by around +30% over the past week, more than doubling since October lows. The market is growing increasingly confident that the worst of SMTC's woes are behind it and that demand trends requiring higher-speed access to the cloud will result in a long-lasting tailwind.
- A gradual turnaround was illuminated by a sequential jump in consumption across each of SMTC's end markets. Still, revenue fell mildly qtr/qtr in Q4 to $192.9 mln, driven by infrastructure and high-end consumer end markets, which were partially offset by a slight uptick in industrial end market growth. Meanwhile, adjusted EPS turned negative to $(0.06), landing around the midpoint of SMTC's $(0.11)-$0.01 guidance.
- Infrastructure slipped by 9% sequentially to $39.4 mln, underpinned by an expected pause in North American hyperscale data center deployment and SMTC's intent to normalize channel inventories. Nevertheless, there were some positive trends, including strong interest across certain data center components and accelerating passive optical network (broadband) demand.
- High-end consumer sales saw the most aggressive qtr/qtr drop at 15%, primarily due to coming off robust sales of transient voltage suppressors (TVS), which provide protection for electronic systems where voltage spikes. However, revenue trends underscore normalizing channel inventory levels. Meanwhile, proximity sensing bookings reached their highest point throughout FY24, aided by a substantially higher percentage of China handset OEMs incorporating the sensors.
- Industrial sales edged 1% higher sequentially to $121.5 mln, fueled by demand for internet-of-things (IoT) systems. Unfortunately, in SMTC's largest end market, the company anticipates that elevated module inventories will continue. Furthermore, visibility remains limited, leading management to believe recovery could be extended, possibly until the second half of this year.
- A measured recovery is evident in SMTC's Q1 (Apr) guidance, projecting potentially higher sequential headline numbers, including adjusted EPS of $(0.04)-$0.04 and revs of $195-205 mln. End market growth will likely be the inverse of what unfolded in Q4. SMTC expects sequentially higher revs in infrastructure and high-end consumers, partially hindered by lower industrial sales.
SMTC's Q4 numbers may not have been overly thrilling, but they were a step in the right direction. A market recovery could remain wobbly. However, with AI technology garnering more interest, SMTC is in a firm position to reignite growth. With shares still roughly 70% below all-time highs hit in late 2021, SMTC is a compelling turnaround opportunity.
Oxford Industries not feeling the beach vibe; apparel retailer misses and guides down (OXM)
Oxford Industries (OXM -2%) is heading lower following Q4 (Jan) earnings results, even as it boosted its quarterly dividend by 3% to $0.67/sh (new yield is 2.4%). This apparel company, which owns Tommy Bahama, Lilly Pulitzer, Johnny Was, Southern Tide, Beaufort Bonnet and Duck Head focuses on the laid-back vacation vibe. As such, they should be benefitting as consumers get out and travel more. However, results and guidance were weak.
- OXM reported a rare EPS miss this quarter, following 11 consecutive EPS beats. OXM had consistently reported double-digit EPS upside quarters, although the upside had narrowed in recent quarters and now we got a miss. Revenue rose 5.7% yr/yr to $404.4 mln, but that was below analyst expectations and at the low end of prior guidance of $403-423 mln. This pressured margins as consolidated adjusted operating margin fell sharply to 9.6% from 12.1% in the year ago period. Perhaps even more disappointing was some significant downside guidance for Q1 (Apr) while full year guidance was mixed.
- So, what happened? OXM said that January was a bit softer than expected and that softness continued into the new fiscal year. February was also down as OXM lapped strong double-digit comps from last year. As comps eased in March, comps have picked up, which is a bit of a silver lining. For a total months to-date, OXM says Q1 is comping modestly positive.
- OXM believes this choppiness is reflective of a somewhat unusual situation. Most economic indicators are fairly positive and yet consumer sentiment remains materially below where it was pre-pandemic. OXM says this muted consumer sentiment is manifesting itself in consumers who have the ability to spend but are being much more cautious in their spending on discretionary items such as fashion apparel, which is the core of OXM's business.
- In response, OXM is doubling down on its efforts to have fresh, new, differentiated product that gives consumers a reason to open their wallets. OXM is also maintaining an elevated, happy and optimistic messaging that is representative of each of its brands. In Tommy Bahama, its biggest brand, OXM is focused on growing its hospitality business, which includes its new Tommy Bahama Miramonte Resort, its restaurants and bars, and its fast casual Marlin Bars. Stores that are connected to a restaurant or bar typically sell more items.
Overall, this was a disappointing way to wrap up the fiscal year. In addition to its first miss in many quarters, its comments about the softness lingering into Q1 was not great to hear. The EPS downside guidance for Q1 was significantly below expectations. As such, we are a bit surprised the stock is not down more. We are a little surprised to see these results/guidance from OXM, because its customers tend to be older and higher income. Other apparel retailers catering to this clientele have performed better.
MSC Industrial trades lower following mixed quarter; expects improvement later this fiscal year
MSC Industrial Supply (MSM -2.5%) is trading roughly flat following its Q2 (Feb) earnings report this morning. This distributor of metalworking and MRO products reported a slight EPS miss but missed on revenue. MSM is a company that Briefing.com keeps an eye on because it provides a glimpse into the industrial economy. Roughly 45% of its sales are metalworking products, and about 70% of its business is sold into manufacturing environments, both light and heavy.
- As it exits the first half of its fiscal year, MSM describes its performance as mixed. The company is pleased with how it is managing the business in a soft environment. However, its core customer growth rate has not yet improved in the face of a sluggish macro environment. The silver lining is that MSM expects to see improvement during the back half of its fiscal year.
- Specifically for Q2, MSM endured a slow start to the quarter with continued softness in heavy manufacturing verticals. That led to sales declining 2.7% yr/yr to $935.3 mln. That was its worst yr/yr revenue performance in the past 13 quarters and MSM has now posted back-to-back yr/yr revenue declines following 10 quarters of growth.
- Despite sales falling short of expectations, it was good to see gross margin tick up by 20 basis points yr/yr to 41.5%. However, Q2 adjusted operating margin did fall to 10.5% from 12.2% a year ago.
Overall, the stock is not moving much. We think investors were not really surprised to see the top line miss. MSM has high exposure to manufacturing and its business has been slow for several quarters. While MSM does not provide guidance, it was encouraging to hear that management expects a better 2H than 1H. However, its business can be difficult to predict and a lot of it is affected by macro conditions.
Hopefully, the Fed starts lowering rates later this year, which should help companies like MSM. Finally, the stock has been in a fairly narrow $93-105 trading range since June 2023. We suspect it will take an improvement in the macro environment to get the stock moving again.
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