Market Snapshot
| Dow | 39869.38 | -38.62 | (-0.10%) | | Nasdaq | 16698.32 | -44.07 | (-0.26%) | | SP 500 | 5297.10 | -11.05 | (-0.21%) | | 10-yr Note | -25/32 | 4.38 |
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| | NYSE | Adv 1256 | Dec 1489 | Vol 945 mln | | Nasdaq | Adv 1996 | Dec 2230 | Vol 1.2 bln |
Industry Watch
| Strong: Consumer Staples |
| | Weak: Industrials, Materials, Consumer Discretionary, Energy, Utilities, Information Technology |
Moving the Market
-- Lacking conviction following record closing highs for major indices
-- Mixed responses to earnings from Dow components Walmart (WMT) and Cisco (CSCO)
-- Treasury yields moving slightly higher after this morning's data
-- Pullback after DJIA topped 40,000 for the first time
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Closing Summary
16-May-24 16:30 ET
Dow -38.62 at 39869.38, Nasdaq -44.07 at 16698.32, S&P -11.05 at 5297.10
[BRIEFING.COM] The major indices extended further into record territory today. The S&P 500 was up 0.3% at its high, the Nasdaq Composite showed a 0.3% gain at its best, and the Dow Jones Industrial Average traded above 40,000 for the first time at its high, sporting a 0.4% gain.
Participants were lacking conviction, though, even when the market was at intraday highs. Market breadth was mixed through the entire session, skewing more negative by the close. Decliners led advancers by an 11-to-10 margin at both the NYSE and the Nasdaq.
The major indices all closed with modest losses after early gains faded in the afternoon. The late pullback was driven in part by a sense that stocks are due for a cooldown after reaching fresh all-time highs.
A slight rise in market rates also contributed to the modest pullback in equities. The 10-yr note yield settled two basis points higher at 4.38% and the 2-yr note yield settled five basis points higher at 4.79%.
Ten of the 11 S&P 500 sectors registered declines, but like index-level moves, the losses were relatively modest. None of the sector fell more than 0.8%. The consumer discretionary sector was the worst performer, dropping 0.8%, followed by the materials sector, which closed 0.7% lower.
The S&P 500 consumer staples sector was alone in positive territory at the close, showing a 1.5% gain. A sizable gain in shares of Walmart (WMT 64.00, +4.17, +7.0%) following impressive earnings results and outlook.
Meanwhile, Fellow Dow component Cisco (CSCO 44.32, -1.34, -2.7%) received a negative response to its earnings news.
Today's economic data did not garner much of a response from stocks or bonds. Weekly jobless claims continue to run below slowdown-like levels and housing starts were weaker-than-expected April. April import-export prices, the May Philadelphia Fed Index, and April industrial production were also released this morning.
- S&P 500:+11.1% YTD
- Nasdaq Composite: +11.2% YTD
- S&P Midcap 400: +8.4% YTD
- Dow Jones Industrial Average: +5.6% YTD
- Russell 2000: +3.4% YTD
Reviewing today's economic data:
- Initial jobless claims for the week ending May 11 decreased by 10,000 to 222,000 (Briefing.com consensus 218,000). Continuing jobless claims for the week ending May 4 increased by 13,000 to 1.794 million.
- The key takeaway from the report is that the level of initial jobless claims remains supportive of an economy that is not steering toward a recession.
- Housing starts increased 5.7% month-over-month in April to a seasonally adjusted annual rate of 1.360 million units (Briefing.com consensus 1.440 million). Building permits declined 3.0% month-over-month to a seasonally adjusted annual rate of 1.440 million (Briefing.com consensus 1.488 million).
- The key takeaway from the report is that there wasn't any strength in single-unit starts (-0.4% month-over-month) or single-unit permits (-0.8%), which is a setback for an inventory-constrained existing home market dealing with the added constraint of high mortgage rates and high prices that have created affordability pressures.
- Import prices increased 0.9% month-over-month in April (+1.1% yr/yr). Excluding fuel, they were up 0.7% (+0.9% yr/yr). Export prices rose 0.5% month-over-month in April (-1.0% yr/yr). Excluding agricultural products, they were up 0.7% (+0.1% yr/yr).
- The key takeaway from the report is that import and nonfuel import prices have accelerated in each of the last two months, which is contributing to inflation sticking stubbornly above the Fed's 2% target.
- The Philadelphia Fed Index for May checked in at 4.5 (Briefing.com consensus 5.0) versus 15.5 in April. A number above 0.0 is indicative of expansion, so the May reading connotes a slowdown in the pace of expansion versus the prior month.
- The key takeaway from the report is that manufacturing activity in the Philadelphia Fed region is still positive, but weakened in May in a manner that fits with a slower growth narrative.
- Total industrial production was unchanged month-over-month in April (Briefing.com consensus 0.2%) following a downwardly revised 0.1% (from 0.4%) in March. The capacity utilization rate dipped to 78.4% (Briefing.com consensus 78.4%) from an upwardly revised 78.5% (from 78.4%) in March. Total industrial production was down 0.4% yr/yr while the capacity utilization rate was 1.2 percentage points below its long-run average.
- The key takeaway from the report was the weakness in manufacturing output, which goes hand-in-hand with a lower growth outlook.
Looking ahead, Friday's economic lineup is limited to the April Leading Indicators Index at 10:00 ET.
Stocks drift lower in front of close
16-May-24 15:35 ET
Dow +20.79 at 39928.79, Nasdaq -20.83 at 16721.56, S&P -3.15 at 5305.00
[BRIEFING.COM] The Dow Jones Industrial Average is still higher on the day, but looks poised to close below 40,000.
The 10-yr note yield settled two basis points higher at 4.38% and the 2-yr note yield settled five basis points higher at 4.79%.
Looking ahead, Friday's economic lineup is limited to the April Leading Indicators Index at 10:00 ET.
Stocks move slightly higher
16-May-24 15:05 ET
Dow +63.45 at 39971.45, Nasdaq -0.26 at 16742.13, S&P +3.65 at 5311.80
[BRIEFING.COM] Stocks are moving higher, leading the major indices further off session lows.
The S&P 500 and equal-weighted S&P 500 are each trading 0.1% higher. The Nasdaq Composite, meanwhile, trades near its prior close.
Separately, the US Dollar Index is up 0.1% to 104.48.
Dollar General rises in S&P 500 on Walmart sympathy
16-May-24 14:25 ET
Dow +9.17 at 39917.17, Nasdaq -13.72 at 16728.67, S&P -1.73 at 5306.42
[BRIEFING.COM] The major averages have dipped a bit in recent trading, the S&P 500 (-0.03%) now narrowly lower.
Elsewhere, S&P 500 constituents Dollar General (DG 146.09, +5.03, +3.57%), Everest Group (EG 387.43, +12.32, +3.28%), and Bunge (BG 104.79, +3.05, +3.00%) pepper the top of the standings. DG rises in sympathy to Walmart's (WMT 64.02, +4.19, +7.00%) report, while both EG and BG announced a dividend raise.
Meanwhile, North Carolina-based building materials firm Martin Marietta (MLM 584.00, -28.68, -4.68%) is today's top laggard.
Gold slips as yields, dollar rebound on Thursday
16-May-24 14:00 ET
Dow +28.78 at 39936.78, Nasdaq +1.98 at 16744.37, S&P +2.27 at 5310.42
[BRIEFING.COM] The Nasdaq Composite (+0.01%) is narrowly higher, climbing out of modest losses from the previous half hour.
Gold futures settled $9.40 lower (-0.4%) to $2,385.50/oz, pressured by a modest rebound in yields and a slightly firmer dollar.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.47.
Under Armour's Founder does not wait long to enact sweeping changes; FY25 revs to take a hit (UAA)
Under Armour (UAA) founder Kevin Plank took little time to implement sweeping changes as newly minted CEO, replacing Stephanie Linnartz, who sat in the corner office for just 13 months, on April 1. Mr. Plank announced a broad restructuring plan, reinvigorating the company's brand strength over the next 18 months by zeroing in on brand-building fundamentals. The turnaround plan is the second UAA has undergone within the past year following Ms. Linnartz's plan.
A company constantly undergoing an overhaul tends to generate impatience from investors, evidenced by shares of UAA staying within a tight range of $6.00-10.00 over the past year, around 60% below levels from 2021. The next 18 months may not be much better either, as Kevin Plank conceded that his strategy will result in a low double-digit percentage drop in revs yr/yr in FY25 (Mar), including a 15-17% decline in North America.
- Given the magnitude of UAA's ambitious turnaround efforts, the company's Q4 (Mar) report took a backseat today. UAA delivered adjusted EPS of $0.11, modestly better than analysts anticipated, on $1.33 bln in revs, or a 4.7% decline yr/yr, consistent with consensus.
- What are the pillars of Kevin Plank's turnaround plan? UAA will eliminate products that are not up to par, reducing its SKUs by around 25% over the next year and a half. UAA is also looking to reduce the time it takes to get a product to market, targeting a 12-month go-to-market capability.
- UAA will also re-emphasize its men's apparel business, particularly in North America. Mr. Plank remarked that too much promotional activity and a lack of focus in the apparel business materially hurt the perception of the Under Armour brand. As such, men's apparel will be its top priority, making it crucial to begin seeing improvements over the next few quarters. In Q4, apparel sales edged 1.3% lower yr/yr, which did outpace footwear and accessories, dropping by 10.6% and 6.6%, respectively. However, apparel fell yr/yr for back-to-back quarters, the first time since 3Q23 (Sep).
- Finally, UAA will enhance its direct-to-consumer (DTC) line of exclusive products for its stores and e-commerce. Wholesale will remain vital to UAA's success, comprising roughly 60% of its total revenue. However, Mr. Plank wants to reignite demand around DTC, leveraging its physical and digital stores to drive success.
Like many turnaround strategies, UAA is looking to reduce the number of moving parts in its operations, from the number of consultants to the number of suppliers. Investors initially balked at the news that the founder, Kevin Plank, would replace Stephanie Linnartz, likely frustrated by how little time the Board gave to the former CEO to enact her turnaround strategy.
However, following an initial sell-the-news reaction to Mr. Plank's restructuring plan today, shares are moving toward the green, underscoring some mounting enthusiasm over the potential for UAA to finally break free from its constant woes. Announcing a $500 mln repurchase plan is also helping ease the pain. Nevertheless, it may be better to wait until UAA's initiatives result in improved quarterly numbers.
Deere's earnings outlook withering under softening farming fundamentals, lower crop prices (DE)
For the seventh consecutive quarter, Deere (DE) ran past EPS estimates as the ag equipment maker kept a tight lid on expenses, but the company's Q2 earnings outperformance is being overshadowed by another reduction in its FY24 net income guidance. The company is now expecting net income of approximately $7.0 bln, equating to an estimated yr/yr decline of about 31%. With farming fundamentals continuing to soften, DE's outlook is also darkening.
- This is the second time in as many quarters that DE has cut its FY24 net income guidance. Last quarter, the company lowered its profit forecast to $7.50-$7.75 bln from its initial guidance of $7.75-$7.85 bln. A sharp decline in crop prices, including for corn (-21% yr/yr) and soybeans (-13%), is mainly to blame for the company's reduced profit expectations. Falling commodity prices means that farmers have less income to spend on new machinery and equipment.
- When competitor Agco (AGCO) reported a Q1 top line miss and issued downside FY24 EPS guidance on May 2, a warning flag was raised that DE's quarterly results or outlook were in jeopardy of missing the mark and disappointing investors. Beyond the EPS beat, which was mainly driven by a 10% decline in operating expenses, there wasn't much for DE to hang its hat on.
- Revenue dove by more than 15% yr/yr to $13.6 bln, representing DE's largest yr/yr revenue decline since the pandemic impacted quarter of 2Q20. Coming off a boom period in 2022-2023, in which record farming income drove robust demand for new combines and tractors, business in DE's Production & Precision Ag segment has slowed considerably.
- In Q2, sales for the segment fell by 16% to $6.58 bln, due to lower shipment volumes, while operating margin contracted by 260 bps yr/yr to 25.1%.
- Price increases were not enough to offset the effects of lower volumes.
- Unfortunately, DE doesn't expect conditions to improve anytime soon for Production & Precision Ag, its largest segment by revenue. In fact, the company's outlook has worsened since last quarter when it guided for a net sales drop of approximately 20% in FY24. Now, DE is expecting sales for Production & Precision Ag to decrease by 20-25%.
- The story is similar in DE's Small Agriculture & Turf segment, which sells smaller tractors and lawn mowers. Net sales were down 23% in Q2 to $3.18 bln and DE is forecasting a decline of 20-25% in FY24, compared to its prior forecast of a 10-15% drop. Sluggish consumer spending and high interest rates are having an outsized impact on this segment since it caters more to the everyday homeowner.
- Construction & Forestry was the relative bright spot with net sales down a more modest 7% to $3.8 bln. In the earnings press release, CEO John May noted that DE is benefitting from stability in the construction end markets. For FY24, DE is anticipating the construction market to be flat to down 5% in the U.S. and Canada.
The main takeaway is that agriculture fundamentals weakened further this quarter as disinflation puts a dent into farming incomes. It's important to remember that DE is lapping very difficult yr/yr numbers -- revenue soared by 34% in last year's Q2 -- which adds some key context to its results and outlook.
Walmart trades to new all-time highs following strong Q1 results, comps not driven by inflation(WMT)
Walmart (WMT +6%) is heading nicely higher after reporting Q1 (Apr) results this morning. The retail giant reported a healthy beat on EPS and revenue. It issued in-line guidance for Q2 (Jul) and guided to the high end or slightly above prior guidance for full year revenue and adjusted EPS.
- All three operating segments performed well. WMT noted that its momentum is being driven by growth in units sold and transaction counts as well as market share gains including general merchandise. WMT stressed that these are not just inflation-driven results. In the US, like-for-like sales inflation was just 40 bps. Together with its suppliers, WMT is making progress on lowering prices.
- Its Walmart US segment delivered better-than-expected growth with comp sales up +3.8% including strong eCommerce growth of +22%. Traffic and sales growth were strong across both stores and digital channels. Importantly, WMT is seeing higher engagement across income cohorts with upper-income households continuing to account for the majority of share gains. Also, Walmart Connect advertising sales grew 26% with strong growth in advertiser counts, including marketplace sellers.
- Its Walmart US segment also recently launched a new private brand in food called Better Goods, its largest food private brand release in 20 years. The brand focuses on premium quality, but 70% of items are priced under $5. WMT feels this is the type of quality and value that will resonate across income spectrums.
- Sam's Club US comps (excl fuel) had been trending lower in recent quarters: +7.0%, +5.5%, +3.8%, +3.1% but they rebounded to +4.4% in Q1. Comps were led by food and consumables as well as increases in transactions and unit volumes. Sam's Club also gained dollar and unit market share in grocery. Finally, Walmart's International segment had the strongest result with 10.7% CC revenue growth (not comps), reflecting strength in Walmex, China and Flipkart.
- In terms of the consumer, WMT said pocketbooks remain stretched and WMT sees the effect in its mix as they are spending more of their paychecks on non-discretionary categories and less on general merchandise. This merchandise mix remains a headwind to margins but is consistent with expectations.
Overall, this was a very good way to start out the new fiscal year. What stood out to us was WMT noting these comps were not inflation-driven. As such, Briefing.com sees these as higher quality comps. We also thought it was a good sign that higher income consumers are shopping more at Walmart and Sam's Club. Even after inflation eases, they may decide to stick around. Finally, the stock traded nicely higher from mid-December to mid-March but then flattened out since then. However, this report has pushed the stock above this trading range, which is a good signal that perhaps another leg higher is in store. This report bodes well for Target's (TGT) report next week on May 22.
Cisco inches lower despite upbeat AprQ results as customers continue to scrutinize budgets (CSCO)
Cisco's (CSCO -2%) initially excellent reception with investors is crumbling as shares crawl modestly lower despite the company delivering solid top and bottom-line upside in Q3 (Apr) alongside upbeat Q4 (Jul) revenue guidance. The prominent networking component designer was coming off a gloomy Q2 (Jan) report, extending its projected timeline on when customers will deploy their excess inventory and leading to bearish guidance. However, the dynamics in Q3 underscored encouraging trends, with CSCO ending the quarter noticeably stronger than where it started. As such, management believes its customers are on track with the inventory digestion it touched on in Q2, driving demand stabilization.
So why are shares down? CEO Charles Robbins remarked that customers continue to ruthlessly prioritize what projects to allocate their tighter IT budgets toward, a trend that has kept CSCO more conservative in the past with its guidance. As such, even though investors liked what they saw from CSCO, they are proceeding with some caution as the demand environment still contains a few cracks, fading the stock's initial +8.9% jump during yesterday's after-hours session.
- Stabilization was reflected in CSCO's headline results, delivering adjusted EPS of $0.88, nicely above its $0.84-0.86 estimate, and revs of $12.7 bln, cruising past its $12.1-12.3 bln forecast. On a yr/yr basis, revenue dropped by 12.8%. However, sequentially, revenue was flat, a significant improvement from the past two quarters. Likewise, product orders inched 2% higher yr/yr in Q3 despite ongoing budget scrutiny, with highlights stemming from data center and campus switching, as well as Security and Collaboration categories, which enjoyed positive revenue growth.
- CSCO's $28 bln acquisition of Splunk last year, its largest purchase ever, closed during the quarter, added 2 pts to CSCO's product order growth, making the figure flat when backing out Splunk's impact. Still, flat order growth marked a considerable improvement from the 12% drop in Q2.
- Speaking of Splunk, CSCO remains excited over its purchase, identifying 5,000 existing Cisco customers that can become meaningful Splunk customers, which would boost its total customer count by over 30%.
- AI has helped the industry establish stabilization as customers continue adopting and deploying AI, which requires the infrastructure to power it. Already, CSCO is noticing upward momentum among the top four hyperscalers to leverage its designs for AI, giving it the confidence to reiterate its goal of $1.0 bln in AI product orders in FY25.
- Looking ahead, CSCO anticipates Q4 adjusted EPS of $0.84-0.86 and revs of $13.4-13.6 bln, marking a long-awaited sequential increase. While IT budgets remain under a watchful eye, other headwinds are expected to ease. CSCO noted that following a disparity in its public sector demand during Q3, where EMEA and APJC outpaced the U.S., it should see improvements domestically in subsequent quarters. Furthermore, CSCO's win rates are stable and increasing in strength heading into Q4.
Bottom line, CSCO delivered notable improvements from last quarter, sparking a quick pop in its share price. However, upon further inspection, investors are maintaining caution as the macroeconomic backdrop has not structurally changed, for better or worse.
dLocal Limited sinks toward all-time lows as several headwinds from Q1 clipped profitability (DLO)
dLocal Limited (DLO -24%) plummets toward all-time lows today despite recording healthy total payment volume (TPV) growth in Q1, as it failed to drive any meaningful gross profit growth, resulting in adjusted EBITDA compression. DLO, a payment processor focused on emerging markets across Latin America, Asia, and Africa, started the year strong, boasting nearly +50% TPV growth from multiple verticals and an almost tripling of all its e-commerce business.
However, things turned south quickly as the quarter progressed. DLO fell short of adjusted EPS and revenue expectations, posting $0.06 and $184.4 mln, or 34.3% growth yr/yr, respectively. Worse yet, DLO's gross profits of $63.0 mln expanded by just 2% yr/yr, significantly underperforming analyst expectations, while adjusted EBITDA tumbled by 19% to $45.5 mln.
These weak points put DLO in a tough position to achieve its previously outlined gross profit and adjusted EBITDA forecasts of $320-360 mln and $220-260 mln, respectively. DLO mentioned that it is still on track to meet these targets, albeit now closer to the lower end of their ranges.
- What happened? For one, a prominent merchant renegotiated its fees as their contract came up for renewal, moving into a new level in DLO's tiered pricing scheme. DLO's top ten merchants comprise a decent chunk of its overall revenue, making the new pricing scheme materially hurt its top line in Q1.
- Secondly, merchants shifted toward products carrying lower monetization payout volumes to better align with a seasonally soft e-commerce and advertising market. It also did not help that DLO's merchants delayed a few crucial new launches scheduled in the quarter, leading to the company slowing anticipated volume ramp-ups that would have likely countered the seasonal weakness.
- The third factor, and perhaps most frustrating to investors, is that despite the headwinds in the quarter, DLO did not reduce its planned investment increases. The company's decision to keep its foot on the gas even at current gross profit levels reminds us of South East Asian e-commerce giant Sea Limited (SE), which quickly pivoted back to growth over profitability to maintain a competitive position. DLO is amid a similar dynamic and anticipates that gross profit will eventually rebound, proving its move correct in the long run.
It was not all doom and gloom. DLO noticed an improving trend in March, with gross profits in the month above Q4 levels. Furthermore, DLO's cross-border businesses returned to sequential growth, climbing by 9% to reach a record $2.4 bln in TPV in Q1. Cross-border remains at the core of DLO's business, making a return to sequential growth an encouraging indicator. Also worth noting was that DLO announced a new $200 mln repurchase program, underpinning confidence in the future potential of its business framework.
While these silver linings are mildly uplifting, they are doing little to reassure investors that a disappointing Q1 was a one-off quarter, especially given DLO's past setbacks, which it viewed as temporary.
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