Market Snapshot
| Dow | 41914.75 | -293.47 | (-0.70%) | | Nasdaq | 18082.18 | +7.68 | (0.04%) | | SP 500 | 5722.26 | -10.67 | (-0.19%) | | 10-yr Note |
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| | NYSE | Adv 819 | Dec 1953 | Vol 969 mln | | Nasdaq | Adv 1328 | Dec 2901 | Vol 4.88 bln |
Industry Watch
| Strong: Information Technology, Utilities |
| | Weak: Energy, Consumer Discretionary, Financials, Health Care, Materials, Industrials, Real Estate |
Moving the Market
--China continues stimulus push with 30 basis points cut to Medium-Term Lending Facility
--Continued strength in NVIDIA
--Some consolidation interest after big run
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Closing Stock Market Summary
25-Sep-24 16:20 ET
Dow -293.47 at 41914.75, Nasdaq +7.68 at 18082.18, S&P -10.67 at 5722.26
[BRIEFING.COM] There were some familiar sightings today. The People's Bank of China provided another piece of policy stimulus, cutting its Medium-Term Lending Facility by 30 basis points to 2.00%, and NVIDIA (NVDA 123.51, +2.64, +2.2%) continued to outperform. Both provided a measure of support for the stock market, yet neither was enough to excite the buying masses.
The major indices trudged through a lackluster session, succumbing to some consolidation interest that had the Dow, S&P 500, and Russell 2000 trading in negative territory for the bulk of today's trade. The Nasdaq for its part kept its ahead above water most of the day, riding on NVDIA's shoulders.
Still, market internals reflected a more cautious-minded tape. Decliners outpaced advancers by a better than 2-to-1 margin at the NYSE and Nasdaq; the equal-weighted S&P 500 declined 0.6%; the Russell 2000 declined 1.2%; and there were only two S&P 500 sectors that escaped with a gain: the utilities sector and information technology sector, both of which advanced 0.5%.
The "market" had the benefit of the information technology sector exhibiting relative strength, yet the broader market passed on rallying around it.
Nine of the 11 S&P 500 sectors finished with a loss. The energy sector (-1.9%) had the biggest struggle, keeping track with oil prices that slid despite reports of Hezbollah firing a missile at Tel Aviv, which was ultimately intercepted by Israel, and Israel teasing the possibility of moving ground troops into Lebanon. WTI crude futures dropped 2.5% to $69.78/bbl.
The health care sector (-0.9%) was another weak link, hurt by losses in Amgen (AMGN 312.86, -18.06, -5.5%), which reported disappointing data for two drugs, according to CNBC. Other laggards of note included the cyclical materials (-0.6%), financial (-0.6%), and industrials (-0.5%) sectors.
The consumer discretionary sector (-0.4%) was aided by Tesla (TSLA 257.02, +2.75, +1.1%), but its strength was not enough to overcome a pullback in Amazon.com (AMZN 192.53, -1.43, -0.7%), and losses in Ford (F 10.42, -0.45, -4.1%) and General Motors (GM 45.72, -2.35, -4.9%), which were downgraded at Morgan Stanley on concerns about Chinese competition and deteriorating credit quality in the U.S. Morgan Stanley also downgraded Rivian Automotive (RIVN 11.03, -0.81, -6.8%).
Homebuilders also dragged on the consumer discretionary sector even though new home sales in August were stronger than expected. A disappointing earnings report from KB Home (KBH 82.75, -4.68, -5.4%) acted as an offset.
Like the stock market, there wasn't much buying vigor in the Treasury market either. The 2-yr note yield settled the cash session unchanged at 3.55% while the 10-yr note yield jumped five basis points to 3.78% in a continued curve-steepening trade.
The $70 billion 5-yr note auction didn't cause much of a stir. Like the 2-yr note auction yesterday, the 5-yr note auction saw the high yield of 3.519% match the when-issued yield.
- Nasdaq Composite: +20.5%
- S&P 500: +20.0%
- Dow Jones Industrial Average: +11.3%
- S&P Midcap 400: +11.1%
- Russell 2000: +8.4%
Reviewing today's economic data:
- MBA Mortgage Applications Index +11.0% wk/wk with refinance applications +20% and purchase applications +1%
- August New Home Sales 716K (Briefing.com consensus 695K); Prior was revised to 751K from 739K
- The key takeaway from the report is that new home sales, which are tabulated when contracts are signed, were better than expected in August, aided by lower pricing and sliding mortgage rates. Notably, the South was the only region that saw a pickup in sales month-to-month.
Looking ahead, Thursday's calendar features:
- 08:30 ET: Q2 GDP -- third estimate (Briefing.com consensus 3.0%; prior 3.0%) and Q2 GDP Deflator -- third estimate (Briefing.com consensus 2.5%; prior 2.5%)
- 08:30 ET: August Durable Orders (Briefing.com consensus -2.9%; prior 9.9%) and Durable Orders ex-transportation (Briefing.com consensus 0.1%; prior -0.2%)
- 08:30 ET: Weekly Initial Claims (Briefing.com consensus 224,000; prior 219,000) and Continuing Claims (prior 1.829 mln)
- 10:00 ET: August Pending Home Sales (Briefing.com consensus 1.0%; prior -5.5%)
- 10:30 ET: Weekly natural gas inventories (prior +58 bcf)
- 13:00 ET: $44 bln 7-yr Treasury note auction results
Small caps lagging behind
25-Sep-24 15:30 ET
Dow -267.48 at 41940.74, Nasdaq +0.55 at 18075.05, S&P -12.45 at 5720.48
[BRIEFING.COM] Small-cap stocks have been a weak link in today's trade with energy and financial shares trailing. The Russell 2000 is down 0.9%, but continues to sit on a healthy 7.6% gain for the quarter.
The rest of the market is simply languid, missing the vigor of past sessions as buyers have shown some restraint.
The same can be said for Treasuries. Not much vigor today on the part of buyers in that market either. The 2-yr note yield settled the cash session unchanged at 3.55% while the 10-yr note yield jumped five basis points to 3.78% in a continued curve-steepening trade.
The $70 billion 5-yr note auction earlier didn't cause much of a stir. Like the 2-yr note auction yesterday, the 5-yr note auction saw the high yield of 3.519% match the when-issued yield.
Thursday's session will include a $44 billion 7-yr note auction, as well as the response to earnings reports from Micron (MU 95.19, +1.19, +1.2%) and CarMax (KMX 74.79, -1.71, -2.2%), and the weekly initial and continuing jobless claims, revised Q2 GDP, August Durable Goods Orders, and August Pending Home Sales reports.
Market set in its ways
25-Sep-24 15:00 ET
Dow -258.26 at 41949.96, Nasdaq +4.83 at 18079.33, S&P -10.28 at 5722.65
[BRIEFING.COM] The stock market remains set in its ways, which have favored taking a break from the rapid rebound pace off the August lows.
The strength in NVIDIA (NVDA 123.44, +2.57, +2.1%) has been a key support factor all day, but it hasn't been enough to spur broad-based buying interest. Presumably, there is an element of hesitation in the tape ahead of Micron's (MU 95.20, +1.20, +1.3%) earnings report after the close and the weekly initial jobless claims report before Thursday's open.
The financial sector (-0.6%) continues to underperform, but in a reversal from yesterday, other cyclical sectors are also underperforming today. Energy (-1.9%) is the biggest laggard but has a brigade of followers that includes the materials (-0.5%), industrials (-0.4%), and consumer discretionary (-0.4%) sectors.
Health care (-0.9%) is a counter-cyclical laggard, feeling the weight of losses in Amgen (AMGN 312.23, -17.69, -5.4%), which reported some disappointing data on two drugs, according to CNBC.
Global Payments, Tyson underperform in S&P 500
25-Sep-24 14:30 ET
Dow -240.07 at 41968.15, Nasdaq +0.68 at 18075.18, S&P -10.30 at 5722.63
[BRIEFING.COM] The S&P 500 (-0.18%) is in second place, little changed from levels half an hour ago.
Elsewhere, S&P 500 constituents Global Payments (GPN 97.70, -6.11, -5.89%), Tyson Foods (TSN 58.00, -2.52, -4.16%), and Southwest Air (LUV 28.65, -1.10, -3.70%) pepper the bottom of the standings. GPN slides after guidance from its Investor Conference, Piper downgraded TSN to Underweight amid rising cattle costs and declining beef and chicken prices, with LUV falling following its response to Elliott Investment's shareholder letter.
Meanwhile, Vistra Corp. (VST 119.51, +7.11, +6.33%) is outperforming after a Morgan Stanley tgt bump to $132, continuing recent strength shares now up circa +63% from the September bottom.
Gold continues recent strength
25-Sep-24 14:00 ET
Dow -233.73 at 41974.49, Nasdaq +4.84 at 18079.34, S&P -9.53 at 5723.40
[BRIEFING.COM] The tech-heavy Nasdaq Composite (+0.03%) moved into the red briefly in the last half hour, but now stands modestly higher.
Gold futures settled $7.70 higher (+0.3%) to $2,684.70/oz, continuing to drift higher even as the dollar and yields show strength.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $100.91.
Global Payments' medium-term financial goals continue to drive adverse response today (GPN)
Global Payments' (GPN -5%) updated strategy and financial targets released yesterday continue to invoke a negative response today, pushing shares lower response and pushing shares toward August lows. The payment processor, which focuses more on smaller merchants relative to larger players in the industry, such as Fiserv (FI), has run into several headwinds since hitting one-year highs earlier this year. Part of the problem GPN faces is its relatively high exposure to small merchants, which are more sensitive to macroeconomic volatility compared to larger businesses. Over the past few quarters, this exposure has kept a lid on revenue growth.
With GPN already trading roughly 12% lower YTD ahead of its Investor Conference, investors likely did not have sky-high expectations. However, its outlook was still discouraging even when stacked against a relatively low bar.
- GPN projected adjusted net revenue growth of mid-single-digit growth for FY25. Based on the midpoint of the company's estimated FY24 revenue outlook of $9.17-9.30 bln, its FY25 guidance translates to roughly $9.7 bln, missing analyst expectations. Since GPN does not typically project annual revs below consensus -- not missing the mark since 2021 -- its downbeat revenue guidance came as a shock.
- Similarly, GPN's adjusted EPS growth projection of around +10% in FY25 fell short of analyst expectations when using the midpoint of the company's $11.54-11.70 outlook for FY24. This may not be as frustrating as the mild revenue growth prediction since GPN does not possess a strong track record of exceptional margin growth, targeting just 30 bps of expansion in FY24. Nevertheless, underperforming expectations will not help to change the current bearish sentiment surrounding the stock.
- Additionally, GPN outlined its 2026-2027 revenue growth framework, predicting a mid to high-single-digit percentage lift. While the high end does incorporate modest acceleration, it underscores a relatively sluggish demand landscape for the medium term, far from the double-digit gains GPN was enjoying during 2020 and 2021. On the earnings side, GPN targets low teen percentage growth, which is relatively consistent with what it has registered for the past few years.
- On the strategy front, GPN reiterated a few items, such as aligning brand identity across assets and pursuing dispositions. The company also discussed streamlining operations, an effort it has pursued for some time as it contends with a fluid macroeconomic environment. GPN did announce that it was targeting $7.5 bln in shareholder returns over the next three years, which would likely be achieved through repurchases and dividends.
GPN's strategy updates and financial goals were not very inspiring. The company is staring at gradual growth over the medium term, a development not appreciated by investors who may be growing impatient with GPN's slowing growth. Also not inducing much confidence today is that GPN's dependence on small merchants could spark downward revisions to its already soft financial forecasts if the U.S. enters a recession.
Cintas trades modestly higher following another solid earnings beat (CTAS)
Cintas (CTAS) is trading modestly higher after reporting strong results for Q1 (Aug). The company has not missed on EPS in any quarter for the past five years and that was the case again in Q1. Revenue rose 6.8% yr/yr to a record $2.50 bln, slightly better than expected. Importantly, CTAS raised full year EPS guidance to $4.17-4.25 from $4.06-4.19 and raised the low end of FY25 revenue guidance. Of note, Cintas expects its first $10+ bln revenue year in FY25.
- Cintas recently completed a 4-for-1 stock split in early September, so we had to adjust prior EPS guidance. Also, we like to keep an eye on Cintas because it is a window into how businesses see their near term prospects. Cintas is more than just the largest supplier of work uniforms in the US, it also gets more than half of its revenue from facility services (cleaning supplies, mops, first aid cabinets, fire extinguishers, alarms etc.)
- Its Uniform Rental and Facility Services is the much larger segment of the two. Segment revenue rose 5.9% yr/yr to $1.93 bln. Q1 was negatively impacted by one less workday yr/yr. On a same workday basis, Q1 revenue growth was 8.4%. Other revenue, of which its First Aid segment accounts for a big part, rose 10.1% yr/yr to $567.7 mln.
- On its call, Cintas said that it continued to experience strong demand for its services in Q1, not only from existing customers, but across its new business pipeline across. Its four focused verticals (healthcare, hospitality, education and state and local government) continue to perform well.
- Margins were a bright spot in Q1 as gross margin improved to a record 50.1% from 48.7% a year ago as energy expenses (gasoline, natural gas and electricity) were 20 bps lower yr/yr. Cintas drives a lot of trucks to make uniform deliveries, so gas prices make a big difference with margins. The higher gross margin fueled a nice increase in Q1 operating margin to 22.4% vs 21.4% a year ago.
Overall, this was a usual quarter for Cintas with nice upside EPS with generally in-line revenue. Perhaps a minor disappointment was the FY25 guidance. The high end of the range was not increased as much as the lower end of the range. However, we think Cintas is likely just being conservative as we are so early in the fiscal year. The bigger picture is that demand remains healthy and margins expanded nicely. More broadly, we remain a fan of Cintas. Its business tends to be consistent and predictable with a strong recurring revenue component. Also, Cintas benefits from the trend toward businesses wanting to outsource functions so that its employees can focus on their core business.
Progress Software at all-time highs after Q4 guidance eases ShareFile-related nerves (PRGS)
Progress Software (PRGS +12%) progresses to all-time highs today after exceeding earnings and sales estimates in Q3 (Aug) and projecting decent Q4 (Nov) guidance. While the enterprise software provider's adjusted EPS prediction for the upcoming quarter missed expectations, it was dragged down by its previously disclosed acquisition of ShareFile, which it expects to close by year's end.
The acquisition of ShareFile was massive for PRGS, considering the $875 mln price tag versus PRGS's $2.44 bln market cap. The addition of ShareFile was not well-received at first, as it prompted PRGS to suspend its dividend to deleverage rapidly after the deal closed. However, there was still plenty to like, especially ShareFile's 86,000 customer base spanning a broad range of industries, the fact that 100% of its revs was recurring, boosting PRGS's annualized recurring revenue (ARR) by $240 mln upon close, and that it meshed with the company's existing Digital Experience offerings.
At the same time, by delivering sound quarterly numbers in Q3 and illuminating that the financial impact of ShareFile was mild, evidenced by sufficient Q4 guidance, PRGS doused heightened fears over the acquisition while showcasing its growing technological advantages.
- In Q3, PRGS expanded its adjusted EPS by 17% yr/yr to $1.26, crushing its $1.11-1.15 forecast. The impressive profitability was supported by a 200 bp lift in operating margins -- reflecting ongoing expense management -- and a return to positive revenue growth of 2% to $178.69 mln following last quarter's -2.3% dip.
- ARR saw a slight uptick from Q2 (May) to end Q3 at $582 mln. No single product drove material growth in total ARR. Rather, the mild increase emerged from growth across multiple product lines. At the same time, net retention remained sturdy at 99%.
- ShareFile commanded much of the spotlight during the call. However, PRGS's attention on AI should not be overlooked as it underpins much of its recent quarterly performances. By operating in the DevOps market, where customers build, deploy, and manage applications, AI can bring meaningful advantages, especially efficiency improvements. PRGS remains locked in on incorporating AI into its products.
- Looking at Q4, PRGS expects adjusted EPS of $1.15-1.25 and revs of $207-217 mln. The guidance incorporates one month of contribution from ShareFile. The acquisition will weigh on cash flows, clipping about $15-20 mln. However, PRGS is confident in a quick turnaround, especially given ShareFile's fundamentals, which include operating at around 15-20% operating margins. PRGS remarked that as soon as the deal closes, it will begin the integration process, anticipating full integration within 12 months.
PRGS's ShareFile acquisition injected some nervousness into its stock due to the price tag and the subsequent dividend pause. However, following energetic Q3 numbers and better-than-feared Q4 guidance, investors' nerves have subsided, replaced by excitement over a significantly more fortified company operating amid an AI frenzy.
CNH Industrial farms healthy gains today following an analyst upgrade (CNH)
CNH Industrial (CNH +4%) farms healthy gains today, reaching its best levels since May, following an upgrade to "Outperform" from "Mkt Perform" at Raymond James.
Briefing.com notes that the agriculture industry has faced a few setbacks over the past year, producing tepid yields for CNH, which recently delivered its widest yr/yr revenue contraction since mid-2022. However, while headwinds are still generating uneasiness within the ag industry while new construction activity remains shaky, CNH may have already endured a bottom.
- What does CNH do? Since spinning off its commercial vehicles and powertrain business in 2022, CNH has focused on manufacturing agricultural and construction equipment. Its brands directly compete with Deere (DE), AGCO (AGCO), Caterpillar (CAT), and various privately held and overseas companies. In agriculture, CNH's brands are known for their similar quality to Deere, creating meaningful brand loyalty. The same can be said for CNH's construction banners. However, ag remains its core business, comprising over 80% of industrial activity revs in FY23.
- The ag industry is dealing with a downcycle. However, CNH shored up structural costs, production cadence, and sourcing to prepare for this. The company's cost reduction program is aggressive, eyeing $550 mln in savings this year. Even though CNH has had to trim its FY24 EPS outlook twice thus far, its bottom line has held up decently, given how weak its top-line performances have been this year, contracting by 16.4% yr/yr in Q2 and 9.8% in Q1.
- Cost savings will remain CNH's focus throughout the current cycle. Management has expressed confidence in sustaining margin improvements despite industry demand compression. This focus should provide a sturdy foundation once demand rebounds.
- When demand bounces back remains unclear. However, CNH was upbeat about farmer balance sheets in July, which remain in good shape despite incomes tracking below the 20-year average. Meanwhile, equipment is aging, and new equipment dramatically improves yields, offsetting the steeper costs. Even though CNH believes that the industry could remain flattish for a while, it does not anticipate a significant step-down, such as what transpired 15 years ago.
- Deere talked about similar dynamics last month. A possible significant catalyst could be replacement demand, which may begin boosting sales sooner rather than later as interest rates ease. New equipment has tangible benefits, such as producing greater yields and increasing efficiency. Also, while incomes are stagnant, farmland values continue to rise, keeping farmers' financials relatively sound.
Skies may be far from sunny for CNH and the broader ag industry. However, clouds are not darkening, and with interest rates coming down, some may be beginning to retreat. In the interim, CNH's cost-saving initiatives should maintain its profitability. Furthermore, by right-sizing dealer inventories, less used inventory will be on lots, helping eventually nudge consumers toward new equipment.
AutoZone in need of maintenance as soft discretionary merchandise category weighs on results (AZO)
For the first time in over five years, AutoZone (AZO) missed quarterly EPS expectations as the company's domestic DIY business continues to experience some weakness in the discretionary merchandise categories. The company's downside Q4 results, which also include a modest top-line miss, complete a set of recent disappointing earnings reports from the auto parts retailer space, further confirming that many consumers are only spending on the highest priority vehicle repair and maintenance jobs. Recall that on August 22, Advance Auto (AAP) missed Q2 EPS and revenue estimates, while also slashing its FY24 guidance, which was preceded by a Q2 top and bottom-line miss from O'Reilly Auto (ORLY) on July 24.
- Echoing a similar message as ORLY CEO Brad Beckham, who commented during the Q2 earnings call that the discretionary appearance and accessory categories were soft, AZO noted that its business continues to be impacted by weakness in discretionary merchandise and deferrals of non-critical repairs. This is reflected in AZO's total company same store sales sliding to growth of just +0.7%, down from last quarter's growth of +1.9%.
- Along with the declining comp growth, operating expenses as a percentage of sales ticked higher to 31.6% from 31.2%, primarily due to higher store payroll as a percentage of sales compared to a year ago, while gross margin dipped by 21 bps yr/yr to 52.5%. Taken together, these items caused AZO's long winning streak against analysts' EPS estimates to come to an end.
- While demand on the DIY side remains sluggish, the domestic commercial business stood out once again, posting strong comps of +10.9%. AZO's commercial initiatives, such as offering a wider assortment of parts and improving parts delivery times, are paying dividends. The company is also expanding its commercial program, which is now available in over 90% of its domestic stores.
- AZO's international business was another bright spot. Despite lapping a remarkable comp of +31.2% in the year-earlier period, international comps still came in at +4.9% in 4Q24. A key pillar of the company's growth strategy is to grow its footprint in Mexico and Brazil. During Q4, AZO opened 31 new stores in Mexico and 18 new stores in Brazil.
A bumpy earnings report was anticipated, as reflected by the stock's 4.5% drop since the end of August, so the downside results from AZO didn't come as a major surprise. The good news for AZO and its competitors is that this deferral headwind will eventually reverse course into a tailwind as consumers can no longer delay certain maintenance and repair jobs. From a company-specific standpoint, AZO also believes that it's gaining market share in both the retail and commercial businesses, which also bodes well for the company once spending trends improve.
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