Market Snapshot
briefing.com
| Dow | 30617.22 | -404.49 | (-1.30%) | | Nasdaq | 11415.41 | -119.58 | (-1.04%) | | SP 500 | 3850.33 | -49.63 | (-1.27%) | | 10-yr Note | -5/32 | 3.56 |
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| | NYSE | Adv 517 | Dec 2559 | Vol 897 mln | | Nasdaq | Adv 1235 | Dec 3121 | Vol 3.9 bln |
Industry Watch
| Strong: -- |
| | Weak: Materials, Real Estate, Health Care, Consumer Discretionary |
Moving the Market
-- Rising Treasury yields
-- Macro concerns after worrisome inflation data from Germany and Japan
-- Earnings warning from Ford due to supply chain issues
-- Hesitation ahead of Fed rate hike decision tomorrow and an updated Summary of Economic Projections
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Closing Summary
20-Sep-22 16:25 ET
Dow -313.45 at 30708.26, Nasdaq -109.97 at 11425.02, S&P -43.96 at 3856.00
[BRIEFING.COM] Today's trade had a mostly negative disposition. The major indices opened to losses before tumbling further still. Strength from some of the mega cap names fueled a rebound effort around midday before the market lost steam. The S&P 500 eventually fell below Friday's low (3,838), but that is where buyers returned and helped the indices pare their losses into the close.
The biggest factor pressuring investor sentiment was rising Treasury yields. The 2-yr note yield, which reached 3.99% overnight, settled at 3.97%. The 10-yr note yield, which reached 3.60% overnight, settled at 3.56%.
Additional factors piling onto higher rates included worrisome inflation data from Germany and Japan and a Q3 earnings before interest and tax warning from Ford (F 13.09, -1.84, -12.3%) that was attributed to higher than expected supplier costs. There was also an element of trepidation ahead of tomorrow's FOMC interest rate decision, the release of an updated Summary of Economic Projections, and Fed Chair Powell's subsequent press conference.
Support from mega cap stocks drove the midday rebound attempt, particularly support from Apple (AAPL 156.90, +2.42, +1.6%), which rallied after announcing it will increase app store prices in Europe and Asia next month. Still, the support of mega cap stocks was not universal. The Vanguard Mega Cap Growth ETF (MGK) closed down 0.9% versus a 1.1% loss in the S&P 500 and a 1.6% loss in the Invesco S&P 500 Equal Weight ETF (RSP).
Selling efforts were broad in nature, bringing down many stocks. Every S&P 500 sector closed in the red with losses ranging from 0.5% (information technology) to 2.6% (real estate).
Market breadth also reflected the broad nature of today's selling. Decliners led advancers by a 5-to-1 margin at the NYSE and a 5-to-2 margin at the Nasdaq.
One bright spot in the market was casino stocks, which traded against the grain after reports indicated China is aiming to ease foreign entry requirements for tourists. Wynn Resorts (WYNN 67.80, +1.91, +2.9%) was a winning standout for the group.
WTI crude oil futures fell 1.1% to $84.05/bbl on the day and natural gas futures fell 1.3% to $7.71/mmbtu.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Applications Index (prior -1.2%) at 7:00 a.m. ET, August Existing Home Sales (Briefing.com consensus 4.7 million; prior 4.81 million) at 10:00 a.m. ET, and the weekly EIA Crude Oil Inventories (prior +2.44 million) at 10:30 a.m. ET.
The FOMC interest rate decision is out at 2:00 p.m. ET followed by Fed Chair Powell's press conference at 2:30 p.m. ET.
Today's economic data was limited to the August Housing Starts and Building Permits report. Housing starts totaled 1.575 million (Briefing.com consensus 1.448 million) in August following a revised total of 1.404 million in July (from 1.446 million). Building permits came in at 1.517 million (Briefing.com consensus 1.610 million) in August after a revised count of 1.685 million in July (from 1.647 million).
- The key takeaway from the report is that the weakness in the permits data suggests the strength in starts is not sustainable, especially when also taking into account that mortgage rates have risen since the July-August period and yesterday's NAHB Housing Market Index for September showed yet another decline in homebuilder sentiment.
Dow Jones Industrial Average: -15.5% YTD
S&P 400: -16.6% YTD
S&P 500: -19.1% YTD
Russell 2000: -20.4% YTD
Nasdaq Composite: -27.0% YTD
Market continues to climb into the close
20-Sep-22 15:30 ET
Dow -316.58 at 30705.13, Nasdaq -95.80 at 11439.19, S&P -41.55 at 3858.41
[BRIEFING.COM] The stock market is trying to climb off its lows ahead of the close.
Ahead of tomorrow's open, General Mills (GIS) will report quarterly results.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Applications Index (prior -1.2%) at 7:00 a.m. ET, August Existing Home Sales (Briefing.com consensus 4.7 million; prior 4.81 million) at 10:00 a.m. ET, and the weekly EIA Crude Oil Inventories (prior +2.44 million) at 10:30 a.m. ET.
The FOMC interest rate decision is out at 2:00 p.m. ET followed shortly by Fed Chair Powell's press conference.
Market lifts somewhat off lows
20-Sep-22 15:00 ET
Dow -404.49 at 30617.22, Nasdaq -119.58 at 11415.41, S&P -49.63 at 3850.33
[BRIEFING.COM] The major indices lifted somewhat off session lows in the last half hour.
The S&P 500 consumer discretionary sector (-2.0%) trades near the bottom of the pack despite casino components bucking the downtrend. Wynn Resorts (WYNN 67.87, +2.00, +3.1%), Las Vegas Sands (LVS 39.11, +0.29, +0.9%), and MGM Resorts (MGM 34.45, +0.10, +0.3%) all trade up today after reports indicated China is aiming to ease foreign entry requirements for tourists.
Ford Motor (F 13.07, -1.85, -12.4%) is one of the biggest laggard for the S&P 500 today, limiting sector gains.
Market lifts off lows
20-Sep-22 14:35 ET
Dow -476.98 at 30544.73, Nasdaq -154.33 at 11380.66, S&P -60.56 at 3839.40
[BRIEFING.COM] The benchmark S&P 500 (-1.5%) is in the middle of the major averages to this point on Tuesday.
The CBOE Volatility Index climbed while the stock market fell to fresh lows. It's up 6.7%, or 1.77, to 27.51.
Separately, WTI crude oil futures fell 1.1% to $84.05/bbl on the day and natural gas futures fell 1.3% to $7.71/mmbtu.
Market falls to new lows
20-Sep-22 14:00 ET
Dow -541.28 at 30480.43, Nasdaq -187.45 at 11347.54, S&P -70.95 at 3829.01
[BRIEFING.COM] With roughly two hours to go on Tuesday, the stock market sank to new lows. The tech-heavy Nasdaq Composite (-1.6%) sits in first place for the major averages.
Gold futures settled $9.40 lower (-0.6%) to $1,670.90/oz and copper futures fell 0.7% to $3.48/lb on the day.
The US Dollar Index continues to climb, up 0.5% to 110.25.
NIKE flirts with 52-week lows after an analyst downgrade; we see some tailwinds still present (NKE)
NIKE (NKE -4%) is trading toward 52-week lows (101.14) set on July 1 following a downgrade at Barclays, citing ongoing volatility in China and general global demand erosion. Today's downgrade marks the third in the past three months, signaling concern that discretionary spending will continue to cool.
However, Briefing.com notes that despite somewhat disappointing MayQ earnings and AugQ revenue guidance that fell short of consensus, NKE has its share of tailwinds heading into its Q1 (Aug) earnings report on September 29 after the bell.
- Footwear, which comprised over 68% of NKE's MayQ revenue, has demonstrated its relative strength in the current inflationary environment. This was evident across many different retailers' JulQ results, including Foot Locker (FL), Hibbett (HIBB), Macy's (M), and Dick's Sporting Goods (DKS), to name a few.
- Furthermore, footwear was the only category to see positive growth for Under Armour (UAA) in JunQ. Meanwhile, Deckers Outdoor's (DECK) over 20% revenue growth in JunQ was primarily fueled by its HOKA shoe brand, which saw a 55% leap in global revs. HOKA is centered on active footwear, which is also a considerable focus for NKE.
- It is also worth noting that the latest footwear launches from Adidas AG (ADDYY) continue to sell out in just a couple of days, highlighting that demand for the newest generation of particular shoes is still healthy.
- NKE has also been bolstering its digital channels for sales directly to customers, lessening its dependence on retail partners. This strategy helped maintain positive growth in North America and EMEA last quarter despite lapping over 120% growth in each region in the year-ago period.
Still, supply chain issues persist, creating a layer of difficulty for NKE. We have heard from many retailers that active apparel and footwear sales were somewhat tempered by a lack of availability. For example, Kohl's (KSS) stated last month that it continued to experience significant supply chain disruptions relating to active footwear in JulQ. NKE's margins may also remain under pressure due to higher supply chain costs. For instance, Adidas's JunQ gross margins were negatively impacted by supply chain constraints driving higher input costs. NKE expects over 100 bps of pressure on its gross margins in AugQ.
Nevertheless, we were encouraged last quarter that supply chain issues would begin improving after NKE approved a new four-year $18 bln share repurchase program. Also, retailers' results show that demand has not fallen off a cliff, and NKE's strong brand loyalty should help it achieve its revenue forecast of flat to slightly up in AugQ. Lastly, with China lockdowns continuing to ease, COVID disruptions should become much less of an issue going forward.
Ford Motor stumbles with more supply chain woes, weak Q3 guidance (F)
Ford Motor (F -9%) is under pressure today after disappointing investors with its Q3 guidance. After reporting a huge EPS beat with nice revenue upside in Q2, Ford's supply chain issues have tripped up Q3 results. Ford expects Q3 adjusted EBIT of $1.4-1.7 bln, which is below analyst expectations. The slight good news is that Ford reaffirmed full year adjusted EBIT of $11.5-12.5 bln.
- So, what happened? It turns out that Ford expects to have about 40-45K vehicles in inventory at the end of Q3 that are lacking certain parts which are presently in short supply. Ford did not specify that these were chips and typically chips are described more as components, not parts. As such, we think the shortage is something else.
- What makes the problem worse is that those 40-45K vehicles are primarily high-margin trucks and SUVs. The good news is that Ford expects these vehicles will be completed and sold to dealers in Q4. We suspect that is why Ford is maintaining its full year EBIT guidance. Basically, we think Ford sees it as more of a timing issue and not a demand issue.
- Another piece of bad news was Ford quantifying the impact on the cost side. The company expects that, based on recent negotiations, inflation-related supplier costs during Q3 will run about $1 bln higher than originally expected. It sounds like this relates to more than just the 40-45K vehicles expected to be unfinished. It likely stems from the pressures companies in the automotive supply chain are feeling, relating to higher input and labor costs. And that is getting passed on to Ford.
Overall, this was not great guidance for Ford. Some may argue that Ford's reaffirmation of full year guidance makes this is a non-issue. However, Briefing.com thinks there is a real possibility that Ford will lower full year guidance when it formally reports Q3 results in late October. It is tough to absorb $1 bln of costs and not have that impact guidance. Also, we suspect Ford will see inflated costs again in Q4. We hope we are wrong though.
The other part of this is that earlier in the year, it was all about chip shortages and how that should clear up by 2H22. Maybe that has happened, but we will have to wait for the call in October. But now the shortages seem more related to "parts" which sounds more broadly based, which makes us nervous. The stock is taking a pretty big hit on this news. We think investors share our concerns. Finally, we had hopes that vehicle production would get back to normal in 2H22 once the chip shortage abated, but it sounds like the supply chain issues will linger.
Cognex is red hot after raising guidance as recovery from destructive fire progresses (CGNX)
Cognex (CGNX), a provider of machine vision products used to automate manufacturing and distribution functions, sharply raised its 3Q22 revenue guidance ahead of today's Analyst Day. The company now expects to generate revenue of $195-$205 mln, which is well above analysts' estimates. CGNX's improved outlook is primarily related to its ability to restock component inventory faster than it anticipated following a destructive fire at a large contract manufacturer in June.
The upward revision to CGNX's revenue guidance is certainly good news, but it's worth noting that the company's initial revenue forecast of $160-$180 mln badly missed expectations. In fact, this new guidance range is still far below where Q3 estimates stood when CGNX issued its original forecast in its Q2 earnings report in early August.
At that time, CGNX disclosed that an Indonesia-based contract manufacturer experienced a significant fire on June 7, destroying a large portion of the company's component inventory. This reduced CGNX's Q3 revenue estimate by about $80 mln, with $20 mln of that amount being unrecoverable. It was anticipated that the remaining $60 mln would be realized in future quarters, which is now coming to fruition, as indicated by today's enhanced outlook.
However, the fire and CGNX's ongoing recovery from it are only part of the story.
- A more concerning issue is that the e-commerce logistics end market is slowing considerably as companies postpone investments in new fulfillment centers. During CGNX's Q3 earnings call, CEO Robert Willett acknowledged that the e-commerce boom that emerged during the pandemic is waning, causing that strong growth catalyst to fade. With the logistics end market accounting for about 30% of total revenue, this deceleration is having a major impact.
- Specifically, CGNX reduced its Q3 revenue outlook by $50 mln to account for the softening logistics market.
- Relatedly, on September 2, Bloomberg reported that e-commerce giant Amazon (AMZN) has abandoned plans to open 42 new warehouses amid slowing sales growth. While CGNX doesn't specifically single out AMZN, the company did note in its Q2 earnings report that its "largest customer" in e-commerce logistics is delaying investment plans. Its largest customer represents approximately 17% of total revenue.
- While the company believes this setback in logistics could take multiple quarters to play out, strength in the consumer electronics end market should offset some of that weakness. In August, the company said it was anticipating yr/yr growth in Q3 from consumer electronics.
- CGNX also raised its estimated served market value to $6.5 bln from $4.2 bln at the Analyst Day. This is related to a broadening of use cases and customers for its machine vision products.
- Machine vision uses a combination of hardware and software to provide image-based inspection, analysis, process control, and robot guidance, typically in industrial or manufacturing settings.
- Recently, applications for CGNX's machine learning systems have expanded in certain markets, particularly automotive and consumer electronics.
The main takeaway is that CGNX deserves credit for its impressive recovery efforts after the damaging fire in June wiped out much of its inventory. Also, a substantial increase to CGNX's total served market estimate is compelling from a longer-term growth perspective, but a slowdown in its core logistics end market will remain a headwind for the foreseeable future.
Apogee Enterprises smashes AugQ estimates on healthy commercial construction demand (APOG)
Apogee Enterprises (APOG +3%) smashed Q2 (Aug) expectations, topping earnings estimates by double-digits for the fourth-straight quarter while raising its FY23 outlook for the second time this year. As a provider of framing systems, glass, and other services for the commercial construction market, APOG's AugQ report highlights that non-residential construction demand is still relatively healthy, backing up comments expressed by steel titan Steel Dynamics (STLD) last week.
- APOG's explosive adjusted EPS growth of 100% yr/yr to a record $1.06 immediately jumps out. Last year, APOG ventured on a restructuring journey, primarily within its two segments with the most potential to improve their margins: Architectural Framing Systems and Architectural Glass. These efforts have paid off hugely, with adjusted operating margins expanding over 300 bps yr/yr to 8.4% in the quarter, APOG's fourth consecutive quarter of margin expansion.
- Although margins have hovered below double-digits since APOG began its restructuring efforts, the company has been making meaningful progress toward its longer-term goal of double-digit margins.
- Revenue growth of 14.2% to $372.1 mln was also solid and represented an acceleration over the previous two quarters. Although APOG's price hikes were the main fuel behind its accelerating sales growth in AugQ, APOG would not have been able to pass these onto consumers without healthy non-residential construction demand.
- APOG's largest segment, Architectural Framing Systems, drove overall growth, increasing 26% yr/yr to $172.9 mln. Each of APOG's other businesses, outside of Architectural Glass, which fell 2.5% yr/yr, saw growth in the quarter on higher volumes compared to the year-ago period.
- Framing Systems is expected to continue driving overall growth in the back half of the year. As a result, APOG now expects sales to climb +8-10% yr/yr in FY23, which is more upbeat than its vague commentary from last quarter when the company stated that it expects growth in the year.
- Additionally, due to the ongoing earnings outperformance in FY23 and the success of last year's restructuring, management felt confident in raising its FY23 EPS forecast to $3.75-4.05 from $3.50-3.90.
The main takeaway is that the commercial construction industry remains strong, furthering the sentiment felt by STLD last week, which also expected the momentum to trickle into 2023. APOG's numbers also counter the weak guidance from another steel giant Nucor (NUE), which is highly exposed to the non-residential construction market. Finally, with earnings season coming up in about a month, APOG's AugQ results make us less nervous for construction stocks with exposure to the commercial construction industry.
NetApp is positioned for solid upside as supply chain issues begin to ease in FY23 (NTAP)
NetApp (NTAP -1%) is trading lower today after catching a downgrade at Susquehanna, just the second in the past five months. Shares of the hybrid cloud data services organization, which helps businesses construct and optimize their cloud transformations, remain down over 25% on the year, recently sliding by around 15% since August 25.
Although NTAP has fallen victim to supply chain constraints this year, Briefing.com notes that the worst of NTAP's woes are mostly in the past.
- NTAP recently reported upbeat Q1 (Jul) results and reiterated its FY23 earnings and revenue guidance despite a few headwinds.
- Recall in Q3 (Jan), NTAP endured component supplier de-commits, requiring the company to purchase components at high premiums. As a result, product margins were expected to take a hit in Q4 (Apr). However, operating margins still reached record levels in the quarter, as NTAP's sales team focused on capturing recent price increases, mitigating part of the component cost headwinds. This momentum carried into Q1, helping achieve solid earnings growth.
- Even though component cost hikes are expected to persist in FY23 (Apr), NTAP forecasted gross margins to remain around 66-67%, representing no more than a 140 bp hit at the midpoint compared to the previous three years.
- Assisting NTAP's solid FY23 gross margin outlook is a continued easing of supply chain constraints. In late August, NTAP noted that it saw early signs of supply availability relief and was cautiously optimistic that conditions would improve further in the second half of FY23.
- During a presentation last week, the company touched on supply chains again, stating that the main challenge surrounds analog components primarily due to a combination of low investment and China-related lockdowns. However, the good news is that the premiums NTAP paid during Q3 have stabilized. Going forward, NTAP is transitioning toward being less dependent on these types of components, although the benefits from this will likely not be seen in the near term.
Overall, light is beginning to appear at the end of a supply-constrained tunnel for NTAP. Additional lockdowns and supply chain disruptions remain risks that could eat into NTAP's FY23 guidance. However, we believe that the worst of NTAP's woes are behind it, and the company can return to highlighting its improving growth profile illuminated by consistent 65+% Public Cloud growth.
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