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Market Snapshot
briefing.com
| Dow | 33574.63 | -27.05 | (-0.08%) | | Nasdaq | 10892.60 | -62.14 | (-0.57%) | | SP 500 | 3932.20 | -9.48 | (-0.24%) | | 10-yr Note | +33/32 | 3.41 |
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| | NYSE | Adv 1449 | Dec 1545 | Vol 897 mln | | Nasdaq | Adv 1843 | Dec 2644 | Vol 4.2 bln |
Industry Watch
| Strong: Real Estate, Health Care, Consumer Staples |
| | Weak: Information Technology, Communication Services |
Moving the Market
-- Pullback in Treasury yields
-- Better-than-expected revision to Q3 productivity, which included a less robust increase in unit labor costs than originally reported
-- Weak mega cap stocks weigh on index performance
-- Global growth concerns in play after China reported bigger than expected decreases in imports and exports for November
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Closing Summary
07-Dec-22 16:30 ET
Dow +1.58 at 33603.26, Nasdaq -56.34 at 10898.40, S&P -7.34 at 3934.34
[BRIEFING.COM] The stock market showed some resilience today after a big retreat in the last two sessions. Overall, though, buyers remained a reluctant bunch amid lingering angst about global growth prospects. The major indices were little changed in today's session, yet the Nasdaq Composite continued to underperform.
There was likely also an element of trepidation in play today with market participants eyeing the November Producer Price Index on Friday, the November Consumer Price Index next Tuesday, and the FOMC decision next Wednesday, all of which have the potential to spark outsized reactions.
Bond market buyers, however, did not exhibit the same lack of conviction as stock market participants today. The 2-yr note yield fell 11 basis points to 4.24% and the 10-yr note yield fell 11 basis points to 3.41%.
These moves followed the revised Q3 Productivity Report, which showed a softer 2.4% increase in unit labor costs than the preliminary estimate of 3.5%. That report followed on the heels of trade data from China released overnight that showed a larger-than-expected decline in exports (-8.7% yr/yr) and imports (-10.6% yr/yr) in November.
The softer unit labor cost data helped drive the rally in the Treasury market, yet, despite the sharp drop in market rates, stocks traded in a more reserved fashion, cognizant that the driver of weaker inflation will be weaker growth that does not bode well for 2023 earnings prospects.
In addition, rate hikes by the Reserve Bank of India (+35 bps to 6.25%) and the Bank of Canada (+50 bps to 4.25%) served as reminders of the tighter monetary policy taking root around the globe to curtail inflation by using higher rates to weaken demand.
S&P 500 sector performance reflected the sluggish nature of today's trade. There wasn't a single sector that finished the day up or down more than 0.9%. Health care (+0.9%) and consumer staples (+0.4%) led the outperformers while communication services (-0.9%), information technology (-0.5%), and consumer discretionary (-0.5%) brought up the rear, weighed down by their lagging mega cap components.
The Vanguard Mega Cap Growth ETF (MGK) closed down 0.5% versus a 0.2% loss in the S&P 500 and Invesco S&P 500 Equal Weight ETF (RSP).
- Dow Jones Industrial Average: -7.5% YTD
- S&P Midcap 400: -12.8% YTD
- Russell 2000: -19.5% YTD
- S&P 500: -17.5% YTD
- Nasdaq Composite: -30.0% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Application Index fell 1.9% versus a 0.8% decline last week
- Nonfarm business sector labor productivity increased 0.8% in the third quarter (Briefing.com consensus +0.3%) versus the preliminary estimate of 0.3%. Unit labor costs, meanwhile, were up 2.4% versus the preliminary estimate of 3.5%.
- The key takeaway from the report was the softer unit labor cost reading, which was deemed to be a supportive development for the peak inflation view. However, it bears pointing out that productivity is still weak in general, evidenced by the understanding that nonfarm business sector labor productivity decreased 1.3% from the same quarter a year ago.
- Weekly EIA Crude Oil Inventories showed a draw of 5.19 million barrels following last week's draw of 12.58 million barrels
- Consumer credit increased by $27.0 bln in October (Briefing.com consensus $26.5 billion) following an upwardly revised $25.9 billion (from $25.0 billion) in September.
- The key takeaway from the report is that consumer credit continued to expand at a robust pace in October, demonstrating that the demand for credit did not vanish in a rising interest rate environment. That point notwithstanding, a slowdown in the pace of expansion is expected as the persistence of high(er) interest rates, tighter underwriting standards, and some weakening in the labor market reduces loan demand/lending activity.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (prior 225,000) and Continuing Claims (prior 1.608 mln)
- 10:30 ET: Weekly natural gas inventories (prior -81 bcf)
Key takeaway from consumer credit report
07-Dec-22 15:35 ET
Dow -2.49 at 33599.19, Nasdaq -56.23 at 10898.51, S&P -8.54 at 3933.14
[BRIEFING.COM] Things are little changed heading into the close. The main indices are just off session lows, but sporting modest losses.
Consumer credit increased by $27.0 bln in October (Briefing.com consensus $26.5 billion) following an upwardly revised $25.9 billion (from $25.0 billion) in September.
The key takeaway from the report is that consumer credit continued to expand at a robust pace in October, demonstrating that the demand for credit did not vanish in a rising interest rate environment. That point notwithstanding, a slowdown in the pace of expansion is expected as the persistence of high(er) interest rates, tighter underwriting standards, and some weakening in the labor market reduces loan demand/lending activity.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (prior 225,000) and Continuing Claims (prior 1.608 mln)
- 10:30 ET: Weekly natural gas inventories (prior -81 bcf)
Stocks cling to narrow range while Treasury yields fall
07-Dec-22 15:00 ET
Dow -27.05 at 33574.63, Nasdaq -62.14 at 10892.60, S&P -9.48 at 3932.20
[BRIEFING.COM] The stock market continues to oscillate around the flat line while Treasury yields drift lower.
The 10-yr note yield is down 11 basis points to 3.41% and the 2-yr note yield is down 12 basis points to 4.22%.
Energy complex futures settled mixed. WTI crude oil futures fell 2.9% to $72.29/bbl and natural gas futures rose 5.7% to $5.74/mmbtu.
Brown-Forman falls after earnings miss, PayPal gains on conference commentary
07-Dec-22 14:30 ET
Dow -12.18 at 33589.50, Nasdaq -54.77 at 10899.97, S&P -10.22 at 3931.46
[BRIEFING.COM] The S&P 500 (-0.26%) has moved back into the red in the last half hour, now down about 10 points off yesterday's close.
S&P 500 constituents Brown-Forman (BF.B 68.47, -5.18, -7.03%), Generac (GNRC 90.18, -4.11, -4.36%), and Southwest Air (LUV 38.08, -1.60, -4.03%) pepper the bottom of today's standings. BF.B slides after this morning's Q2 earnings miss, GNRC hits a two and a half year low after this morning's equity investment in WATT Fuel Cell Corp., while LUV slips today despite reinstating its dividend and giving select guidance for Q4.
Meanwhile, financial tech giant PayPal (PYPL 74.24, +2.01, +2.78%) is higher owing to favorable earnings commentary by management out of today's UBS conference.
Gold grabs back-to-back gains, can't manage $1,800 level
07-Dec-22 14:00 ET
Dow +12.85 at 33614.53, Nasdaq -45.31 at 10909.43, S&P -6.34 at 3935.34
[BRIEFING.COM] With about two hours to go on Wednesday afternoon the tech-heavy Nasdaq Composite (-0.41%) is today's worst-performing major average.
Gold futures settled $15.60 higher (+0.9%) to $1,798.00/oz, aided by weakness in the dollar and treasury yields.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $105.06.
Page One
Last Updated: 07-Dec-22 09:04 ET | Archive
Sellers have been holding the reins of late
Sellers have controlled the market action thus far this week and for the better part of the last two weeks. To that end, the S&P 500 has declined in seven of the last eight trading sessions. The lone, winning session was last Wednesday following Fed Chair Powell's speech on the economic outlook, inflation, and the labor market.
What has become clear since then is that the stock market overreacted to that speech. In fact, it has retraced the entirety of the move it made that day and a bit more.
Market participants have sold into that strength, bothered by the idea that the Fed's benchmark rate may go higher in 2023 than previously expected and bothered by the idea that the economy could suffer a deeper setback than expected because of the Fed's incessant rate hikes.
The underlying concern is that 2023 earnings estimates are too high and that stocks are overvalued in relation to the downwardly revised earnings estimates that many participants think will follow in coming weeks and months.
Accordingly, the willingness to pay up for each dollar of earnings has been reined in following a massive rally off the October lows.
Some cautious-sounding remarks on the prospects for the consumer and the economy from leading CEOs yesterday provided a catalyst for sellers to continue their efforts. Today, a focal point has been larger-than-expected declines in China's exports (-8.7% yr/yr) and imports (-10.6% yr/yr) in November.
The latter has compounded the market's growth concerns and has contributed to the weak disposition in the futures market.
Currently, the S&P 500 futures are down 10 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 58 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 32 points and are trading 0.1% below fair value.
That disposition is not as bad as what was seen earlier. There was some improvement following the better-than-expected revision to Q3 productivity that included a less robust increase in unit labor costs than originally reported.
Nonfarm business sector labor productivity increased 0.8% in the third quarter (Briefing.com consensus +0.3%) versus the preliminary estimate of 0.3%. Unit labor costs, meanwhile, were up 2.4% versus the preliminary estimate of 3.5%.
The key takeaway from the report was the softer unit labor cost reading, which was deemed to be a supportive development for the peak inflation view. However, it bears pointing out that productivity is still weak in general, evidenced by the understanding that nonfarm business sector labor productivity decreased 1.3% from the same quarter a year ago.
The Treasury market, nonetheless, took a liking to the softer Q3 unit cost labor number. The 2-yr note yield, at 4.34% ahead of the release, has dipped to 4.30%, and the 10-yr note yield, which stood at 3.54% ahead of the release, has dropped to 3.47%.
The improvement in the equity futures market from lower levels coincided with the Treasury market's response to the productivity and unit labor cost data.
That is striking knowing that it is backward-looking data (we're two-thirds of the way through Q4), which makes us think the stock market may be searching for an excuse to have a better day today because it has lost ground in seven of the last eight sessions.
Separately, the Democrats picked up some ground in the Senate after incumbent Raphael Warnock defeated Republican challenger Herschel Walker in the Senate runoff election in Georgia. That outcome leaves the Senate chamber tilted 51-49 in favor of the Democrats. The GOP, meanwhile, holds a slight majority in the House.
-- Patrick J. O'Hare, Briefing.com
Casey's General sets fresh 52-week highs on strong and consistent OctQ results (CASY)
Casey's General (CASY +6%) is setting fresh 52-week highs today following another quarter of double-digit earnings upside in Q2 (Oct). The convenience store chain also raised its FY23 same-store inside sales outlook to +5-7% from +4-6% while guiding to the low end of its prior operating expense outlook. These updated forecasts reflect encouraging results from CASY's recent initiatives to boost sales and limit operating expenses, underscoring management's ability to excel despite a tricky economic environment.
- One of CASY's core focus this fiscal year was simplifying its store structure to reduce employee turnover and store labor hours in an effort to offset higher worker costs. By making running a Casey's General Store simpler, worker engagement has shot up toward record highs, leading to a sequential improvement in turnover every month this year.
- CASY also reduced training and overtime hours, with the metrics falling 25% and 22%, respectively, yr/yr.
- CASY noted that by achieving lower operating expenses without negatively impacting its customers' experience, it believes it can sustain these lower costs long term.
- Meanwhile, CASY's inside margins fell just 90 bps yr/yr despite ingredient and other input costs remaining elevated, such as cheese, which climbed 14% yr/yr, as pricing adjustments helped offset much of these higher costs.
- Inside margins were also assisted by robust inside comp growth of +7.9%, fueled by resilience in pizza and beverages. Also, through its vendor partners, CASY successfully managed product mix and in-stock levels, another boost to comp growth in the quarter.
Overall, CASY's steady growth over the past few quarters is a testament to its value-based business model, capitalizing on trade-down effects by the consumer, as well as its positioning to benefit from an ongoing recovery in fuel consumption since the pandemic. For example, in-store traffic continued to accelerate in Q2, expanding nicely from Q1 (Jul). Meanwhile, fuel gallon volumes ticked up sequentially in Q2 as gas prices began trending lower. Furthermore, with CASY attacking its operating expenditures, once inflationary costs moderate, the company will be in an excellent position to return to margin expansion. With previous CPI reports indicating that the worst of inflation may already be in the rear-view mirror, CASY may begin to realize these benefits sooner rather than later.
Bottom line, CASY is proving to be a solid choice during the current environment ripe with recession fears. With most of its locations positioned in the Midwest, where populations are relatively more spread out, individuals are forced to drive to work or school, cushioning CASY from the pronounced uncertainty affecting the broader retail landscape.
MongoDB's surprising recovery in consumption trends fuels beat-and-raise report (MDB)
To say that sentiment was negative heading into MongoDB's (MDB) 3Q23 earnings report would be a major understatement. Since the database management software provider last reported earnings on August 31, shares have plunged by over 55% and have recently been hovering around multi-year lows. A combination of an expected slowdown in growth for MDB's consumption-based model and the stock's rich valuation with a P/S of around 10x have tag-teamed to drag shares lower. Last night, however, MDB dramatically turned the tables by posting an impressive beat-and-raise quarterly report.
The magnitude of upside certainly stands out -- MDB's Q3 EPS beat is its largest on record -- but the fact that it turned a profit on a non-GAAP EPS basis for the second time in the past three quarters is especially promising. Prior to 1Q23, the company had never posted a positive EPS number. This swing to profitability and resilience on the top-line is catching investors by surprise.
- Recall that MDB is coming off a rough Q2 earnings report in which it guided Q3 EPS below expectations, forecasting a loss of $(0.19)-$(0.16) per share. Also, even though the company lifted its FY23 revenue guidance higher to $1.196-$1.206 bln, the outlook actually implied that Q4 revenue would fall short of estimates, when accounting for its Q3 outlook. In other words, MDB primarily lifted its full year forecast due to its top-line outperformance in Q2.
- In last night's earnings report, though, its EPS and revenue outlook for Q4 was comfortably ahead of expectations. Notably, the company is anticipating its first back-to-back quarters of Non-GAAP profitability, forecasting Q4 EPS of $0.06-$0.08.
- During the Q3 earnings call, CEO Dev Ittycheria warned that unfavorable macroeconomic conditions were weighing on its consumption-based model. Similar to data analytics company Snowflake (SNOW), the company generates revenue from the usage of its platform, rather than from subscriptions. Therefore, if customers begin scaling back their usage due to macro-related headwinds, MDB's revenue would take a hit.
- When SNOW reported Q3 results on November 30, it guided Q4 product revenue below the consensus estimate, raising alarm that its customers were reining in spending. This was viewed as a bad omen for MDB since both companies implement the same type of business model.
- In particular, the fear was that the weakness MDB experienced in the mid-market customer tier, and across European markets, last quarter took a turn for the worse in Q3. Indeed, even Ittycheria believed that the weakness in these areas would continue into Q3 and Q4.
As it turns out, MDB performed more like DevSecOPs company GitLab (GTLB) as both companies credited the mission criticality of their platforms for their strong results and outlooks. Importantly, MDB saw a rebound in consumption trends, including for the mid-market segment and the European enterprise business.
Like GTLB's platform, MDB's software enables developers to quickly improve productivity, while removing complexity and costs due to its broad range of capabilities. For instance, MongoDB Atlas, a multi-cloud database service, allows companies to deploy, run, scale, and repair deployments across the leading cloud service providers (Microsoft Azure, Amazon Web Services, Google Cloud). In Q3, Atlas generated revenue growth of 61% and now accounts for 63% of total revenue, compared to 58% in the year-earlier period.
The main takeaway is that MDB emphatically eased investors' fears about a further deceleration in its consumption-based model, while its stronger-than-expected revenue growth underpins an unexpected swing to profitability.
Campbell Soup reports a "soup-er" quarter as higher prices and supply chain fuel results (CPB)
Campbell Soup (CPB +5%) started off FY23 on a "mmm...mmm" good note. The food giant reported strong upside with its Q1 (Oct) results for both EPS and revs. What is notable is that this was CPB's largest EPS beat in the past two years. The company also increased FY23 guidance, although the Q1 upside accounts for much of that. CPB had been dealing with higher inflation for input costs but seems to have finally gotten a handle on it.
- What stood out was that both primary segments (Meals & Beverages; and Snacks) grew nicely. In the M&B segment (soup, Swanson, Prego, Pace, V8), sales rose a robust 15% yr/yr to $1.46 bln. What really helped here was a recovery in the supply chain. This allowed grocery retailers to replenish inventory heading into the critical holiday season. CPB also saw a marked recovery in its foodservice business as supply also improved in this important channel.
- CPB thinks its M&B segment is well positioned because research shows that consumers continue to cut back on out-of-home eating and are migrating from more expensive grocery categories. Consumers are now preparing about 80% of meals from home and they want simple at-home meals and quick-scratch cooking.
- On the Snacks side (Pepperidge Farm, Goldfish crackers, Snyder's, Lance), revenue also grew 15% yr/yr to $1.12 bln. This segment also benefitted from an improvement in the supply chain. Growth was fueled by its power brands, reflecting higher selling prices.
- Of note, CPB saw a strong result from Goldfish as CPB has taken steps to broaden the appeal of this iconic brand. Also, Pepperidge Farm cookies were a highlight as better supply allowed grocers to stock up ahead of the holidays.
In sum, the very strong results were fueled by a combination of inflation-driven pricing and supply chain / productivity improvements. Also, the underlying trend of people cooking more at home seems to be pretty durable. We had concerns that consumers would revert to eating out more but it seems saving money by eating at home is a key trend right now. CPB has been plagued in recent quarters by having to absorb higher food input costs. CPB has announced price increases in the past, but they take time to impact the P&L. However, this Q1 report shows that higher selling prices have finally caught up to offset these costs.
Thor Industries shares are holding up despite a cloudy near-term outlook (THO)
The near-term RV outlook may be cloudy, but Thor Industries (THO) shares continue see some sun after the RV manufacturer, which owns Airstream and Jayco, posted solid upside on its top and bottom lines in Q1 (Oct). The RV Industry Association (RVIA) recently revised its North American wholesale projections for CY22 and CY23, modeling for total RV shipments between 379,200-403,600, a meaningful cut to its previous forecast of 419,000, reflecting decelerating demand as interest rates and inflation remain high.
However, unlike rival Winnebago (WGO), which projected its RV shipments to likely trend below the previous RVIA outlook in AugQ, THO remains aligned with the RVIA's forecast, even expecting to outpace shipments slightly next year as dealers adjust stocking levels. As a result, the stock is holding its own today.
- As expected, headline numbers fell to their lowest levels in two years, with sales tumbling 21.5% yr/yr to $3.11 bln and adjusted EPS contracting 41.7% to $2.53. Nevertheless, these results were still better than consensus, keeping its streak of sales and earnings upside alive for the 11th straight quarter.
- A focal point during the current economic downturn is avoiding overproduction, which hammered the industry in 2018. THO is focused on slowing its production in Q2 (Jan) through reduced production rates and extended holiday shutdowns to put its independent dealers in a better position heading into the prime Spring selling season.
- RV dealer Camping World Holdings (CWH) touched on this last month, commenting that it is stocking around 13% fewer units per location compared to averages during 2016-2019 in anticipation of yielding more with less. While this illustrates softening demand dynamics, it also displays further evidence of the industry avoiding overproduction.
- Looking ahead, Q1 marked the first time THO provided annual guidance, which was in-line with consensus. The company expects FY23 (Jul) EPS of $7.40-8.70 and revs of $11.5-12.5 bln, representing massive declines from the record numbers posted in FY22. However, when stacked against FY19, THO's FY23 guidance translates to 52% earnings and sales growth.
Overall, uncertainty remains elevated within the RV industry as economic conditions dampen discretionary spending. With RVs typically purchased through financing, rising rates ups the monthly cost. Meanwhile, widespread inflation hikes the total cost of ownership, from repairs to refueling.
However, these headwinds are well-known, explaining why shares have steadily climbed around 24% since September 26 lows. THO also commands a solid track record of successfully managing through industry downturns. With the pandemic cementing favorable camping and outdoor trends, THO is building upon a firmer foundation over the long term. Still, it is worth approaching the stock cautiously as the near term will remain choppy.
NRG Energy looks to power growth with acquisition of Vivent, but risk profile also increases (NRG)
Major M&A deals have been few and far between in recent months due to volatile market conditions, but NRG Energy (NRG) and Vivint Smart Home (VVNT) made a sizable splash today. Power company NRG, which sells electricity to residential and commercial customers in Texas, announced that it will acquire VVNT for $12/share in cash. That offer price represents a steep 34% premium for VVNT based on yesterday's closing price.
- There may be some sticker shock over that $5.2 bln price tag (inclusive of $2.4 bln in debt) from NRG's investors, explaining why the stock is getting hit hard on the acquisition news.
- At about 3x estimated FY23 sales, the buyout price doesn't seem too egregious at first blush. However, when considering that VVNT isn't profitable, posting a net loss of nearly $(72) mln for the nine months ended September 30, 2022, the offer price begins to look much more generous.
Furthermore, some may be questioning the timing of acquiring a consumer-based company with exposure to the slowing housing market in this economic climate.
- For some quick background, VVNT sells, installs, and monitors smart home security products that sync up with other devices such as Amazon (AMZN) Echo and Google (GOOG) Home.
- VVNT is coming off a pretty solid Q3, though, in which it easily beat EPS estimates as average monthly recurring revenue per user increased to an all-time high of $69.76. Additionally, the attrition rate improved by 40 bps to 11.0%, near a record low.
While VVNT's Q3 performance was encouraging, the concern is that the economy will slip into a recession in 2023 as the Fed continues to raise rates, causing demand for VVNT's products to erode.
- That makes this acquisition a risky proposition, especially if NRG's free cash flow shrinks due to lower electricity demand in a recessionary environment.
- Relatedly, NRG intends to use excess free cash flow in 2023 to finance the deal and pay down acquisition-related debt.
- Although NRG plans to return to its dividend growth policy in 2024, there's likely some disappointment that the company is deviating from its typical capital allocation strategy as macro-related risks increase.
From NRG's perspective, the company likes the fact that VVNT will diversify its customer base while adding a subscription-based model to the mix. There will also be significant cross-selling opportunities that increase the customer lifetime value. Overall, though, this acquisition adds considerable risk to a steady, dividend paying stock, and that isn't going over too well with NRG's investors.
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