Market Snapshot
briefing.com
| Dow | 32690.05 | -166.32 | (-0.51%) | | Nasdaq | 11535.08 | +4.75 | (0.04%) | | SP 500 | 3977.58 | -8.79 | (-0.22%) | | 10-yr Note | -1/32 | 3.98 |
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| | NYSE | Adv 1515 | Dec 1382 | Vol 791 mln | | Nasdaq | Adv 2166 | Dec 2297 | Vol 5.0 bln |
Industry Watch
| Strong: Real Estate, Information Technology, Materials, Utilities, Industrials |
| | Weak: Energy, Consumer Discretionary, Health Care, Financials |
Moving the Market
-- Digesting Fed Chair Powell's testimony
-- Rising Treasury yields; 2s10s spread reaching widest margin since 1981
-- Accounting for the possibility of a 50 bps rate hike in March
-- Gains in a few mega cap stocks supporting the broader market
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Closing Summary
08-Mar-23 16:25 ET
Dow -58.06 at 32798.31, Nasdaq +45.67 at 11576.00, S&P +5.64 at 3992.01
[BRIEFING.COM] There was not a lot of conviction behind today's trade as investors digested day two of Fed Chair Powell's testimony before the House Financial Services Committee. The main indices spent the majority of the session trading either slightly above or slightly below their flat lines.
The lackluster price action today was due to the Treasury market signaling concerns about the Fed possibly taking rates too high and forcing a recession. Yesterday's settlement levels brought the 2s10s spread to its widest margin since 1981 and things didn't get any better today.
The 2-yr note yield rose five basis points to 5.06% and the 10-yr note yield settled unchanged at 3.98%. This followed a slate of better than expected data this morning and a $32 billion 10-yr note reopening, which did not go over so well at auction. The high yield of 3.985% at that auction tailed the when-issued yield of 3.958% by nearly three basis points on relatively weak dollar demand. The bid-to-cover ratio was 2.35 versus the prior 12-auction average of 2.43.
Following the auction at 1:00 p.m. ET, the 10-yr note yield moved up to challenge the 4.00% level again. With that move, stock prices deteriorated and the major indices slipped to trade closer to their lows of the session.
The main indices were able to close comfortably above their lows, though, thanks to a mega-cap driven rally effort taking root in the last hour of trading. The upside momentum eventually petered out when the S&P 500 almost hit its 50-day moving average (3,997), which pivoted Tuesday from support to resistance.
With the late afternoon push higher, most of the S&P 500 sectors registered a gain today. Moves were somewhat modest in scope with the exception of real estate (+1.3%), information technology (+0.8%), and utilities (+0.8%). The energy sector (-1.0%), meanwhile, logged the biggest decline.
Market participants also received the Fed's Beige Book, released at 2:00 p.m. ET, that indicated overall economic activity increased slightly in early 2023. The reaction to the Fed's Beige Book, along with today's better than expected economic data (the February ADP Employment Change, the January Trade Balance, and the January JOLTS - Job Openings), was relatively muted.
- Nasdaq Composite: +10.6% YTD
- Russell 2000: +6.7% YTD
- S&P Midcap 400: +6.4% YTD
- S&P 500: +4.0% YTD
- Dow Jones Industrial Average: -1.0% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Application Index rose 7.4% with refinancing applications increasing 9.0% and purchase applications rising 7.0%.
- The ADP Employment Change showed that private payrolls rose by 242,000 in February (Briefing.com consensus 195,000) following a revised 119,000 increase in January (from 106,000).
- The trade deficit for January widened to $68.3 billion (Briefing.com consensus -$69.0 billion) from an upwardly revised $67.2 billion (from -$67.4 billion), as imports were $9.6 billion more than December imports and exports were $8.5 billion more than December exports.
- The key takeaway from the report is that both imports and exports increased versus December, reflecting a pickup in global trade activity that is a reflection of increased demand.
- JOLTS - Job Openings totaled 10.824 million in January following a revised 11.234 million in December (from 11.012 million).
- Weekly EIA Crude Oil Inventories showed a draw of 1.69 million barrels following last week's build of 1.17 million barrels.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 198,000; prior 190,000) and Continuing Claims (prior 1.655 mln)
- 10:30 ET: Weekly natural gas inventories (prior -81 bcf)
Market deteriorates ahead of close
08-Mar-23 15:30 ET
Dow -157.52 at 32698.85, Nasdaq -1.50 at 11528.83, S&P -8.36 at 3978.01
[BRIEFING.COM] The main indices are in a slow grind lower heading into the close.
The 2-yr note yield rose five basis points to 5.06% and the 10-yr note yield settled unchanged at 3.98%.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 198,000; prior 190,000) and Continuing Claims (prior 1.655 mln)
- 10:30 ET: Weekly natural gas inventories (prior -81 bcf)
Semiconductors outpace broader market
08-Mar-23 14:55 ET
Dow -166.32 at 32690.05, Nasdaq +4.75 at 11535.08, S&P -8.79 at 3977.58
[BRIEFING.COM] The market is drifting lower after a quick pop higher following the release of the Fed's Beige Book.
Notably, semiconductor stocks are a distinct pocket of strength today. The PHLX Semiconductor Index is up 2.1% with most components trading up.
Energy complex futures lost ground this session. WTI crude oil futures fell 1.2% to $76.62/bbl and natural gas futures fell 4.5% to $2.72/mmbtu.
On a related note, the S&P 500 energy sector remains in last place among the 11 sectors, down 1.4%.
Market digests Beige Book; S&P 500 remains slightly lower
08-Mar-23 14:30 ET
Dow -164.24 at 32692.13, Nasdaq +5.26 at 11535.59, S&P -7.80 at 3978.57
[BRIEFING.COM] The major averages moved narrowly higher after the release of the Fed's latest Beige Book which showed that overall economic activity increased slightly in early 2023. The S&P 500 (-0.20%) is still firmly wedged in second place.
Other points of interest from the report included: employment continued to increase at a modest to moderate pace in most Districts despite hiring freezes by some firms and scattered reports of layoffs. Labor availability improved slightly, though finding workers with desired skills or experience remained.
Inflationary pressures remained widespread, though price increases moderated in many Districts. Several Districts reported input costs rose further, particularly for energy and raw materials, though there was some relief reported for freight and shipping costs. Some Districts noted that firms were finding it more difficult to pass on cost increases to their consumers.
Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead.
Gold narrowly lower as afternoon gains in dollar, yields apply pressure
08-Mar-23 14:00 ET
Dow -195.51 at 32660.86, Nasdaq -13.66 at 11516.67, S&P -11.44 at 3974.93
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-0.12%) is just off lows, hosting the shallowest declines among the major averages.
Gold futures settled $1.40 lower (-0.1%) to $1,818.60/oz, fading off earlier gains as the dollar and yields perked up out of midday.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $105.70.
Dealing with interest rate jitters
We concluded this column yesterday with the reminder that nothing matters more to the stock market these days than the direction of interest rates. By way of review, the 6-month T-bill yield climbed eight basis points yesterday to 5.21%, the 1-yr T-bill yield surged 16 basis points to 5.27%, and the 2-yr note yield jumped 10 basis points to 5.01%.
There was also a marked jump in expectations for a 50 basis points rate hike at the March FOMC meeting. According to the CME FedWatch Tool, the probability of a 50 basis points rate hike at the March meeting increased to 70.5% from 31.4% on Monday. That probability now sits at 73.5%.
The S&P 500 declined 1.5% on Tuesday and closed below its 50-day moving average (3,997).
Yep, rates went up and stocks went down. The catalyst for it all was Fed Chair Powell, who sounded more hawkish than market participants expected in his prepared remarks on monetary policy for the Senate Banking Committee.
In those remarks, he suggested that "...the ultimate level of interest rates is likely to be higher than previously anticipated" and that the Fed "...would be prepared to increase the pace of rate hikes" if the data suggested a faster pace of tightening is warranted.
Those views, and some associated commentary in the Q&A portion of his testimony, triggered the rapid shift in rate-hike expectations for the March meeting and also pushed up expectations for the terminal rate to be in a range of 5.50-5.75% in June versus 5.25-5.50% previously.
There is some related market chatter this morning that the terminal rate might ultimately have a 6-handle on it. In any case, the stock market had the interest rate jitters yesterday and it has been slow to shake them off today, cognizant that Fed Chair Powell will be back before the House Financial Services Committee at 10:00 a.m. ET today for day two of his semiannual monetary policy testimony.
There is probably a twinge of hope that he will downplay the market's interpretation of his views. At the same time, there is a twinge of hope that the market will reclaim some of yesterday's lost ground on the notion that it may have overreacted to what the Fed Chair said since his matter-of-fact presentation is what the market should have expected of him.
To that end, Mr. Powell reiterate the point that the Fed is data dependent, that it is not pre-judging any policy moves at the March meeting, and that it will act accordingly if the coming data necessitate a more aggressive pace of tightening.
We can't say that this morning's data helped lessen the rate-hike tension, although the initial reaction was somewhat counter-intuitive.
The ADP Employment Change Report for February was stronger than expected with 242,000 jobs estimated to have been added to private-sector payrolls (Briefing.com consensus 195,000) on top of an upwardly revised 119,000 (from 106,000) in January.
We suppose the market was willing to discount the strength of this report based on the allowance that it has not been the best predictor of payrolls data provided in the report from Bureau of Labor Statistics.
The trade deficit for January, meanwhile, widened to $68.3 billion (Briefing.com consensus -$69.0 billion) from an upwardly revised $67.2 billion (from -$67.4 billion), as imports were $9.6 billion more than December imports and exports were $8.5 billion more than December exports.
The key takeaway from the report is that both imports and exports increased versus December, reflecting a pickup in global trade activity that is a reflection of increased demand.
Currently, the 2-yr note yield is up one basis point to 5.02% and the 10-yr note yield is down three basis points to 3.95%. We should add that the 10-yr note yield fell yesterday, too. The spread between the two (-107 basis points) is the widest since 1981.
The added connection with short-term rates going up and long-term rates going down after the Fed Chair spoke is that there is burgeoning concern that the continued rate hikes will indeed invite a recession down the road. The uncertainty for many is, just how far down the road might that be?
Only time will tell, but the tell of the tape yesterday is that the stock market didn't like the idea of the Fed continuing to raise rates for a variety of reasons that include the constraints it will put on multiple expansion, the increased competition it will create with bonds, and the potential it will invite for a sharp economic slowdown that won't be good for earnings prospects.
At the moment, the S&P 500 futures are up one point and are trading roughly in-line with fair value, the Nasdaq 100 futures are up nine points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 24 points and are trading 0.1% above fair value.
-- Patrick J. O'Hare, Briefing.com
Korn/Ferry getting the job done for investors today after delivering beat-and-raise report (KFY)
Korn/Ferry (KFY), an executive search and consulting firm, is standing out today after delivering a solid beat-and-raise 3Q23 earnings report despite operating in an uneven and dynamic business environment. While some trends are working in KFY's favor and providing a boost to demand, such as the digital transformation and the shift to a hybrid work model, other macro-related factors like rising interest rates and geopolitical tensions are mainly offsetting those favorable workplace changes.
- This is most clearly seen in KFY's Executive Search segment, which is the company's largest business at about 32% of total fee revenue on a year-to-date basis. In Q3, fee revenue for Executive Search fell by 11% to $212 mln, after dropping by 7% last quarter. Speaking to the current turbulent market conditions, new engagements declined by 15% yr/yr to 1,516.
- Although recruiting activity at the board and executive levels remains sluggish, the broader labor market is still relatively healthy and many companies are still in need of finding good talent. This puts KFY's Recruitment Process Outsourcing (RPO) segment in a favorable position to capitalize as companies increasingly look to outside firms to handle their recruiting, hiring, and HR responsibilities. RPO fee revenue increased by 5% yr/yr to $103.5 mln in Q3, helping KFY overcome the weakness in Executive Search.
- What's really moving the stock, though, is KFY's upside Q4 EPS guidance of $0.97-$1.05. Last quarter, the company also beat on the top and bottom-line, but it disappointed investors by issuing a Q4 EPS outlook that badly missed the mark. However, the company also disclosed that it's realigning its workforce and is looking at further reductions in its real estate footprint, in addition to reductions in other discretionary operating costs. Overall, KFY said that it expects this plan to generate $45-$55 mln in annual run rate savings.
- As KFY cuts costs and streamlines its operations, it also intends to focus on driving business from faster growing, larger addressable, and less cyclical markets. Additionally, KFY plans to put more emphasis on its regional accounts.
- This combination of cost-cutting and prioritizing higher growth markets should help turn KFY's margins and profits around. In Q3, adjusted EBITDA tumbled by more than six percentage points to 14.1%, mainly due to unfavorable product mix and an increase in compensation and benefits expense.
Overall, KFY clearly isn't firing on all cylinders, as indicated by the ongoing struggles for its Executive Search segment, but its results and outlook were better-than-feared and its cost-cutting approach is resonating well with investors.
United Natural Foods' slashed FY23 profitability outlook ignites a significant sell-off
United Natural Foods' (UNFI -28%) woes continued in Q2 (Jan), posting its widest earnings miss in over five years, causing the food distributor and retail grocer to slash its FY23 (Jul) earnings target considerably. UNFI also withdrew its FY24 (Jul) financial targets. After missing Q1 (Oct) earnings estimates, shares have struggled, trading in a consolidation pattern before today's sell-off. However, despite the weak numbers in Q1, UNFI remained confident in achieving its FY23 goals, reiterating its earnings and revenue estimates. Therefore, despite UNFI raising its FY23 sales outlook today, its lowered profitability forecast was quite discouraging.
- In Q2, adjusted earnings tumbled by 31% yr/yr to $0.78, UNFI's lightest quarter of profitability since 2Q20, and well below analyst expectations, which called for positive yr/yr growth.
- UNFI chalked up its reduced profitability to its inability to repeat the level of procurement and inventory improvements that it did in the year-ago period. For example, UNFI purchased products before supplier price hikes last year, benefiting its bottom line immensely.
- UNFI did not fully grasp the commercial drivers of these benefits during Q2 due to what it described as legacy issues with digital infrastructure limiting real-time data. As such, it was caught off guard by the magnitude of the adverse impact cycling significant price increases from the prior year had on its profitability.
- However, management has already begun mitigating these issues in the short term. CEO Sandy Douglas was also quick to point out that, critically, the problems UNFI experienced in Q2 do not indicate a fundamental challenge to the longer-term health of the business.
- Also worth mentioning, UNFI's top-line growth of 5.4% yr/yr to $7.82 bln in Q2 edged past analyst estimates, reflecting healthy demand. UNFI also noted that its longer-term margin structure continues to be solid.
- Still, UNFI's FY23 adjusted earnings guidance of $3.05-3.90, down meaningfully from its prior forecast of $4.85-5.15, casts a dark shadow over the few bright spots in the quarter. UNFI expects to see similar trends in profitability for the remainder of the year as it continues lapping periods of significant benefits from procurement gains.
UNFI is acting swiftly to ensure it does not encounter the shocking drop in profitability that it did in Q2 going forward. The company is amid a transformation agenda, focusing on network automation, simplifying its pricing and procurement approaches, enhancing its digital offerings, and modernizing its digital infrastructure.
Although these moves are commendable, we think it best to employ a wait-and-see attitude toward UNFI over the near term. With Whole Foods Market (AMZN) being UNFI's largest customer (the only one representing over 10% of sales in FY22), it could continue to face profitability issues if inflationary pressures do not let up. Organic products carry higher prices than non-organic alternatives, forcing consumers, whose discretionary income remains squeezed by widespread inflation, to potentially look to reduce their basket size. Lastly, UNFI's retail locations also typically price their products higher than big box competitors like Walmart (WMT) and Kroger (KR).
CrowdStrike a crowd pleaser today as beat-and-raise report highlights its resiliency (CRWD)
Coming off a rare disappointing performance last quarter in which it guided Q4 revenue below expectations, cybersecurity company CrowdStrike (CRWD) returned to form last night by posting a strong beat-and-raise earnings report. While CRWD is contending with many of the same macro-related challenges as other tech companies, such as elongated sales cycles and smaller initial deployments, the mission-critical nature of its platform and its market share gains are helping to insulate the company from these headwinds.
- The resiliency of the cybersecurity space was put under the spotlight when peer Palo Alto Networks (PANW) issued its own beat-and-raise quarterly report on February 22. The company's much better-than-expected results and outlook indicated that cybersecurity spending was still at the top of most enterprises' IT budgets.
- Both CRWD and PANW are also benefitting from many customers consolidating their technology vendors as they look to simplify and streamline their IT operations. Larger vendors like CRWD and PANW offer a wider range of products that can meet many of their customers' needs.
- It's not just the vendor network that clients want to shrink. During the earnings call, CRWD CEO George Kurtz stated that a clear mandate from customers is that they want to reduce costs, headcount, and the number of point products, in order to simplify operations. Again, CRWD believes that its favorably positioned to capitalize on that directive due to its best-in-class ROI from its Falcon platform that accelerates cost savings for its customers.
After taking a more cautious tone last quarter, as reflected in the soft Q4 revenue guidance, Mr. Kurtz was more upbeat about the demand environment this time around. It's difficult to not feel encouraged when looking at some of CRWD's key metrics this quarter.
- More so than total revenue, annual recurring revenue (ARR) is the key demand metric for CRWD that many analysts and investors focus on. In Q3, ARR grew by 48% to $2.56 bln, exceeding estimates, with nearly $222 mln of that amount resulting from new ARR added during the quarter.
- CRWD also added a record number of net new customers in Q4. Specifically, net new subscription customers increased by 41% yr/yr for a total of 23,019.
- Not only is the "land" portion of its "land and expand" strategy working out nicely, but so too is the "expand" piece, as illustrated by a dollar-based net retention rate of 125.3% at quarter end. In fact, this metric never fell below the 120% mark during the fiscal year as customers continue to add more modules. On that note, subscription customers with 5 or more, 6 or more and 7 or more modules grew 52%, 62% and 75% year-over-year, respectively, in Q4.
The main takeaway is that CRWD's resiliency is on display today, and that while it's not completely immune to macroeconomic headwinds, the mission-critical nature of its top-tier cybersecurity platform provides it with a major advantage.
Campbell Soup posted another pretty "mmm...mmm" good result (CPB)
Campbell Soup (CPB) posted a pretty "mmm...mmm" good result with its Q2 (Jan) earnings this morning. The EPS beat in Q2 was not as large as Q1 (Oct), but still quite solid with nice revenue upside. Also, the food giant raised the mid-point of is adjusted EPS guidance and raised its FY23 sales outlook to +8.5-10% from +7-9%. CPB says its results reflect inflation-driven pricing and supply chain improvements which are aimed at offseting inflation pressures and increased marketing costs.
- What stood out was that both primary segments (Meals & Beverages; and Snacks) grew double-digits. In the M&B segment (soup, Swanson, Prego, Pace, V8), sales rose 10% yr/yr to $1.41 bln fueled by gains in both retail and foodservice. CPB was aided by supply chain productivity improvements relative to last year. However, favorable net price realization was partially offset by modest volume / mix declines. Also, CPB saw some inflation on the cost side.
- CPB thinks its M&B segment is well positioned because research shows that over 80% of meals are being prepared in home, that's about 400 bps higher than it was in a pre-COVID world. Also, CPB says what's different now is that the magic prep time for consumers is just 20 minutes for dinner and 10 minutes for lunch. CPB says its categories land well in these time frames and its products provide a great value.
- On the Snacks side (Pepperidge Farm, Goldfish crackers, Snyder's, Lance), revenue grew a robust 15% yr/yr to $1.08 bln. And its Power Brands were up 20%. CPB says it was number one in both the cookie cracker and salty snack categories in terms of share growth in Q2. Its snacks brands had a very strong holiday season with Pepperidge Farm Cookies gaining 0.7 points of dollar share. This brand benefitted from better supply, which allowed grocers to stock up ahead of the holidays. Another bright spot was its Goldfish brand, which is climbing toward its goal of $1 bln in annual sales. CPB has taken steps to broaden the appeal of this iconic brand.
- Looking ahead to the second half of FY23, CPB will begin to lap its most significant year-ago price increases, so CPB will see less benefit in 2H. Also, CPB expects to see a $0.12 headwind from lower pension income. However, given the strength of its top line, some cost saving measures and greater visibility, CPB was still confident enough to raise its adjusted EPS guidance.
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 remains a key trend right now. As a food company, CPB is not the most exciting name out there, but it has been posting solid results, especially the last two quarters as price increases benefit sales and EPS. The stock has been in a slow but general uptrend over the past year, plus it pays a nice 2.8% dividend yield.
Casey's General fuels up on raised FY23 inside comp outlook driven by consistent Q3 results (CASY)
Casey's General (CASY +3%) registered a solid beat on its bottom line in Q3 (Jan), topped inside same-store sales estimates, and lifted the low end of its FY23 (Apr) inside comp forecast, fueling its favorable price action today. The convenience store chain, predominantly in the Midwest, has been in a downward trend since providing a QTD update on January 31. Investors were discouraged by CASY's remarks that Q3-to-date inside comps were trending toward the lower end of its FY23 outlook of +5-7%. Given this mild forecast, the market likely started pricing in a reduced FY23 inside comp forecast.
- As a result, investors are pleasantly surprised today after CASY raised its FY23 inside same-store sales growth to approximately +6-7% despite Q3 comps tracking in line with its prior remarks, expanding +5.6%. The company also reiterated its inside margins of roughly 40%. However, CASY modestly tempered these positive developments by trimming its same-store fuel gallons prediction from negative 1% to positive 1% from flat to up 2%.
- CASY also served up solid numbers in Q3. Earnings of $2.36 represented a 56% jump yr/yr, assisted by robust sales growth of 9.3% to $3.33 bln. Inside margins of 40.6%, a 120 bp improvement yr/yr, also helped drive CASY's sizeable earnings beat in Q3, boosted by consumers drifting toward higher-margin items like energy drinks as well as further penetration from CASY's private labels.
- However, it is worth noting that elevated commodity costs continued to weigh on margins in Q3.
- Another component of CASY's ability to outperform analyst expectations in Q3 stemmed from its central focus throughout the year: store efficiency. CASY has been simplifying its store structure to help lower employee turnover and labor hours to mitigate higher worker costs. These initiatives have continuously shown up in CASY's operating expenses, excluding credit card fees, which continue to decelerate, growing just 5% yr/yr in Q3, down significantly from the 16.6% jump in 3Q22.
Although gas stations and convenience stores are seemingly located on every street corner, with new sites popping up constantly, CASY has been able to separate itself from the homogeneous pack. The company's focus on its inside offerings, such as pizza and bakery items, both of which demonstrated resilience in Q3, as well as its attention to keeping its locations reasonably tidy, continue to resonate with travelers. Although gas prices directly affect miles driven, CASY's in-store traffic remains robust despite prices climbing 20 cents per gallon yr/yr. Again, this is largely due to its product assortment inside its shops; management noted that around 75% of its transactions are nonfuel-related.
There are still risks, mainly sticky inflationary headwinds, that can continue to pressure CASY's inside margins, possibly causing the figure to decline in subsequent quarters. Lower gas prices could also squeeze fuel margins, which have hovered around 40 cents for the past two quarters. However, it was encouraging to hear management remaining confident in fuel margins gradually expanding over time and noting that fuel margins in the mid-30 cent range represent a baseline.
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