| | | Market Snapshot:
briefing.com
| Dow | 33339.56 | -261.50 | (-0.78%) | | Nasdaq | 12093.89 | -95.57 | (-0.78%) | | SP 500 | 4093.64 | -32.14 | (-0.78%) | | 10-yr Note | +28/32 | 3.34 |
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| | NYSE | Adv 887 | Dec 2036 | Vol 920 mln | | Nasdaq | Adv 1304 | Dec 3169 | Vol 4.1 bln |
Industry Watch
| Strong: Utilities, Communication Services |
| | Weak: Materials, Energy, Industrials, Financials, Consumer Discretionary |
Moving the Market
-- JPMorgan Chase (JPM) CEO Jamie Dimon saying in his annual letter to shareholders that the regional banking crisis is not over and that it will have repercussions for years to come, but that it is nothing like the 2008 financial crisis
-- Economic slowdown concerns following this morning's weaker than expected February JOLTS Job Openings and Factory Orders
-- Strength from some mega cap stocks
-- Sharp turn lower in Treasury yields
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Closing Summary
04-Apr-23 16:30 ET
Dow -198.77 at 33402.29, Nasdaq -63.13 at 12126.33, S&P -23.91 at 4101.87
[BRIEFING.COM] The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 logged relatively modest losses today as the resilience to selling that drove yesterday's price action dissipated. Initially, the main indices all moved higher, but gains quickly faded and the market traded near its worst levels of the day for most of the session. The S&P 500 was able to close right on top of the 4,100 level thanks to a last minute move higher.
Banks stocks came under some added selling pressure today, undercut by economic slowdown concerns that followed this morning's weaker than expected economic data and a contention by JPMorgan Chase (JPM 128.42, -1.74, -1.3%) CEO Jamie Dimon in his annual shareholder letter that the regional banking crisis is not over yet and will have repercussions for years to come.
The S&P 500 financial sector fell 1.0%; the SPDR Bank ETF (KBE) fell 2.0%; and the SPDR Regional Bank ETF (KRE) fell 2.2%. Weakness in bank stocks and energy stocks had an outsized influence on the Russell 2000 (-1.8%). After today's action, the Russell 2000 holds the slimmest year-to-date gains among the major indices.
In addition to the financial sector, other cyclical sectors felt the pinch of slowdown concerns and underperformed today. Industrials (-2.3%), energy (-1.7%), and materials (-1.5%) were the biggest laggards. Meanwhile, the defensive-oriented utilities sector (+0.5%) led the outperformers followed by communication services (+0.3%).
Treasuries saw gains across the curve today in response to the weaker than expected February JOLTS Job Openings and Factory Orders. The 2-yr note yield, at 3.99% just before the release, fell 15 basis points to 3.84%. The 10-yr note yield, at 3.46% before the release, fell nine basis points to 3.34%. The U.S. Dollar Index fell 0.5% to 101.60.
The stock market did not respond favorably to the drop in yields due to a sense that a weakening economic backdrop will translate to further cuts to earnings estimates.
Still, the S&P 500 held up okay today despite being overbought on a short-term basis following big gains in Q1. Losses would have been more pronounced if not for gains in a few heavily-weighted stocks. Namely, Alphabet (GOOG 105.12, +0.21, +0.2%), Amazon.com (AMZN 103.95, +1.54, +1.5%), and Meta Platforms (META 214.72, +1.65, +0.8%) offered a measure of support. The Invesco S&P 500 Equal Weight ETF (RSP), however, declined 1.0%.
- Nasdaq Composite: +15.9% YTD
- S&P 500: +6.8% YTD
- S&P Midcap 400: +1.6% YTD
- Dow Jones Industrial Average: +0.8% YTD
- Russell 2000: +0.4% YTD
Reviewing today's economic data:
- Factory orders declined 0.7% month-over-month in February (Briefing.com consensus -0.5%) following a downwardly revised 2.1% decline (from -1.6%) in January. Shipments of manufactured goods decreased 0.5% month-over-month after increasing 0.3% in January.
- The key takeaway from the report is that it is backward looking, yet it fits the understanding that manufacturing conditions have weakened, evidenced by the more current March ISM Manufacturing Index which registered the fifth consecutive, sub-50% reading.
- JOLTS - Job Openings totaled 9.931 million in February following a revised count of 10.563 million in January (from 10.824 million). This was the first reading below 10 million since May 2021.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 2.9%)
- 8:15 ET: March ADP Employment Change (Briefing.com consensus 205,000; prior 242,000)
- 8:30 ET: February Trade Balance (Briefing.com consensus -$69.0 bln; prior -$68.3 bln)
- 9:45 ET: Final March IHS Markit Services PMI (prior 53.8)
- 10:00 ET: March ISM Non-Manufacturing Index (prior 54.5%; prior 55.1%)
- 10:30 ET: Weekly crude oil inventories (prior -7.49 mln)
Market remains near lows of the day in final half hour
04-Apr-23 15:35 ET
Dow -247.12 at 33353.94, Nasdaq -85.60 at 12103.86, S&P -31.20 at 4094.58
[BRIEFING.COM] The main indices remain near their worst levels of the session ahead of the closing bell.
The 2-yr Treasury note yield fell 15 basis points today to 3.84% and the 10-yr note yield fell nine basis points to 3.34%.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 2.9%)
- 8:15 ET: March ADP Employment Change (Briefing.com consensus 205,000; prior 242,000)
- 8:30 ET: February Trade Balance (Briefing.com consensus -$69.0 bln; prior -$68.3 bln)
- 9:45 ET: Final March IHS Markit Services PMI (prior 53.8)
- 10:00 ET: March ISM Non-Manufacturing Index (prior 54.5%; prior 55.1%)
- 10:30 ET: Weekly crude oil inventories (prior -7.49 mln)
Energy complex futures settle mixed
04-Apr-23 15:00 ET
Dow -261.50 at 33339.56, Nasdaq -95.57 at 12093.89, S&P -32.14 at 4093.64
[BRIEFING.COM] Things are little changed in the last half hour.
Despite the main indices trading near their worst levels, market breadth is less negative compared to earlier in the session. This morning, decliners led advancers by a greater than 3-to-1 margin at the NYSE and greater than 7-to-3 margin at the Nasdaq. Now, decliners lead advancers by a less than 3-to-1 margin at the NYSE and a greater than 2-to-1 margin at the Nasdaq.
Energy complex futures settled in mixed fashion. WTI crude oil futures rose 0.2% to $80.72/bbl and natural gas futures fell 0.1% to $2.11/mmbtu.
Steel Dynamics, peers among economic-sensitive names underperforming following jobs opening data
04-Apr-23 14:25 ET
Dow -246.51 at 33354.55, Nasdaq -73.83 at 12115.63, S&P -28.06 at 4097.72
[BRIEFING.COM] The S&P 500 (-0.68%) is still in second place among the major averages, having taken a modest move lower in the last half hour.
S&P 500 constituents Steel Dynamics (STLD 130.49, -9.68, -8.55%), United Rentals (URI 358.92, -30.15, -7.75%), and Trane (TT 173.70, -10.00, -5.44%) pepper the bottom of the standings. STLD, URI, and TT all move lower owing in part to sensitivity to economic and recession concerns.
Meanwhile, Newmont (NEM 51.36, +1.89, +3.82%) is atop the S&P, enjoying solid gains alongside today's broader move in the underlying commodity.
Gold higher following weaker jobs data
04-Apr-23 14:00 ET
Dow -219.12 at 33381.94, Nasdaq -57.04 at 12132.42, S&P -22.81 at 4102.97
[BRIEFING.COM] With about two hours remaining on Tuesday, the tech-heavy Nasdaq Composite (-0.47%) is down about 57 points at the moment.
Gold futures settled $37.80 higher (+1.9%) to $2,038.20/oz after this morning's JOLTs data came in weaker than expected, which in turn pushed yields and the greenback lower.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $101.62.
Cardlytics soaring after lifting guidance, providing hope that a turnaround is in motion (CDLX)
Cardlytics (CDLX), the operator of an advertising platform that utilizes data from the banking rewards programs it runs for its financial partners, is soaring today on a massive surge in volume after the company raised its Q1 guidance. The company now expects to generate revenue of $63.5-$66.5 mln, up from its original forecast of $54-$63 mln, and adjusted EBITDA of ($8.0)-($5.0) mln compared to its prior outlook of ($17.0)-($10.0) mln. Recently appointed CEO Karim Temsamani credited better than expected growth in the U.S. business, in addition to the impact from product optimizations, for the improved outlook.
The beleaguered company was badly in need of some good news.
- Since the beginning of 2022, the stock had cratered by about 95% prior to today's surge. Of course, as the operator of an advertising platform, the company has been deeply affected by the steep pull-back in marketing spending. This is reflected in CDLX's poor financial results which include twelve consecutive quarters of net losses. Additionally, revenue growth slipped into negative territory for the first time since 4Q20 last quarter.
The company's struggles instigated an overhaul of its executive team, as well.
- Last September, CDLX appointed Mr. Temsamani as its new CEO, succeeding Lynne Laube, who announced her intention to retire. Temsamani joined CDLX after serving as Head of Global Partnerships for leading fintech company Stripe.
- A few months later, the company named Amit Gupta as its new COO, who also came over from Stripe where he was Head of Strategy and Operations for Global Partnerships.
- This appointment was followed by the resigning of CDLX's CFO, Andy Christiansen, who will leave his post on July 21, 2023. The company is currently searching for his replacement.
While it's far too soon to declare victory, it appears that the changes at the top have CDLX moving in the right direction.
- On the cost side, CDLX successfully implemented $35 mln in expense reductions by the end of December, which are now taking effect in Q1. More cuts are anticipated, too, with Temsamani stating that he's focused on achieving positive cash flow in 3Q23.
- Simultaneously, the company is improving and upgrading its ad platform to support modern ad ranking models in order to drive higher monetization rates and provide more relevancy for its customers. Specifically, CDLX believes it can drive an improvement in RPMs of10-15% in 2H23.
- Furthermore, the company is exploring new pricing models that are more tied to impression events, while putting in place processes that allow it to track product performance more effectively.
The bottom line is that CDLX's improved outlook clearly caught investors by surprise, providing some much-needed hope that its new management team can finally turn things around.
MSC Industrial's cautious optimism regarding the industrial sector weighs on shares today (MSM)
Shares of MSC Industrial (MSM -1%) are struggling to close the day in positive territory after slowly erasing initial gains today. The metalworking and MRO products distributor delivered strong numbers during Q2 (Feb), including beats on its top and bottom lines and reaffirming its FY23 (Aug) adjusted operating margins forecast of 12.7-13.3% and average daily sales (ADS) growth projection of +5-9% yr/yr.
So why have shares struggled to build upon initial gains? MSM shared cautiously optimistic remarks on the global economy during the call. Certain comments were uplifting, such as solid order levels and demand activity. However, MSM noted that it is watching the banking situation closely to monitor any potential ripple effects on the industrial economy. The company is also dealing with price increases from its suppliers. Although, MSM stated that it has been able to pass along the price hikes with strong realization.
- MSM's Q2 results were still sturdy, boasting ADS growth of 11.5% yr/yr to $961.6 mln, well above the Industrial Production (IP) Index, which was essentially flat during Q2.
- Part of MSM's robust ADS growth can be attributed to the success of its Mission Critical goals outlined in 2020, which were centered on market share capture and improving profitability. To achieve these goals, MSM has been repositioning toward becoming a mission-critical partner on its customers' plant floors.
- M&A has been a vital component of this transformation. MSM has continued bolstering its high-touch product categories, acquiring Buckeye Industrial Supply Company and Tru-Edge Grinding during the quarter. Around 4 pts of MSM's ADS growth in Q2 was due to past acquisitions.
- The company is not planning on tapping the brakes on M&A anytime soon either, with tuck-in acquisitions being one of the main priorities within its broader capital allocation strategy.
- Looking ahead, MSM's reaffirmed FY23 guidance is consistent with its repeated remarks that the environment is stable. The company's growth trajectory will likely temper as it laps unfavorable year-ago comparisons. Also, MSM wanted to stay conservative in its outlook given the heightened uncertainty in the markets, explaining why it merely reaffirmed its ADS growth rate for the year despite two straight quarters of at least +11% growth.
Briefing.com likes to keep an eye on MSM, given its commanding presence within the industrial economy. We do not mind its continually conservative approach in forecasting how the remainder of FY23 will shake out. However, this lack of conviction has led to a relatively volatile stock price over the past six months, with shares constantly bouncing between $70 and $90. Investors seem to continue wanting to take a wait-and-see approach regarding MSM, as further disruptions, possibly from the banking sector, could weigh on the industrial markets over the near term.
On a final note, MSM's cautious optimism is somewhat concerning ahead of peer Fastenal's (FAST) Q1 (Mar) earnings report on April 13.
Stratasys receives another sweetened bid from Nano Dimension, but deal seems unlikely (SSYS)
Less than twenty-four hours after rejecting Nano Dimension's (NNDM) revised $19.55/share buyout offer (up from $18/share), Stratasys (SSYS) received yet another acquisition proposal this morning from fellow 3D printing company NNDM. This time, NNDM sweetened the bid to $20.05/share in cash, representing a 40% premium to SSYS's closing price from March 8, 2023 -- the day prior to NNDM's original offer.
- Considering that SSYS believes that NNDM's proposals have "substantially undervalued" the company and its growth prospects, it seems highly unlikely that it will accept this latest deal.
- NNDM, which is significantly smaller than SSYS with a market cap of $740 mln compared to $1.1 bln for SSYS, believes that a combination of the two would create a global leader in 3D printing, while creating meaningful revenue and cost synergies.
However, there is also a major drama unfolding at NNDM as the company continues its pursuit of SSYS.
- In early February, activist investor Murchinson, which holds a 5.1% stake in NNDM, stated that it was attempting to call a special meeting with the company's Board of Directors with the intent of urging its leadership to "refrain from undertaking any rash acquisition or other transaction for an improper purpose." The "improper purpose", according to Murchinson, is to dilute the shareholder base and to place shares into "friendly hands."
- NNDM retaliated by calling Murchinson's shareholder meeting "illegal and invalid", but on March 9, proxy advisory firm Institutional Shareholder Services (ISS) recommended that shareholders support all of Murchinson's proposals -- including the removal of NNDM CEO Yoav Stern as director of the Board of Directors.
- That same day, NNDM made its first offer to acquire SSYS in a $1.1 bln all cash transaction.
- Fast forward a week-and-a-half to March 20, and NNDM's shareholders followed ISS's recommendations and voted to remove the four directors of the company. Mr. Stern, though, isn't going down without a fight, arguing that the vote was invalid and should be ignored due to a low voter turnout. On June 18, 2023, there's a hearing set in an Israeli court to determine whether Murchinson's special general meeting of shareholders was valid.
Meanwhile, SSYS is caught in the middle of this battle. Notably, its stock is trading well below the latest $20.05/share buyout offer, reflecting investors' doubt that a deal will be agreed upon.
- SSYS is coming off a pretty solid Q4 report in which it beat analysts' top and bottom-line estimates, while issuing inline guidance for FY23. Revenue did decline by nearly 5% yr/yr, though, as macroeconomic headwinds continue to impact spending by its customers.
- Like many other companies, SSYS is experiencing longer sales cycles and occasional order deferrals. Helping to mitigate these issues are the benefits of 3D printing, including production efficiency, better performing parts, and reduced logistics costs.
The main takeaway is that we see little chance of a NNDM acquisition of SSYS occurring. NNDM characterized its latest proposal as its "last and best offer", which we expect SSYS to turn down as NNDM navigates through a bitter proxy battle.
Acuity Brands has the lights turned off on its recent rally after missing sales targets in Q2 (AYI)
Shares of Acuity Brands (AYI -12%) are fading well below their 200-day moving average (175.95) today after the commercial, industrial, and residential light supplier missed sales estimates for the first time in nearly two years in Q2 (Feb). AYI exceeded earnings expectations by a healthy margin, extending its bottom-line upside to 12 consecutive quarters. However, its revenue miss is putting out the flame that ignited a solid +8% stock rally over the past two weeks.
- AYI improved its top-line by just 3.8% yr/yr to $943.6 mln in Q2, its lightest quarter of growth since 2Q21. Although component availability continued improving during the quarter, macroeconomic weakness took a toll on AYI's revenue. The problem stemmed from a slowing order rate, primarily in the construction and industrial markets, driven by lower lead times management discussed last quarter, which are currently running down about 30% from the peak in 4Q22 (Aug). For instance, projects that would have been ordered later have already been ordered.
- CEO Neil Ashe also commented that the softening order rates emanate from the distributor side. However, the market is sending out mixed signals, as distributors' inventory purchased for resale, AYI's Contractor Select portfolio, grew more than the rest of the business in Q2.
- AYI also benefited from increasing favorability in input costs and price management, which helped lift adjusted operating margins by 50 bps yr/yr to 14%. These attributes contributed to AYI's 19% earnings growth in Q2, good enough to top estimates by double digits.
- Looking ahead to the rest of FY23, AYI will have to continue wading through a slowing order rate within its project business. On the bright side, the company boasts an extended backlog, which will help buoy sales to a degree. Also, its Contractor Select business remains robust. Furthermore, it is worth noting that AYI's FY23 guidance remains unchanged despite the uncertainty ahead. Management still expects to achieve adjusted EPS of $13.00-14.50 and revs of $4.1-4.3 bln.
- However, investors are disappointed that AYI did not, at the very least, increase its earnings outlook, given its sizeable beat in Q2. Also, Mr. Ashe stating that the significant lending tightening on the C&I side is giving the company pause was a concerning remark.
The main takeaway is that although some aspects of AYI's business are performing well, such as its Contractor Select business and the infrastructure and educational markets, its core C&I project business remains adversely impacted by macroeconomic headwinds. Management believes lead time compression, which affects the company the most, will persist until at least through Q3 (May).
Although it was encouraging to see AYI reiterate its FY23 outlook, the bearish comments surrounding the construction and industrial markets are concerning, turning the lights off on otherwise solid developments in Q2.
Extra Space Storage packs away huge market share gains with buyout of Life Storage (EXR)
Extra Space Storage (EXR) is making room in its property portfolio for smaller competitor Life Storage (LSI), acquiring the company in an all-stock deal that values LSI at about $12.7 bln. EXR and LSI, each of which are REITs, will combine to make the country's largest storage space rental operator with more than 3,500 locations and more than two million customers. For some context, Public Storage (PSA), which was formerly the largest company in the space before this merger, has nearly 2,900 rental space properties in the U.S.
- On that note, PSA attempted to acquire LSI in early February, offering 0.4192 shares of PSA common stock for each LSI share. At the time, that penciled out to an implied value of $126.14/share for LSI for a total equity value of approximately $11.0 bln. Two weeks later, LSI turned down the proposal, stating that the offer undervalued LSI and its growth prospects.
- The rejection opened the door for EXR to swoop in and make a more attractive offer. Specifically, LSI has agreed to accept 0.8950 shares of EXR common stock for each share of LSI owned, representing a total consideration of $145.82/share based on EXR's closing price on March 31, 2023. That's a premium of about 30% relative to LSI's closing price on February 3 -- the last trading day before PSA made its acquisition offer.
- EXR's rationale for making this acquisition isn't complicated. As the company's CEO Joseph Margolis stated, "This is an industry where scale really matters." With a larger footprint, the combined EXR/LSI will have a stronghold in many markets, making it very difficult for smaller companies to compete -- especially since it's such a commoditized industry where price really matters. Geographically, EXR is headquartered in Salt Lake City, Utah, while LSI's home base is in Buffalo, New York, providing the combined company with considerable coast-to-coast coverage.
- There's also plenty of overlap in terms of operating expenses since the businesses are so similar. EXR anticipates that the transaction will generate at least $100 mln in annual run-rate operating synergies from G&A and property operating expense savings. EXR also anticipates improved property operating revenue.
Although EXR expects the acquisition to be accretive to Core FFO within the first year of closing and to be leverage neutral, the stock is trading lower on the news. For an all-stock transaction, it's commonplace to see the acquiring company's stock trade lower. Overall, though, we believe that this deal certainly makes sense for EXR and that the combination should create significant Core FFO growth, while supporting a high dividend yield that currently sits at nearly 4% for EXR.
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