Market Snapshot
briefing.com
| Dow | 34016.37 | +139.68 | (0.41%) | | Nasdaq | 13430.38 | +170.86 | (1.29%) | | SP 500 | 4330.97 | +30.84 | (0.72%) | | 10-yr Note | -2/32 | 3.77 |
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| | NYSE | Adv 1454 | Dec 1403 | Vol 878 mln | | Nasdaq | Adv 2621 | Dec 1837 | Vol 4.7 bln |
Industry Watch
| Strong: Consumer Discretionary, Information Technology, Communication Services, Industrials |
| | Weak: Energy, Utilities |
Moving the Market
-- Wait-and-see mode ahead of busy week of potentially market-moving events
-- S&P 500 maintaining a position above 4,300
-- Relatively broad based advance paced by mega caps
-- Treasury market absorbing nearly $200 billion worth of bills and notes today
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Closing Summary
12-Jun-23 16:25 ET
Dow +189.55 at 34066.24, Nasdaq +202.78 at 13462.30, S&P +40.07 at 4340.20
[BRIEFING.COM] The stock market had a slightly positive bias in the early going, but really started to build up steam in the afternoon. Ultimately, the S&P 500 closed at its highest level since April 21, 2022, aided by chasing action and a possible fear of missing out on further gains.
Stocks shifted into rally-mode as market rates declined after the Treasury market did a good job absorbing nearly $200 billion worth of bills and notes, eyeing another $101 billion scheduled to be sold tomorrow. The 2-yr note yield, which reached a high of 4.63% overnight, fell to 4.56% before settling the session at 4.59%. The 10-yr note yield, which reached a high of 3.79%, pulled back to 3.73% and settled at 3.77%.
Mega cap stocks were in a leadership position, again, with many other stocks also coming along for the rally. The Vanguard Mega Cap Growth ETF (MGK) rose 1.5% and the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.7%. The market-cap weighted S&P 500 closed with a 0.9% gain.
Most of the S&P 500 sectors closed with a gain. Information technology (+2.1%) was the top performer by a decent margin followed by consumer discretionary (+1.7%) and communication services (+1.2%), all of which benefitted from strong mega cap constituents.
Meanwhile, the energy sector was the worst performer, down 1.0%, as oil prices fell ($67.09/bbl, -3.21, -4.6%). This was in response to Goldman Sachs cutting its Brent crude forecast to $86.00/bbl from $95.00/bbl and its WTI crude forecast to $81.00/bbl from $89.00/bbl, citing higher oil supplies.
There are several market-moving events on the horizon, although that did not deter buyers today. This week will feature the release of the May Consumer Price Index (Tuesday) and the May Retail Sales report (Friday), and policy decisions from the FOMC (Wednesday), the European Central Bank (Thursday), and the Bank of Japan (Friday).
- Nasdaq Composite: +28.6% YTD
- S&P 500: +13.0% YTD
- Russell 2000: +6.4% YTD
- S&P Midcap 400: +5.1% YTD
- Dow Jones Industrial Average: +2.8% YTD
Economic data today was limited to the May Treasury Budget, which showed a deficit of $240.3 billion compared to a deficit of $66.2 billion in the same period a year ago. The deficit in May was the result of outlays ($547.8 billion) exceeding receipts ($307.5 billion). The Treasury Budget data is not seasonally adjusted so the May 2023 deficit cannot be compared to the April 2023 surplus.
- The key takeaway from the report is that the level of outlays was the second highest in fiscal 2023.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 6:00 a.m. ET: May NFIB Small Business Optimism (prior 89.0)
- 8:30 a.m. ET: May Consumer Price Index (Briefing.com consensus +0.2%; prior +0.4%) and core-Consumer Price Index (Briefing.com consensus +0.4%; prior +0.4%)
S&P 500 on track for highest close since April 2022
12-Jun-23 15:40 ET
Dow +156.07 at 34032.76, Nasdaq +190.98 at 13450.50, S&P +36.94 at 4337.07
[BRIEFING.COM] The major indices continue to climb, trading near their best levels heading into the close. The S&P 500 is tracking toward its highest close since April 21, 2022.
Treasuries settled in mixed fashion. The 2-yr note yield fell three basis points to 4.59% and the 10-yr note yield rose two basis points to 3.77%.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 6:00 a.m. ET: May NFIB Small Business Optimism (prior 89.0)
- 8:30 a.m. ET: May Consumer Price Index (Briefing.com consensus +0.2%; prior +0.4%) and core-Consumer Price Index (Briefing.com consensus +0.4%; prior +0.4%)
Market climbs; energy complex settles mixed
12-Jun-23 15:05 ET
Dow +139.68 at 34016.37, Nasdaq +170.86 at 13430.38, S&P +30.84 at 4330.97
[BRIEFING.COM] The main indices turned higher over the last half hour, sitting at fresh session highs now.
Mega caps are offering a lot of support to the broader market still. The Vanguard Mega Cap Growth ETF (MGK) is up 1.2% while the market-cap weighted S&P 500 trades up 0.7%.
Energy complex futures settled the session mixed. WTI crude oil futures fell 4.6% to $67.09/bbl after Goldman Sachs cut its Brent crude forecast to $86.00/bbl from $95.00/bbl and its WTI crude forecast to $81.00/bbl from $89.00/bbl, citing higher oil supplies. Natural gas futures, meanwhile, rose 0.7% to $2.28/mmbtu.
May budget deficit widens as spending continues to rise
12-Jun-23 14:30 ET
Dow +64.53 at 33941.22, Nasdaq +134.33 at 13393.85, S&P +20.47 at 4320.60
[BRIEFING.COM] The major averages are entrenched in their standings following the release of the May Treasury Budget; to this point, the S&P 500 (+0.48%) remains in second place, having moved mostly sideways over the prior half hour.
The Treasury Budget for May showed a deficit of $240.3 bln versus a deficit of $66.2 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the May surplus cannot be compared to the surplus of $176.2 bln for April.
Total receipts of $307.5 bln fell 21.0% compared to last year while total outlays of $547.8 bln rose about 20.3% compared to last year.
The total year-to-date budget deficit now stands at $1.16 trln vs $426.23 bln at this point a year ago.
Gold modestly lower ahead of Treasury Budget
12-Jun-23 13:55 ET
Dow +87.79 at 33964.48, Nasdaq +123.05 at 13382.57, S&P +19.79 at 4319.92
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+0.93%) is now at HoDs, having jumped a bit in the last half hour.
Gold futures settled $7.50 lower (-0.4%) to $1,969.70/oz, pressured in part by rising yields and a stronger greenback.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $103.74.
As a reminder, the Treasury Budget for May will be released in about 5 minutes at the top of the hour.
Poised for a big week of market-moving news
Today, there is some relative calm on the news front, yet that will change as the week progresses with a series of newsworthy -- and market-moving -- items that revolve around economic data and monetary policy.
That spin cycle will get going with the May Consumer Price Index on Tuesday and will be followed by the May Producer Price Index and FOMC decision on Wednesday, Initial Jobless Claims and the ECB policy decision on Thursday, and the May Retail Sales Report and Bank of Japan policy decision on Friday.
Separately, the Treasury will sell nearly $300 billion worth of debt today and tomorrow, with $206 billion in bill issuance and $90 billion in notes and bonds. The 2-yr note yield is currently down six basis points to 4.56% and the 10-yr note yield is down three basis points to 3.72%.
There is a good bit of chatter this morning about the likelihood of the Fed skipping a rate hike at this week's meeting. That was the chatter last week, too, but it is more than just talk. According to the CME FedWatch Tool, there is only a 20.6% probability of a 25-basis points rate hike at this week's meeting.
A hot CPI report on Tuesday could change that thinking, but for now, no change by the Fed is the default expectation. What can change -- and is likely to change -- is the Summary of Economic Projections that will also include an updated dot-plot that captures policy rate projections.
The change in the equity futures market this morning has been positive. The S&P 500 futures are up 13 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 79 points and are trading 0.6% above fair value, and the Dow Jones Industrial Average futures are up 40 points and are trading 0.1% above fair value.
Relative strength in the usual mega-cap suspects has been an early support factor along with speculation that the S&P 500 can achieve a breakout above 4,300. Goldman Sachs for its part recently raised its 2023 year-end S&P 500 price target to 4,500 from 4,000.
That view has also fostered some hope that the advance by the market-cap weighted S&P 500 this year (+12.0%) will broaden out to include more stocks. There is some ample catching up to do in that respect considering the Invesco S&P 500 Equal-Weight ETF (RSP) is up just 2.8% for the year.
Oracle (ORCL), which reports its quarterly results after today's close, is a pre-market standout, jumping 3.9% after Wolfe Research upgraded the company to Outperform from Peer Perform, touting in part Oracle's ability to capitalize on AI tailwinds.
Brokerage actions are also responsible for a 6.0% gain in Carnival Corp. (CCL). That cruise line operator garnered an upgrade to Overweight from Neutral at JPMorgan Chase and an upgrade to Buy from Neutral at BofA Securities.
Nasdaq, Inc. (NDAQ) is another mover of note before the bell, only to the downside. It is off 9.1% following the news that it will acquire software company Adenza in a $10.5 billion cash-and-stock deal. The other M&A deal of note this morning involves Novartis (NVS), which plans to acquire Chinook Therapeutics (KDNY) for $40.00 per share upfront plus a contingent value right of up to $4.00 per share in cash, which equates to a roughly $3.5 billion transaction.
Clearly, then, there is news in today's mix, but the news everyone is waiting to hear is still out there.
-- Patrick J. O'Hare, Briefing.com
Ferguson plc may have already carved out a bottom; residential construction turning around (FERG)
After delivering solid Q3 (Apr) earnings results last week, we wanted to highlight Ferguson plc (FERG), a plumbing, heating, and HVAC distributor primarily serving the U.S. housing market (95% of FY22 revs). FERG currently sits at #45 on our Yield Leaders Rankings. Although new residential construction has remained challenged due to supply constraints, labor availability, and inflationary costs, FERG also serves the repair and remodel (R&R) market, which has demonstrated relative resilience, and the nonresidential construction industry, which has also been fairly strong.
Meanwhile, following FERG's recent comments and those made by others across similar industries, the company may have already carved out a bottom back in October. It also recently raised its annualized dividend by 9%, giving the stock a respectable 2.2% yield. At the same time, FERG added $500 mln to its share repurchase program, bringing the total to $700 mln.
- FERG's revenue decline in Q3 was modest in scope, sliding just 2% yr/yr to $7.14 bln, translating to a 20% improvement from 2021 levels. Meanwhile, adjusted EPS jumped 24% yr/yr to $2.20, boosted by a 230 bp expansion in adjusted operating margins, reflecting FERG's successful cost improvement initiatives.
- FERG implemented headcount reductions to navigate the volatile demand landscape, reducing its full-time equivalent employee count by over 2,000 during the year. FERG has also managed labor and non-labor operating expenses, targeting overtime and temporary labor reductions. Furthermore, FERG closed 44 smaller underperforming branches within its network of around 1,700 locations.
- The demand backdrop remains shaky. Overall growth in the U.S. moderated in Q3, with residential markets impacted by a slowdown in construction. However, this was mostly expected. Conversely, R&R demand proved resilient, particularly amongst FERG's core trade professionals and high-end markets. Similarly, nonresidential end markets, representing half of FERG's U.S. revenue, saw solid activity, with sales 3% higher yr/yr.
- Encouragingly, organizations primarily serving the R&R market, like Trex (TREX) and Floor and Decor (FND), have noted that this industry is well cushioned against economic downturns, evidenced by its professional customers enjoying robust remodel orders.
- While R&R and nonresidential construction buoys overall growth for FERG, residential construction looks to be amid a turnaround. Homebuilder KB Home (KBH) mentioned in March that new starts build times improved by over a month between slab start and hanging drywall. KBH expects the front half of its construction schedule to improve as the year progresses. Toll Brothers (TOL) stated late last month that this trend was already materializing, with labor constraints, especially at the front end of the construction process, easing, resulting in a two-week cycle time improvement.
Bottom line, after years of unfavorable market conditions, the U.S. residential construction industry may be beginning to turn. Coinciding with this is resilient R&R and nonresidential construction trends, resulting in FERG's woes potentially being well behind it. The stock has hit possible resistance around the $150 mark in recent trading but has found support at its 200-day moving average (127.54). As always, a 15-20% stop loss limit is a good idea.
Novartis takes big step in plan to reshape drug portfolio with buy out of Chinook Therapeutics (NVS)
Novartis (NVS), a Switzerland-based pharmaceutical company that's undergoing a major overhaul of its drug portfolio, took a big step in its mission to build a pipeline of highly profitable rare disease treatments with its $3.2 bln acquisition of Chinook Therapeutics (KDNY). At $40/share, the price tag was quite steep, representing a 67% premium to last Friday's closing price. That price also has the potential to increase by another $4/share based on the achievement of certain regulatory milestones.
With $12 bln in cash and cash equivalents on the books as of March 31, 2023, and with the company preparing to spin-off Sandoz, its generic drug business, in 2H23, NVS is positioned to make a splash in the M&A space.
- The crown jewel of the acquisition is atrasentan, KDNY's lead candidate that is currently in Phase 3 trials for the treatment of IgA nephropathy (IgAN) and proteinuric glomerular diseases. IgAN, which afflicts about 21 people per million per year in the U.S., is a condition that damages the glomeruli in kidneys and can cause kidney disease, potentially leading to dialysis and/or transplants.
- Atrasentan aims to reduce proteinuria -- high levels of protein in urine, and the strongest predictor of kidney function loss -- and to provide anti-inflammatory and anti-fibrotic effects to preserve kidney function.
- The drug has been in development for a long time. In fact, when KDNY and Aduro Biotech merged in June 2020, atrasentan was being readied for Phase 3 trials after being evaluated in over 5,300 diabetic kidney disease patients. In those studies, the drug demonstrated clinically significant and sustained reductions in proteinuria and reduced risk of kidney function decline.
- Over the past few years, KDNY has been building its enrollment in the Phase 3 ALIGN trial, reaching 320 patients in the main stratum as of May 9, 2023. The company expects to report topline data from the study in 4Q23.
- KDNY is also currently conducting a Phase 2 trial called AFFINITY to evaluate the efficacy and safety of atrasentan in patients with proteinuric glomerular disease who are at risk of progressive loss of kidney function.
- Similar to the ALIGN study, results for the AFFINITY trial have been promising so far with atrasentan demonstrating mean reductions in the 24-hour urine protein creatinine ratio of 38.1% at six weeks of treatment, 48.3% at 12 weeks of treatment, and 54.7% at 24 weeks of treatment.
Atrasentan and zigakibart (BION-1301), KDNY's other main renal drug candidate that's currently in Phase 1/2 studies, look like compelling additions to NVS's more refined drug portfolio. In March, NVS's strategy to focus on stronger growth opportunities in its Innovative Medicines segment received a substantial boost when it reported that its Kisqali Phase 3 trial met its primary endpoint. Kisqari, which has already been approved to treat hormone-driven breast cancer that has spread to other parts of the body, is being evaluated as a treatment with endocrine therapy in earlier stages of the disease.
The main takeaway is that while NVS is paying a hefty price for KDNY, which is weighing a bit on the stock today, the acquisition provides an instant and significant boost in its plan to reshape its drug portfolio as it prepares to shed its generic drug business later this year.
NASDAQ getting a chilly reception from investors with its Adenza deal (NDAQ)
Nasdaq (NDAQ -11%) is heading lower today after it announced a deal to acquire financial software firm Adenza from Thoma Bravo for $10.5 bln in cash (55%) and stock (45%). This deal is the latest for NDAQ in its push to diversify beyond exchange operations, which can be pretty volatile depending on market conditions. A couple of years ago, it paid $2.75 bln to acquire Verafin, which provides a suite of anti-financial crime management products.
- Adenza is a fast-growing software company created through the combination of two global brands: Calypso and AxiomSL. Calypso serves capital markets participants with treasury, risk, and collateral management workflows, and AxiomSL supports financial institutions with regulatory and compliance software.
- The financials look pretty good with Adenza expected to report $590 mln in revenue this year, which includes 15% organic revenue growth, annual recurring revenue growth of 18%, and Adenza boasts frothy adjusted EBITDA margins of 58%. NDAQ says Adenza has a loyal and growing client base, with 98% gross retention, 115% net retention, and a durable mix of approximately 80% recurring revenue.
- Why do this deal? First, we understand NDAQ's desire to diversify away from its boom-bust exchange operations. Software companies tend to provide more consistent and predictable revenue streams. The deal boosts NDAQ's Solutions Businesses revenue from 71% of total revenue to 77% in 2023E. The transaction also improves Nasdaq's adjusted EBITDA margins from 55% to 57% on a 2023 pro forma basis. Also, Nasdaq expects to achieve $80 mln in run-rate net expense synergies by the end of year two. The deal is also expected to unlock cross-sell opportunities, with run-rate revenue synergies of $50 mln in the medium term and $100 mln over the long term.
- So, why is the stock lower? We think there are a few reasons. First, the $10.5 bln price tag is quite large relative to NDAQ's $26 bln market cap, so this is a big deal for them and that carries risk. Investors hope that management is making the right call here. Second, the price tag looks pretty steep with NDAQ paying nearly 18x sales. Adenza does sport some lofty margins but that is still pretty pricey.
- Third, this deal includes a large stock component. Thoma Bravo will be receiving a 14.9% stake in NDAQ and a board seat as part of the deal. Also, more generally, when any management uses stock as M&A currency, investors tend to surmise that management thinks the share price is pretty fully valued. Management will not use shares if they think their stock price is cheap. So that is not great from a sentiment perspective. Also, NDAQ plans to issue $5.9 bln of debt to finance the deal.
- A final concern is that NDAQ's other areas are not great right now, so maybe it's not the best time to spend like this. At an investor conference last week, NDAQ said it's been a tougher environment with fewer IPOs, which means fewer sales of its corporate solutions to newly listed companies. Its index suite has good inflows, but its overall business has had more challenges yr/yr. NDAQ has also been seeing elongated sales cycles across its analytic suite.
- Finally, on the trading side, it's been kind of mixed. Options volumes continue to be very strong, but equities volumes have had more of a mixed year in the US. Its European trading business has been challenged because NDAQ gets paid on value traded, which has been a combination of lower volumes and lower market cap.
Overall, investors are giving a chilly response to the Adenza deal. The high equity component, the price being paid and the added debt all appear to be concerns for investors. Also, with some other segments not performing well, maybe this is not the right time to take such a big swing.
Carnival launches toward May 2022 highs following BofA Securities and JP Morgan upgrades today (CCL)
Carnival (CCL +12%) embarks toward highs not seen since May 2022 today after receiving an upgrade from BofA Securities and JP Morgan. Today's upgrades mark the fourth and fifth upgrade CCL, the world's largest cruise line, has received since delivering a mixed Q1 (Feb) report in late March, including downbeat FY23 earnings guidance. Still, despite this blemish, enough promising developments kept CCL's shares afloat.
Briefing.com notes that after several upgrades since late March, analysts forecast that the bottom is already in for CCL. Travel firms like Airbnb (ABNB), Delta Air Lines (DAL), and Hilton (HLT) have already demonstrated resilient travel demand in their most recent quarterly results, reflecting a broad return to normalcy worldwide following the pandemic.
Although this is a good sign for cruise lines like CCL, it also prices in raised expectations, requiring CCL to showcase the current robust travel demand by likely increasing its FY23 outlook next week when it reports Q2 (May) earnings. Also, it should be mentioned that the recent series of analyst upgrades resembles what we saw leading into the summer of 2021, only for the stock to begin an extended sell-off in September 2021.
Still, CCL is amid industry tailwinds while increasing its capacity and exposure to massive markets like the Asia Pacific, allowing it to chart a path toward sustained positive momentum.
- CCL exceeded 2019 capacity levels in Q1 and anticipated being just 7 points or less from 2019 occupancies in Q2, tracking in line with historical occupancies this summer. Meanwhile, CCL has increased ticket prices without experiencing a fallout in demand, a testament to the strength of current travel trends.
- The shift toward emphasizing experiences has been a notable dynamic recently as inflation has generated more cost-consciousness amongst consumers. With inflation remaining stubborn, we do not expect this tailwind for experience-based firms like CCL to dwindle over the near term.
- Companies within the travel sector touched on a solid comeback in regions particularly hurt by the pandemic, including China. Unfortunately for CCL, China is not opening its seas for the company to begin sailing until closer to the end of 2023, around Q4 (Nov). This market historically accounted for about 1.0 mln of CCL's guests, an influential figure to help boost sales in future quarters.
- Furthermore, CCL's Asian market is still about two years behind the U.S. regarding the recovery cycle, the furthest behind stacked against each of the company's international markets. However, CCL just resumed operations within its Asian markets, with ships in Japan and one in Taiwan beginning over the summer, capitalizing on depressed and underserved regions.
Plenty of risks could still send shares reversing their over 140% gains since October lows, including a longer-than-expected post-pandemic recovery in China, sticky commodity inflation, and potential geopolitical tensions. However, CCL is amid several favorable tailwinds hitting the cruise line industry, allowing it to sustain its current positive momentum.
Corning catches an upgrade as recent price increases bode well for margins and profits (GLW)
With shares virtually unchanged on a year-to-date basis compared to a 12% gain for the S&P 500, display glass company Corning (GLW) was badly in need of a spark. This morning, GLW received that overdue boost when Morgan Stanley (MS) upgraded the stock to Overweight from Equal Weight, while lifting the price target to $38 from $35. The impetus for the upgrade was based on the firm's belief that the risk/reward profile has swung to a more favorable position as GLW is poised to capitalize on its recent price increases.
- Rewinding to last December, China, which accounted for approximately 30% of GLW's total revenue in 2022, began to shift away from its zero-COVID policy. This change had a profound effect on the company's business as a wave of new virus cases resulted in lower consumer spending, workforce shortages, and, ultimately, lower demand for its display, environmental, and specialty materials products.
- In Q4, net sales for its Display Technologies segment, which manufactures glass substrates that are used in mobile phones, tablets, PCs, and TVs, fell by 17% yr/yr to $783 mln.
- Due to the tough business conditions, GLW implemented a series of actions in Q4 to improve profitability and cash flow. These actions included price increases in the optical communications and life sciences segments, an inventory reduction of $115 mln, and an adjustment of the company's productivity ratio.
When GLW reported better-than-expected Q1 results on April 25, the impact from its initiatives were noticeable.
- Despite demand remaining at recessionary levels in several key markets, core gross margin increased by 160 bps sequentially to 35.2%, driven by pricing and productivity improvements.
- Additional gross margin expansion should materialize after the company announced a 20% increase to its display glass substrate prices on May 23. Those price increases are on top of improving volumes and higher panel maker utilization rates as conditions brighten for GLW's Display Technologies segment.
MS's argument is that the stock isn't reflecting the benefits of GLW's price increases and stronger demand environment. Given the stock's weak performance and reasonable valuation with a forward P/E of about 16x, we tend to agree with that assessment.
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