Market Snapshot
briefing.com
| Dow | 34430.47 | +451.23 | (1.33%) | | Nasdaq | 13811.42 | +184.56 | (1.35%) | | SP 500 | 4435.36 | +61.50 | (1.41%) | | 10-yr Note | +27/32 | 3.73 |
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| | NYSE | Adv 2135 | Dec 745 | Vol 1.0 bln | | Nasdaq | Adv 2914 | Dec 1505 | Vol 5.6 bln |
Industry Watch
| Strong: Energy, Health Care, Consumer Staples, Utilities, Industrials, Materials |
| | Weak: -- |
Moving the Market
-- Digesting heavy batch of economic data
-- Drop in market rates acting as a support factor
-- Broad rally bringing many stocks higher
-- S&P 500 climbing past 4,400
-- Strong response to CAVA Group (CAVA) IPO helped boost investor sentiment
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Closing Summary
15-Jun-23 16:25 ET
Dow +428.73 at 34407.97, Nasdaq +156.34 at 13783.20, S&P +53.25 at 4427.11
[BRIEFING.COM] It was a decidedly strong day for the stock market. The major indices opened somewhat soft, but quickly shifted into rally mode as investors digested a heavy batch of economic data. Many stocks contributed to index gains today, likely fueling a flat squeeze as investors employed cash from the sidelines due to a fear of missing out on further gains.
Ultimately, the major indices all closed near their highs of the day, which had the S&P 500 above 4,400 and the Dow Jones Industrial Average up by more than 400 points.
This morning's economic data was mixed in aggregate but featured a modest 0.1% increase in May retail sales, excluding autos, the highest four-week moving average for initial claims since November 20, 2021, and some welcome year-over-year deflation in import and export prices.
Treasuries settled with gains across the curve in response to this morning's data, which is seen as a sign of confidence that the Fed is done, or close to being done, raising rates. The 2-yr note yield was down six basis points to 4.64%. The 10-yr note yield was down seven basis points to 3.73%. The drop in market rates was a big support factor for equities today.
The strong response to CAVA Group's (CAVA 43.78, +21.78, +99.0%) IPO also helped boost investor sentiment. The quick-casual Mediterranean restaurant operator opened at a huge premium of $42/share after pricing its IPO at $22/share.
Today's gains were fairly broad based, yet many semiconductor stocks did not come along for the rally, likely driven by some consolidation efforts after a big run recently. The PHLX Semiconductor Index fell 0.9% with nearly every component sporting a loss. Intel (INTC 35.82, +0.24, +0.7%), however, went against the grain after the company announced the release of its newest quantum research chip.
All 11 S&P 500 sectors closed with gains and seven of them rose by more than 1.0%. The health care (+1.6%) and communication services (+1.5%) sectors led the pack. Meanwhile, the real estate (+0.3%) and consumer discretionary (+0.7%) sectors logged the slimmest gains.
The consumer discretionary sector was weighed down by a loss in Tesla (TSLA 255.90, -0.89, -0.4%) while several other components logged sizable, news driven gains. Domino's Pizza (DPZ 325.46, +19.74, +6.5%), Lennar (LEN 119.81, +5.06, +4.4%), and AutoZone (AZO 2497.37, +97.95, +4.1%) were the standouts in that regard. DPZ was upgraded to Buy from Hold at Stifel; LEN reported pleasing earnings and increased FY23 deliveries guidance; and AZO authorized a stock repurchase of an additional $2.0 billion of common stock.
Separately, the ECB announced a 25 basis points increase in its three key policy rates, as expected, while the the People's Bank of China announced a 10 basis points cut in the one-year medium-term lending facility rate to 2.65%.
China also reported some weaker than expected retail sales, industrial production, and fixed asset investment data for May.
- Nasdaq Composite: +31.7% YTD
- S&P 500: +15.3% YTD
- Russell 2000: +7.3% YTD
- S&P Midcap 400: +6.6% YTD
- Dow Jones Industrial Average: +3.8% YTD
Reviewing today's economic data:
- Total retail sales increased 0.3% month-over-month in May (Briefing.com consensus 0.0%). Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus +0.1%).
- The key takeaway from the report is that spending was flat or up in May across nearly every retail category with the exception of gasoline stations (-2.6%) and miscellaneous store retailers (-1.0%), which speaks to the enduring spending capacity of U.S. consumers who continue to be bolstered by a strong labor market.
- Initial jobless claims for the week ending June 10 were unchanged at 262,000 (Brieifng.com consensus 251,000). Continuing jobless claims for the week ending June 3 increased by 20,000 to 1.775 million.
- The key takeaway from the report is that initial jobless claims have elevated in recent weeks, yet they remain well below levels north of 375,000 that have been seen in all recession since 1980.
- The June Philadelphia Fed Index slumped to -13.7 (Briefing.com consensus -13.0) from -10.4 in May.
- The key takeaway from the report is that June was the tenth consecutive negative reading, pressured by another negative reading for the new orders index (to -11.0 from -8.9).
- The June Empire State Manufacturing Survey surged to 6.6 (Briefing.com consensus -16.0) from -31.8 in May.
- The key takeaway from the report is that the index for future business conditions jumped to 18.9 from 9.8, which is the second consecutive increase and suggests firms have become more optimistic about conditions improving over the next six months.
- May import prices declined 0.6% month-over-month following a downwardly revised 0.3% increase (from 0.4%) in April. Excluding fuel, import prices were down 0.1% following an unchanged reading for April. Export prices declined 1.9% month-over-month following a downwardly revised 0.1% decline (from 0.2%) in April. Excluding agricultural products, export prices declined 1.8% following a downwardly revised 0.1% decline (from 0.2%) in April.
- The key takeaway from the report is the deflation seen in import prices year-over-year (-5.9%), nonfuel import prices year-over-year (-1.9%), export prices year-over-year (-10.1%), and non-agricultural export prices year-over-year (-10.5%).
- Total industrial production declined 0.2% month-over-month in May (Briefing.com consensus +0.1%) following an unrevised 0.5% increase in April. The capacity utilization rate slipped to 79.6% (Briefing.com consensus 79.7%) from an upwardly revised 79.8% (from 79.7%) in April.
- The key takeaway from the report is that manufacturing output remained positive in May, helping to offset weakness in mining and utilities output.
- Business inventories rose 0.2% in April (Briefing.com consensus 0.2%) following a revised 0.2% decline in March (from -0.1%).
- The weekly EIA natural gas inventories showed a build of 84 bcf versus a build of 104 bcf last week.
Economic data tomorrow is limited to the preliminary University of Michigan Consumer Sentiment Survey for June (Briefing.com consensus 60.2; prior 59.2) at 10:00 a.m. ET.
Market continues to climb; Treasuries settle with gains
15-Jun-23 15:35 ET
Dow +462.54 at 34441.78, Nasdaq +179.40 at 13806.26, S&P +60.24 at 4434.10
[BRIEFING.COM] The market continues to build on gains, likely triggered by a flat squeeze as investors employ cash from the sidelines due to a fear of missing out on further gains.
Treasuries settled with gains across the curve, seen as a sign of confidence that the Fed is done, or close to being done, raising rates. The 2-yr note yield was down six basis points to 4.64%. The 10-yr note yield was down seven basis points to 3.73%.
Economic data tomorrow is limited to the preliminary University of Michigan Consumer Sentiment Survey for June (Briefing.com consensus 60.2; prior 59.2) at 10:00 a.m. ET.
TSLA, AMZN, NVDA recoup early losses; GS shares slide after WSJ report
15-Jun-23 15:05 ET
Dow +451.23 at 34430.47, Nasdaq +184.56 at 13811.42, S&P +61.50 at 4435.36
[BRIEFING.COM] The major indices continue to climb.
Mega cap stocks that had been trading down earlier have tipped into positive territory recently, helping to boost index performance. NVIDIA (NVDA 432.10, +2.13, +0.5%), Amazon.com (AMZN 127.22, +0.80, +0.6%), and Tesla (TSLA 256.97, +0.27, +0.1%) are the standouts in that respect.
Energy complex futures settled the session with gains. WTI crude oil futures rose 3.6% to $70.69/bbl and natural gas futures jumped 8.8% to $2.55/mmbtu.
Separately, Goldman Sachs (GS 339.83, +1.31, +0.4%) has pulled back after The Wall Street Journal suggested a potential probe into its SVB role.
Domino's outperforming in S&P 500 after Stifel upgrade
15-Jun-23 14:30 ET
Dow +394.11 at 34373.35, Nasdaq +120.48 at 13747.34, S&P +44.19 at 4418.05
[BRIEFING.COM] The S&P 500 (+1.01%) is in second place to this point on Thursday afternoon.
S&P 500 constituents Domino's Pizza (DPZ 323.67, +17.95, +5.87%), CVS (CVS 69.32, +2.67, +4.01%), and Elevance Health (ELV 451.89, +15.56, +3.57%) pepper the top of the standings. DPZ moves higher after Stifel upgrade to Buy, while CVS and ELV recoup some of yesterday's UNH-related losses.
Meanwhile, Warner Bros. Discovery (WBD 13.13, -0.54, -3.95%) is at the bottom of the S&P; earlier in the afternoon Reuters suggested ITV Plc (ITVPY 8.98, -0.25, -2.73%) was exploring purchase of All3media from owners WBD and Liberty Global (LBTYA 17.40, +0.18, +1.07%).
Gold climbs out of overnight losses, settles slightly higher on Thursday
15-Jun-23 14:00 ET
Dow +408.33 at 34387.57, Nasdaq +130.76 at 13757.62, S&P +45.67 at 4419.53
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+0.96%) joins its counterparts at session highs, having moved modestly higher over the prior half hour.
Gold futures settled $1.80 higher (+0.1%) to $1,970.70/oz, climbing out of overnight losses as the dollar and bond yields got smacked after a batch of economic data out this morning which included a modest 0.1% increase in May retail sales, excluding autos, the highest four-week moving average for initial claims since November 20, 2021, and year-over-year deflation in import and export prices..
Meanwhile, the U.S. Dollar Index is down about -0.8% to $102.15.
Taking stock of a load of macro inputs
There are a lot of macro inputs for the market to digest today, including the output heard yesterday from the FOMC and Fed Chair Powell.
There was a unanimous vote (a surprise to us) to hold the target range for the fed funds rate steady at 5.00-5.25% and new projections that included an upward revision to the median estimates for the change in 2023 real GDP (to 1.0% from 0.4%), a downward revision to the expected 2023 unemployment rate (to 4.1% from 4.5%), and an upward revision to the expected 2023 core PCE inflation level (to 3.9% from 3.6%). In turn, the dot-plot contained a median estimate for two more rate hikes before the end of the year (versus one more rate hike that the market had been expecting).
In sum, there were a few surprises from the Fed yesterday, yet the stock market didn't act as if it was really surprised. The S&P 500, which experienced some normal volatility following the decision, ended the day at roughly the same level it was trading just before the FOMC decision at 2:00 p.m. ET.
The tolerance for the Fed's surprises was underpinned by an assumption that the Fed won't ultimately realize the projection of raising rates at least two more times before the end of the year. That assumption was borne out of an abiding belief that inflation trends will improve more than the Fed expects, thereby allowing the Fed to hold off on additional rate hikes.
This will be the great divide in coming months that one side is going to have to cross: either the market is right or the Fed is right. If the Fed is right, then the market will find its climb more challenging. If the market is right, then one might reasonably expect to see some shock absorbers kick in on any pullbacks, as participants ride the notion that the rate hikes at least are basically over.
That doesn't mean, however, that the Fed is going to pivot quickly to a rate-cut cycle. It is apt to keep rates higher for longer until it is confident inflation will get back to its 2.0% target and stay there on a sustained basis. How the economy handles the higher rates for longer will be key in dictating the market's path since that will ultimately factor into thoughts about earnings prospects.
In other central bank news, the People's Bank of China cut its one-year medium term lending facility rate by 10 basis points to 2.65% amid a slate of May retail sales, industrial production, and fixed asset investment data that was all weaker than expected. The European Central Bank for its part raised its three key policy rates by 25 basis points, as expected.
Those developments preceded a large batch of economic data out of the U.S. this morning that was mixed:
- Total retail sales increased 0.3% month-over-month in May (Briefing.com consensus 0.0%). Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus +0.1%).
- The key takeaway from the report is that spending was flat or up in May across nearly every retail category with the exception of gasoline stations (-2.6%) and miscellaneous store retailers (-1.0%), which speaks to the enduring spending capacity of U.S. consumers who continue to be bolstered by a strong labor market.
- Initial jobless claims for the week ending June 10 were unchanged at 262,000 (Brieifng.com consensus 251,000). Continuing jobless claims for the week ending June 3 increased by 20,000 to 1.775 million.
- The key takeaway from the report is that initial jobless claims have elevated in recent weeks, yet they remain well below levels north of 375,000 that have been seen in all recession since 1980.
- The June Philadelphia Fed Index slumped to -13.7 (Briefing.com consensus -13.0) from -10.4 in May.
- The key takeaway from the report is that June was the tenth consecutive negative reading, pressured by another negative reading for the new orders index (to -11.0 from -8.9).
- The June Empire State Manufacturing Survey surged to 6.6 (Briefing.com consensus -16.0) from -31.8 in May.
- The key takeaway from the report is that the index for future business conditions jumped to 18.9 from 9.8, which is the second consecutive increase and suggests firms have become more optimistic about conditions improving over the next six months.
- May import prices declined 0.6% month-over-month following a downwardly revised 0.3% increase (from 0.4%) in April. Excluding fuel, import prices were down 0.1% following an unchanged reading for April. Export prices declined 1.9% month-over-month following a downwardly revised 0.1% decline (from 0.2%) in April. Excluding agricultural products, export prices declined 1.8% following a downwardly revised 0.1% decline (from 0.2%) in April.
- The key takeaway from the report is the deflation seen in import prices year-over-year (-5.9%), nonfuel import prices year-over-year (-1.9%), export prices year-over-year (-10.1%), and non-agricultural export prices year-over-year (-10.5%).
The equity futures market improved somewhat after the release of the data, which coincided with an improvement in the Treasury market after the release of the data. The 2-yr note yield is down three basis points to 4.67% (having been as high as 4.78%) and the 10-yr note yield is down four basis points to 3.76% (having been as high as 3.84%).
Currently, the S&P 500 futures are down 11 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 61 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 25 points and are trading 0.1% below fair value.
-- Patrick J. O'Hare, Briefing.com
Domino's Pizza rolling in dough today as shares gap up nicely on an upgrade at Stifel (DPZ)
Domino's Pizza (DPZ +6%) is slicing out a nice piece of the broader market rally today, gapping well above its 50-day moving average (312.96) following an upgrade at Stifel to "Buy" from "Hold." Today's upgrade is the second one this month from the firms we track, possibly illuminating that the most intense of the global pizza chain's headwinds may already be behind it.
Briefing.com notes that today's jump breaks DPZ's downward trend, sliding roughly 14% as of yesterday's close since hitting resistance at its 200-day moving average (334.54) immediately following its Q1 earnings report in late April. Investors ultimately sold DPZ's Q1 results despite initially charging higher as the company's delivery business remained pressured. However, DPZ is amid some favorable tailwinds, which could help the company achieve its long-term annualized growth forecast of +5-7%, resulting in a more significant rebound going forward.
- DPZ conceded earlier this week that it lost a lot of traction on the delivery side of its business, which comprises a little over half its total sales each year. However, given the company's astounding 60-year delivery history, we are not worried about DPZ returning to growth over the long term. DPZ continuously prioritizes value during the inflationary environment, keeping prices below many of its competitors and the overall quick-service restaurant industry. This should resonate with customers, bolstering DPZ's customer loyalty over the long haul.
- Speaking of which, DPZ commands the most prominent loyalty program amongst pizza firms nationwide, boasting 77 mln members, 30 mln of which are active customers. DPZ is gearing up to upgrade its loyalty program this fall, adding new features to allure more members. Enhancing its loyalty program can be a surefire way for DPZ to sustain and expand its massive customer base, which will only add further kindling to ignite a return to accelerated sales growth once macroeconomic pressures ease more meaningfully.
- International expansion will be another crucial factor in expanding its customer base. DPZ has penetrated underserved markets like China and India to bolster its global footprint. Management remains thrilled about the potential growth in these markets, noting this week during an Oppenheimer conference that the economics in China are very compelling given it is a highly developed quick-service restaurant market. DPZ added that India is another market with similar potential. DPZ expects these two regions to be material drivers of its international business.
While DPZ has cooled off since being a darling during the pandemic due to its foothold on the delivery pizza business, it is taking the proper actions to strengthen its positioning as a dominant global pizza chain during a less favorable period. It may take time until its core delivery business gains traction, especially if consumers' tastes shift from emphasizing convenience over value, i.e., delivery over carryout. However, DPZ is focusing on what it can in the interim, which should help trigger a swift volume bump once macroeconomic conditions turn more favorable.
Jabil is quite able today; stock trades to new 52-week high following nice upside quarter (JBL)
Jabil (JBL +4%) is trading to a new 52-week high today after reporting solid upside with its Q3 (May) earnings results this morning. The EPS upside was notably stronger than the past two quarters and the Q4 (Aug) EPS and revenue guidance was in-line. We think the stock is not up more because it had already run quite a bit heading into this report.
- We like to keep an eye on Jabil because it's an electronics design and production service provider. Its results provide a window into the semiconductor/electronics space. It also has exposure to many markets. Jabil says its assumptions remain largely consistent with its view on its last earnings call. It continues to be conservative given the macro dynamics. Jabil expects strong growth from its secular markets to be slightly offset by lower demand in some consumer-facing markets and in semi cap.
- Its DMS (Diversified Manufacturing Services) segment was the star of the show with revenue growing a robust 13% yr/yr to $4.35 bln, driven by strength in automotive and healthcare. Automotive is booming as it grew 60% yr/yr as volume, content and brands continue to expand. Its EMS (Electronics Manufacturing Services) segment saw revenue fall 8% yr/yr to $4.1 bln. As expected, Jabil saw a revenue shift in 5G, wireless and cloud business driven by its previously announced move to a consignment model for certain components.
- Automotive and EV growth continues to be robust, limited only by the pace at which Jabil can scale up production across multiple geographies with several OEMs. Jabil also noted that the outsourcing trend in healthcare continues to play out as it's seeing increased activity with interest from multiple OEMs.
- Growth expectations for its Industrials segment have also improved since March, driven higher by renewable energy infrastructure (solar inverters, smart meters, energy storage). Jabil now expects its industrials business to be up more than 25% in FY23. This growth has been slightly offset by incremental end market weakness in its semi cap business.
Overall, this was a solid quarter for Jabil. We had concerns going in that the +25% move since early May had priced the stock to perfection and maybe we'd see a sell-the-new reaction. However, investors appear to like what they see as do we. Its automotive business is just booming with EVs being an area of strength. It was also notable for Jabil to bolster its view on its Industrial segment. Consumer remains a concern though. Jabil is not a high profile tech-related name, but it has been performing well.
Lennar homes in on record highs after crushing quarterly estimates once again (LEN)
Lennar (LEN) is building on its strong run following another blow out quarterly report that has shares jumping to new all-time highs. Including today's gains, LEN has soared higher by 72% on a yr/yr basis, fueled by a string of much better-than-expected quarterly reports as the company capitalizes on what CEO Stuart Miller described as a "chronic supply shortage" of homes on the market.
- That supply shortage, combined with a greater comfort level for higher mortgage rates among home buyers, generated strong demand in Q2 with new home orders and home deliveries both easily exceeding LEN's expectations.
- For the quarter, new home orders increased by 26% sequentially to 17,885 compared to LEN's Q2 guidance of 16,000-17,000, while deliveries jumped by 25% to 17,074, cruising past the company's forecast of 15,000-16,000.
- A skeptic might argue that the upswing in demand is mainly a function of LEN offering more incentives and lowering prices to lure home buyers in. With LEN's average selling price dropping to $449,000 from $483,000 in the year-earlier period, causing revenue to decline by 6.3% yr/yr, there is an element of truth to that assertion.
- However, even with LEN cutting its prices, gross margin on home sales improved by 130 bps sequentially to 22.5%, playing a key role in its blowout EPS result of $2.94.
- Additionally, the company expects further improvement in Q3, forecasting gross margin on home sales of 23.5-24.0%. The rebound in margins is due to cost reductions and tightly managed homebuilding SG&A expenses. In Q2, SG&A expenses were 6.7% of total homebuilding revenue, up modestly from 6.1% in the year-ago quarter.
- Momentum appears to be building, too, as reflected in LEN's upwardly revised FY23 deliveries guidance of 68,000-70,000. In fact, this is the second time that LEN has increased its full year deliveries forecast.
- Last quarter, the company bumped its guidance higher to 62,000-66,000 from its original projection of 60,000-65,000. With demand strengthening, average selling prices should turn higher, providing another boost to LEN's margins.
- From a longer-term perspective, the outlook seems equally bright for LEN and its homebuilding peers like D.R. Horton (DHI), KB Home (KBH), and PulteGroup (PHM). New home construction has lagged family formation growth in the U.S. for many years, resulting in a housing supply shortage that will take years to correct. According to the National Association of Realtors, the U.S. is facing a shortage of approximately 5.5 mln homes.
The main takeaway is that analysts and investors alike continue to underestimate the strength of the homebuilding industry, which has batted away headwinds such as rising interest rates, high inflation, and labor shortages. While LEN shares are already trading at record highs, the path of least resistance seems to be higher based on the strengthening demand environment for new homes.
Kroger did not ring up substantial AprQ numbers despite relatively favorable dynamics (KR)
Kroger (KR -4%) exceeded profitability estimates in Q1 (Apr) but fell a hair short of revenue expectations, generating meaningful selling pressure today. Leading into Q1 results, the prominent grocery retailer was amid somewhat favorable dynamics. Per the latest CPI report, dining-out prices continued to climb faster than food-at-home prices, possibly keeping consumers from accelerating their away-from-home consumption. Meanwhile, given KR's pricing power, it can offer goods at less expensive prices than many of its regional and organic counterparts, potentially leading to expanding market share, a trend United Natural Foods (UNFI), whose largest customer includes Whole Foods Market (AMZN), touched on last week.
Therefore, despite KR's Q1 results not necessarily painting a doom and gloom picture, the market anticipated better performance, evidenced by KR's shares enjoying a decent rally of ~6% after bottoming out on June 1.
- The relatively soft sales growth of 1.3% yr/yr to $45.16 bln, KR's lightest quarter 1Q21, overshadowed a series of positives from Q1. Adjusted EPS of $1.51 marked KR's 14th consecutive beat, and it came on identical sales without fuel of +3.5%, tracking nicely above its reiterated FY24 (Jan) outlook of +1.0-2.0%.
- Digital sales jumped 15% yr/yr in Q1, outpacing overall growth. Given that KR's primary competitors, Walmart (WMT) and Costco (COST), offer robust digital offerings, such as Walmart+, KR must continue to bolster its online presence to sustain its competitive positioning and boost future performance.
- Encouragingly, despite stubborn inflationary pressures hanging over consumer spending, KR registered increased customer households and trips during the quarter. Larger grocers like KR can attract customers who may be trading down from their relatively higher-priced organic and regional grocers, especially given its vast assortment of private labels.
- KR's "Our Brands" private labels sustained its demand from several previous quarters as shoppers look for the best bang for their buck. As a result, FIFO gross margins -- commonly used by grocers given their abundance of perishable goods -- tacked on 21 bps yr/yr.
- Still, by merely reiterating its FY24 guidance, expecting adjusted EPS of $4.45-4.60 and comps of +1.0-2.0% despite the outperformance in Q1, investors are tempering their enthusiasm today as KR remained conservative on its near-term view.
- Regarding KR's pending $24.6 bln acquisition of Albertsons (ACI), it did not offer additional details. KR's repurchase program remains paused to prioritize de-leveraging.
KR's Q1 numbers were solid. However, economic conditions remain challenging; consumers are potentially forecasting prices to stay at current levels, only to increase from here for the foreseeable future. As such, shoppers may become more prudent in their spending habits at the grocery store, only buying essentials and decreasing their basket sizes. Individuals may also be turning to merchants offering better values like WMT and COST, which both rang up more substantial quarterly results than KR.
Shift4 Payments looking to shift back into rally mode after an upgrade at MoffettNathanson (FOUR)
Shift4 Payments (FOUR), a payment processor utilized across over 200,000 businesses, primarily SMBs in the hospitality and restaurant industries, is gearing up to break above its 50-day moving average (65.83) today following an upgrade to "Outperform" from "Market Perform" at MoffettNathanson.
Briefing.com notes that FOUR shares are still consolidating, however, struggling to remain above their 50-day moving average since tumbling in late April on a short seller report. Still, today's upgrade could provide the kindling needed to ignite a return to recent rally efforts.
- Around 90% of FOUR's revenue stems from transaction fees, similar to privately-held Stripe, meaning the company heavily relies on robust consumer spending at the many businesses utilizing its software. This presents a challenge, as spending trends remain depressed due to widespread inflation. Still, despite the tricky demand environment, FOUR delivered Q1 results on pace to meet or exceed its FY23 guidance, helped by a lack of any concerning spending trends during the quarter.
- However, the real test is ongoing, with May and June typically enjoying seasonal strength. FOUR was cautiously optimistic that spending would not endure a significant drop off from previous years during Q2, illuminated by the firm slightly increasing its FY23 revenue forecast to $2.55-2.70 bln from $2.50-2.70 bln.
- How restaurants perform will be critical, as this sector comprises approximately 40% of FOUR's annual revenue. Somewhat alarming was food-away-from-home prices continuing to edge higher yr/yr in May and at a quicker pace than food-at-home prices. Nevertheless, even after yesterday's CPI report, shares of publicly-traded restaurants mostly brushed off this economic data, ticking higher on the day. Although that does not guarantee relative strength within the food service industry, it shows that the market is not overly concerned.
- Also, FOUR has continuously broadened its sector diversification, showcased by restaurants falling from comprising 55% of total volumes in early 2019. FOUR is also amid aggressive international expansion plans, partnering with international gateways and alternative payment models like PayPal (PYPL). With nearly all of FOUR's volume growth emanating from customer additions instead of industry growth, it is encouraging to see the company add partners overseas to help boost its long-term financial performance.
Overall, FOUR could be looking at shifting into rally mode again after pulling back on a short seller report in April and somewhat underwhelming earnings in May. As we have seen from others in this space, including Toast (TOST) and Shopify (SHOP), volumes are exhibiting relative resilience despite macroeconomic uncertainty. Still, we advise waiting until after FOUR registers Q2 earnings results sometime around early August to see if May and June displayed seasonal strength.
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