Market Snapshot
briefing.com
| Dow | 34027.82 | -25.96 | (-0.08%) | | Nasdaq | 13554.66 | -113.01 | (-0.83%) | | SP 500 | 4377.94 | -12.04 | (-0.27%) | | 10-yr Note | 0/32 | 3.72 |
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| | NYSE | Adv 1436 | Dec 1403 | Vol 934 mln | | Nasdaq | Adv 1838 | Dec 2568 | Vol 5.2 bln |
Industry Watch
| Strong: Energy, Utilities, Industrials, Consumer Staples, Materials, Health Care |
| | Weak: Information Technology, Consumer Discretionary, Communication Services, Real Estate |
Moving the Market
-- Digesting Fed Chair Powell's remarks before the House Financial Services Committee, which didn't contain anything too surprising
-- Lingering sense the market is due for consolidation
-- Weakness in mega caps
-- Mixed action in the Treasury market
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Closing Summary
21-Jun-23 16:30 ET
Dow -102.35 at 33951.43, Nasdaq -165.09 at 13502.58, S&P -23.02 at 4366.96
[BRIEFING.COM] The stock market closed on a softer note today. The price action in the mega caps drove a lot of the index level moves, as well as a sense the market is still due for some consolidation. Notwithstanding the losses seen in the mega cap stocks, the major indices held up fairly well. The market-cap weighted S&P 500 fell 0.5%, but the Invesco S&P 500 Equal Weight ETF (RSP) fell by a modest 0.1%.
Market participants were also digesting Fed Chair Powell's semiannual monetary policy testimony before the House Financial Services Committee, but his comments didn't contain anything too surprising; therefore, they did not move the market much. Specifically, he reiterated that there is still a long way to go to get inflation back down to the 2.0% target and that nearly all Fed members anticipate the need for additional tightening before year end.
Following an early slide, there was a rebound effort in the afternoon trade as stocks pared their losses in response to falling Treasury yields, which reacted to a strong $12 billion 20-year bond reopening at 13:00 ET. The 2-yr note yield, which flirted with 4.76% earlier, fell to 4.67% before settling the session up one basis point at 4.71%. The 10-yr note yield, which hit 3.79% earlier, fell to 3.71% and settled down one basis point at 3.72%.
Selling in the stock market, however, picked up again in the final hour of trading on no news. Ultimately, the major indices all closed in negative territory.
The Vanguard Mega Cap Growth ETF (MGK), which had narrowed its loss to 0.6%, fell 1.1% today.
S&P 500 sector performance was mixed. The energy (+0.9%) and utilities (+0.8%) sectors held the top spots on the leaderboard at the close.
Meanwhile, lagging mega cap stocks pinned the communication services (-1.4%), information technology (-1.4%), and consumer discretionary (-1.2%) sectors at the bottom of the pack. Tesla (TSLA 259.46, -14.99, -5.5%), which has been on a tear, gaining 50% since May 24, was the main drag on the consumer discretionary sector after being downgraded by Barclays to Equal Weight from Overweight.
The information technology sector was also weighed down by its weak semiconductor components. The PHLX Semiconductor Index declined 2.7% with every component registering a loss. NVIDIA (NVDA 430.45, -7.63, -1.7%), up nearly 200% for the year, was among the more influential laggards from the space.
- Nasdaq Composite: +29.0% YTD
- S&P 500: +13.7% YTD
- Russell 2000: +5.8% YTD
- S&P Midcap 400: +5.3% YTD
- Dow Jones Industrial Average: +2.4% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index rose 0.5% with purchase applications rising 2.0% while refinancing applications fell 2.0%.
Looking ahead, market participants will receive the following economic data on Thursday:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 259,000; prior 262,000), Continuing Claims (prior 1.775 mln), and Q1 Current Account balance (prior -$206.80 bln)
- 10:00 ET: May Existing Home Sales (Briefing.com consensus 4.28 mln; prior 4.28 mln) and May Leading Indicators (Briefing.com consensus -0.8%; prior -0.6%)
- 10:30 ET: Weekly natural gas inventories (prior +84 bcf)
- 11:00 ET: Weekly crude oil inventories (prior +7.92 mln)
Also, Fed Chair Powell will appear before the Senate Banking Committee at 10:00 a.m. ET.
Treasuries settle mixed and little changed
21-Jun-23 15:35 ET
Dow -76.40 at 33977.38, Nasdaq -146.53 at 13521.14, S&P -19.52 at 4370.46
[BRIEFING.COM] The major indices continue to decline. The S&P 500 and Dow, though, remain near their highs of the day.
Treasuries settled in mixed fashion, little changed from yesterday's settlement levels. The 2-yr note yield rose one basis point to 4.71% and the 10-yr note yield fell one basis point to 3.72%.
After the close, KB Home (KBH) will report earnings. Ahead of Thursday's open, Accenture (ACN) and Darden Restaurants (DRI) are among the notable companies reporting earnings.
Looking ahead, market participants will receive the following economic data on Thursday:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 259,000; prior 262,000), Continuing Claims (prior 1.775 mln), and Q1 Current Account balance (prior -$206.80 bln)
- 10:00 ET: May Existing Home Sales (Briefing.com consensus 4.28 mln; prior 4.28 mln) and May Leading Indicators (Briefing.com consensus -0.8%; prior -0.6%)
- 10:30 ET: Weekly natural gas inventories (prior +84 bcf)
- 11:00 ET: Weekly crude oil inventories (prior +7.92 mln)
Energy complex settles higher
21-Jun-23 15:10 ET
Dow -25.96 at 34027.82, Nasdaq -113.01 at 13554.66, S&P -12.04 at 4377.94
[BRIEFING.COM] The major indices saw a modest pullback recently.
Energy complex futures settled the session higher. WTI crude oil futures rose 1.9% to $72.55/bbl and natural gas futures rose 3.5% to $2.60/mmbtu.
On a related note, the S&P 500 energy sector (+1.4%) remains atop the leaderboard by a wide margin.
Dollar Tree gains after guidance, AMD slips alongside peers
21-Jun-23 14:30 ET
Dow +9.86 at 34063.64, Nasdaq -97.74 at 13569.93, S&P -7.55 at 4382.43
[BRIEFING.COM] The S&P 500 (-0.17%), along with its counterparts, has moved higher over the prior half hour.
S&P 500 constituents Dollar Tree (DLTR 142.32, +5.78, +4.23%), Generac (GNRC 134.61, +5.74, +4.45%), and Corteva (CTVA 58.58, +2.04, +3.61%) pepper the top of the S&P. DLTR gains after guidance, GNRC continues yesterday's rebound.
Meanwhile, Advanced Micro (AMD 113.81, -5.12, -4.31%) is at the bottom of the standings, dragged lower by broader weakness in the semi space.
Gold slightly lower on Wednesday
21-Jun-23 14:00 ET
Dow -21.54 at 34032.24, Nasdaq -130.09 at 13537.58, S&P -15.06 at 4374.92
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-0.95%) is still the top laggard among the major averages.
Gold futures settled $2.80 lower (-0.1%) to $1,944.90/oz, recouping a bit of overnight losses with modest dollar losses being mostly offset by modest yield gains.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $102.15.
Consolidation tone persists in front of Powell testimony
The major indices eased their way into this holiday-shortened week with some modest downside action on Tuesday. It appears at the moment that price action modesty will remain a virtue.
Currently, the S&P 500 futures are down 12 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 54 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 89 points and are trading 0.2% below fair value.
There simply isn't a great deal of conviction in the futures trade. That is due partly to market participants waiting to see if the indices relent to stronger selling pressure following their big run since late May and partly due to waiting to see what Fed Chair Powell has to say in his semiannual monetary policy testimony before the House Financial Services Committee at 10:00 a.m. ET.
Actually, it's not so much what he will say in his testimony (the Federal Reserve released its Monetary Policy Report on Friday and some prepared remarks from Fed Chair Powell were released a short time ago). It is what he will say in response to questions posed by committee members, many of whom will likely fixate on the mini-banking crisis in March, their concerns about inflation, and how the Fed plans to bring inflation down without unduly impacting a labor market filled with voters.
Mr. Powell will attest that the banking system is resilient, that the inflation adjustment process has a ways to go still, and that he continues to think a soft landing remains possible. That's what he essentially said at his FOMC press conference a week ago, so it would defy reason for him to say anything demonstrably different only a week later.
In any case, the market's attention will be fixed on the Q&A period when it begins. For now, it is entertaining the notion that the market is overdue for a consolidation period.
There are some headlines this morning that have furthered that notion:
- FedEx (FDX), which toped fiscal Q4 EPS estimates on weaker-than-expected revenue, said the demand backdrop is likely to pressure sales growth in FY24.
- Barclays downgraded Tesla (TSLA) to Equal Weight from Overweight, saying it thinks "it is prudent to move to the sidelines" after the stock's huge rally.
- The UK reported hotter-than-expected CPI and core CPI data for May, fueling speculation that the Bank of England could raise its key policy rate by 50 basis points at Thursday's policy meeting.
- President Biden called Chinese President Xi a "dictator" in a fundraising speech. That drew a rebuke from China, which called it a public political provocation, according to Bloomberg.
-- Patrick J. O'Hare, Briefing.com
Spotify pulls back after hitting 52-week highs following an upgrade at Wolfe Research today (SPOT)
After briefly touching 52-week highs following an upgrade at Wolfe Research today to "Outperform" from "Peer Perform," Spotify (SPOT) is starting to encounter some buffering. Shares of the music and podcast streaming giant exploded this year, soaring nearly 90%. Although the stock still trades at half of where it was in November 2021, its recent rally is impressive, especially since it came despite two consecutive earnings misses.
However, Briefing.com is noticing a few cracks form lately, particularly on the podcasting side of Spotify's business, which may limit further upside.
- Spotify's recent Q1 results were somewhat underwhelming, missing top and bottom line estimates while guiding Q2 revs below consensus. However, shares received a jolt as monthly active user (MAU) growth of 22% exceeded the company's prior forecast. Still, although MAU growth was decent, it did not translate to exceptional revenue growth. This is due to ad-supported MAU growth of 26% yr/yr outpacing Premium subscriber (~87% of total sales) growth of 15%. Furthermore, Premium subs slowed sequentially, increasing 2.4% compared to a 5.1% bump last quarter.
- With macro pressures potentially worsening over the near term, subscriber growth could remain relatively weak, keeping a lid on future sales growth.
- Meanwhile, after spending hundreds of millions acquiring podcast groups and inking exclusive partnerships, Spotify acknowledged in April that it may have overpaid and overinvested with some of these deals. The company has already started not renewing some exclusive deals, reflecting poor performance. Although this should help Spotify's balance sheet, it could begin to face more substantial competitive pressures going forward since it would no longer be the exclusive provider of specific podcasts.
- Tech giants like Apple (AAPL) and Google (GOOG) can more easily divert capital toward enhancing their podcasting apps, potentially taking market share from Spotify. At the same time, there are few barriers to entering podcast app development, allowing for many smaller players to capture Spotify's listeners.
There are still plenty of reasons to remain bullish on Spotify, including its leadership position in music streaming and constant innovation, such as introducing a higher-end subscription tier supporting high-fidelity audio later this year. However, the economic environment is not shaping up to be favorable for Spotify over the near term, especially given that users could switch over to the ad-supported version of the app and continue listening to their playlists. Additionally, the woes Spotify has experienced related to its podcasting business may intensify, especially with the exclusive model not exhibiting the kind of strength it initially expected.
We noted in October that Spotify will likely carve out a bottom sooner rather than later. After hitting lows soon after that comment, only to more than double since, we believe now would probably be an appropriate time to take profits off the table, waiting until after Q2 results to see if Spotify's Premium subscriber growth is proving resilient to macroeconomic pressures.
Patterson Companies has investors smiling with strong beat-and-raise earnings report (PDCO)
Dental and animal health product provider Patterson Companies (PDCO) is jumping sharply higher after delivering a strong beat-and-raise 4Q23 earnings report driven by margin expansion and improving top-line growth. Recently, the company's Dental segment has experienced softening prices for its infection control products, weighing on the consumables category, but pricing appears to have stabilized in Q4. At the same time, demand for PDCO's dental equipment, including CAD/CAM technology products, accelerated from last quarter and favorably impacted total sales, product mix, and gross margin.
- Improving margins through product mix, cost control, and operating efficiencies is a key component of PDCO's strategy. In Q4, the company succeeded in reaching this goal as gross margin expanded by 140 bps yr/yr to 22.6% while adjusted operating margin increased by 170 bps yr/yr to 6.7%.
- The healthier margins are a function of total revenue growth rising to 5% from basically flat in Q3, along with solid cost containment as operating expenses increased by just 3% yr/yr.
- The Dental segment was the standout performer in Q4 with internal sales growing by 8.0% compared to last quarter's 3.8% decline. As the supply chain for certain infection control products has normalized, prices for those products have fallen from the pandemic highs, creating a headwind for the consumable business's growth rate.
- However, those price declines have now moderated, lessening the deflationary impact and enabling consumables internal sales to edge higher by 0.3% compared to last quarter's low-single-digit decline.
- During the Q3 earnings call, PDCO commented on how dental equipment sales can fluctuate quarter-to-quarter due to many different factors, such as upgrade cycles, macroeconomic conditions, product innovation, and promotional programs. With internal sales of dental equipment sliding lower by nearly 10% last quarter, mainly driven by a decline in digital and CAD/CAM products, it was apparent that business conditions were not in its favor.
- In Q4, though, the tide turned with internal sales of equipment climbing higher by 19.2% with strength across all product categories.
- Meanwhile, the Animal Health segment, which sells vaccines, pharmaceuticals, prescriptions, diagnostics, and other products for a wide variety of animal species, continues to display resilience. PDCO's omni-channel model and the expansion of its private label portfolio supported internal sales growth of 3.2%, with particular strength seen on the companion animal side.
Overall, it was a strong performance for PDCO as both of its main business segments generated positive sales growth and margin expansion, leading to a comfortable earnings beat and adjusted EPS growth of 18%.
FedEx delivers a mixed Q4, but tepid guidance for FY24 is worrying to see, especially in 1H (FDX)
FedEx (FDX -2%) closed out FY23 on a bit of a down note with its Q4 (May) report last night. The delivery giant beat on EPS, but the upside was not nearly as large as the past two quarters. Revenue fell 10.1% yr/yr to $21.93 bln, which was below analyst expectations as FedEx continues to be impacted by soft demand. The outlook for FY24 was not great with the mid-point of EPS guidance coming in below expectations. FDX expects demand challenges to continue in FY24, particularly in the first half.
- Express, its largest segment, continues to struggle with revenue falling 13% yr/yr to $10.4 bln. However, this result was generally in-line with internal expectations coming into the quarter. Parcel volume declines were most pronounced in the US. Express has made progress in terms of aligning costs with underlying demand. Specifically, Express reduced total flight hours by 12% yr/yr and permanently retired 18 aircraft. The plan to take another 29 aircraft out of scheduled flying in FY24.
- Ground revenue fell just 2% yr/yr to $8.3 bln, driven by a 6% decline in volume, partially offset by a 5% increase in yield. Management described Ground as being the standout in Q4 by delivering operating income of over $1 bln, accounting for the majority of total company operating income of $1.5 bln. This was the first time in Ground's history where margins expanded when volumes declined. Profitability stemmed from lower staffing levels, store closures/consolidations and reduced Sunday operations. This pushed Ground's Q4 operating margin to 12.1%.
- FedEx Freight revenue was down 18% to $2.3 bln, driven by an 18% decline in volumes. This decline was driven primarily by the slowdown in the market and high inventory levels.
- FDX does not guide on a quarterly basis, but it expects volume declines to moderate in Q1 (Aug) at Express and Ground as it laps the onset of softer volumes. Freight is expected to continue to experience pressure. The company expects external business conditions to remain challenging in the near term and there remains significant uncertainty with respect to the timing of demand recovery particularly in the back half of the fiscal year.
Overall, this was a rough way to end FY23. The Q4 results were not too bad, we think investors feel most let down by the tepid guidance for FY24. And it sounds like demand over the next couple of quarters is likely to be weak. The company is clearly facing difficult operating conditions as volumes have dropped quite a bit. However, what stood out to us was the EPS beat even after missing on the top line. That shows that its cost cutting initiatives are finally benefitting the P&L.
Finally, we were pleased to hear FDX say it expects to repurchase an additional $2 bln of stock in FY24, which is in addition to a recently announced 10% dividend increase. That tells us shareholder returns remain a priority. UPS is ticking lower on this report, as we suspect it will also issue cautious guidance when it reports in late July.
Winnebago seeing clouds dissipate as investors forgive top-line miss, focus on long-term (WGO)
With rival RV manufacturer Thor Industries (THO) setting the tone earlier this month with its upbeat AprQ report, Winnebago's (WGO) top-line miss in Q3 (May) initially generated some selling pressure today. The RV giant did top earnings estimates in the quarter by a wide margin, reflecting better-than-expected profitability within its Towable RV and Marine businesses. However, the subdued sales figures underscored persistent weakness within the RV industry. Also not helping matters is Winnebago's lack of formal guidance, which can provide realistic expectations ahead of earnings results and assist analysts in formulating estimates, something Thor returned to doing this year.
- As expected, the RV industry remains challenged, as higher interest rates make financing expensive and inflationary pressures increase the cost of ownership. This unfavorable combination was reflected in Winnebago's headline results. Adjusted EPS contracted 48.4% yr/yr to $2.13, on a 38.2% revenue decline to $900.8 mln.
- The underwhelming sales in the quarter resulted from significant declines in Towable RV and Motorhome RV, which tumbled 52.3% and 27.5% yr/yr, respectively. The declines stemmed largely from Winnebago implementing higher discounts and allowances compared to the prior year to help move units.
- One notable bright spot in MayQ was Winnebago's Marine line, particularly the Barletta brand, which delivered solid market share gains in the aluminum pontoon category. Leading into Winnebago's MayQ report, we commented that following prominent parts supplier LCI Industries (LCII) remark in early May regarding robust demand within its Marine segment, Winnebago's Marine division should see decent quarterly appreciation. However, at just 14% of total revs, its Marine segment was not meaningful enough to offset the RV industry's softness.
- Management reiterated its plans to actively manage production levels to align with dealer demand, seasonal retail conditions, and the company's broader market share aspirations. Encouragingly, Winnebago continues to buy back its shares, repurchasing $20 mln during MayQ. Meanwhile, it has retained its dividend yield of 1.7%, 50% above the previous year's dividend.
Bottom line, Winnebago's MayQ results reflected the broader challenging market conditions. Although its sales miss initially sent shares packing, it was not that bad when stacked against Thor's 37.1% sales decline yr/yr in AprQ. Also, given that Winnebago does not provide quarterly or annual guidance, analysts may have anticipated a quicker rebound in RV demand than the economy can produce right now, which makes its miss more forgivable. With revs starting to bounce back sequentially and long-term dynamics remaining intact, Winnebago may be amid a long-awaited turnaround, similar to Thor.
Eli Lilly places a bet with DICE Therapeutics buy out in effort to bolster immunology program (LLY)
DICE Therapeutics (DICE) is rolling today with shares rocketing to all-time highs after Eli Lilly (LLY) announced its intention to acquire the clinical stage biopharmaceutical company for $48/share in cash. The purchase price represents a 42% premium over last Friday's close, further signifying big pharma's willingness to ramp up investments in order to bolster and diversify their drug portfolios with higher growth assets, especially in the areas of oncology and immunotherapies.
- On that note, LLY's buy out of DICE comes on the heels of Novartis' (NVS) acquisition of Chinook Therapeutics (KDNY) from last week. Rewinding a bit further, Amgen (AMGN) announced its acquisition of Horizon Pharma (HZNP) last December -- although that deal is now facing serious regulatory uncertainty -- while Pfizer (PFE) completed a $6.7 bln acquisition of Arena Pharmaceuticals in March of 2022.
- For LLY, the addition of DICE would provide a significant boost to its immunology business, which currently relies on its Taltz treatment for plaque psoriasis. In 1Q23, revenue for Taltz increased by 8% to $527 mln, representing only about 7.5% of LLY's total revenue.
- By far, LLY's largest drug is Trulicity for the treatment of type 2 diabetes, which registered total revenue of $7.4 bln in FY22.
- While LLY's top four drugs (Trulicity, Verzenio, Taltz, and Jardiance) are generating solid double-digit growth, the rest of the portfolio is struggling. For instance, revenue for Humalog, an insulin treatment for diabetes patients, decreased by 25% in Q1. Overall, LLY's revenue slid by nearly 11% for the quarter, following a decline of about 9% in the previous quarter.
In need of future growth catalysts, LLY identified DICE and its immunology program as an intriguing opportunity. Specifically, DICE's two IL-17 inhibitor treatments, DC-806 and DC-853, for psoriasis and other chronic immunology indications are the centerpiece of this acquisition. According to DICE, blocking the pro-inflammatory signaling molecule IL-17 has proven to be an effective therapy in several auto-immune diseases.
- DC-806, for instance, has shown plenty of promise so far in clinical studies. Last October, DICE announced positive topline data from its Phase 1 clinical trial of DC-806 as the mean percentage reduction in Psoriasis Area and Severity Index (PASI) from baseline was 43.7% in the high dose group compared to 13.3% in the placebo group after four weeks of treatment.
- DC-806 was also well-tolerated with a strong safety profile across all dose groups.
- In Q1, the first patient was dosed in the Phase 2 trial in patients with moderate-to-severe psoriasis. The company plans to submit an investigational new drug application with the FDA in the first half of 2023 and initiate Phase 2b development.
- Meanwhile, the Phase 1 clinical trial for DC-853 is continuing with top-line expected to be released in 2H23.
Overall, LLY's proposed acquisition of DICE looks like a good bet in our view, especially since it doesn't need to raise any capital to finance the deal. The 42% premium is steep, although, not egregious, considering the upside potential for DICE's immunotherapy program.
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