Market Snapshot
briefing.com
| Dow | 35303.40 | -216.63 | (-0.61%) | | Nasdaq | 14053.56 | -74.11 | (-0.52%) | | SP 500 | 4542.43 | -25.59 | (-0.56%) | | 10-yr Note | -55/32 | 4.01 |
|
| | NYSE | Adv 649 | Dec 2219 | Vol 973 mln | | Nasdaq | Adv 1214 | Dec 3182 | Vol 5.1 bln |
Industry Watch
| Strong: Communication Services |
| | Weak: Utilities, Real Estate, Financials, Industrials, Consumer Discretionary |
Moving the Market
-- Sell off coinciding with the news that the Bank of Japan is going to discuss changes to its yield curve control policy at its policy meeting on Friday
-- Huge gain in Meta Platforms (META) after its earnings report offering a measure of support
-- Positive reactions to other earnings reports from the likes of McDonald's (MCD), Comcast (CMCSA), Lam Research (LRCX), AbbVie (ABBV), and Royal Caribbean (RCL)
-- Lingering notion that the market is due for consolidation
|
Closing Summary
27-Jul-23 16:30 ET
Dow -237.40 at 35282.63, Nasdaq -77.17 at 14050.50, S&P -29.34 at 4538.68
[BRIEFING.COM] The market started the session in rally mode. A nice gain Meta Platforms (META 311.71, +13.14, +4.4%), which reported pleasing earnings and outlook, had initially sparked some buying interest in the mega cap space, helping to bolstered index gains.
The S&P 500, which hit a new 52-week high of 4,607, had been up as much as 0.9%; the Nasdaq Composite had been up as much as 1.7%; and the Dow Jones Industrial Average, which logged 13 straight wins coming into today, had been up as much as 0.4%.
Stocks started to rollover around 1:00 p.m. ET with several potential catalysts to account for the move. There was a Nikkei report that the BOJ is going to discuss possible changes to its yield curve control policy at Friday's meeting. This news piqued concerns about a possible unwinding of some carry trades that have been supportive for U.S. asset prices.
That news hit around the same time that the $35 billion 7-yr note auction was met with underwhelming demand. Selling in the Treasury market, which initially picked up in response to this morning's economic releases, increased after the auction results. The 10-yr note yield settled back above 4.00%, rising 16 basis points to 4.01%. The 2-yr note yield rose nine basis points to 4.92%. Also, the dollar came down sharply against the yen. USD/JPY is down 0.5% to 139.49. The U.S. Dollar Index rose 0.9% to 101.78.
Coincidentally, the S&P 500 was met with resistance on a retest of the 4,600 level around the same time that the BOJ news and 7-yr note auction results hit. The failure to meaningfully break above 4,600, paired with the aforementioned news items, drove participants to take some money off the table in a market that many believe is due for a pullback.
Many stocks participated in the afternoon sell off. Declining issues had a 7-to-2 lead over advancing issues at the NYSE and a better than 5-to-2 lead at the Nasdaq.
Still, there were some notable winners today as investors reacted to a slate of earnings news. McDonald's (MCD 295.19, +3.44, +1.2%), Comcast (CMCSA 45.35, +2.44, +5.7%), Lam Research (LRCX 701.95, +59.58, +9.3%), AbbVie (ABBV 148.85, +6.95, +4.9%), and Royal Caribbean (RCL 109.68, +8.80, +8.7%) were top standouts following their earnings reports.
The positive bias driving early gains was partially fueled by a sense that the economy will avoid a recession and that the Fed could be done raising rates following yesterday's 25 basis points increase. The ECB followed suit today with a 25 basis points increase in its three key lending rates, although there is some speculation, driven by the language in its directive, that the ECB could also be close to being done raising rates.
Some pleasing economic data this morning fed into the idea that the economy will avoid recession.
Briefly, initial jobless claims (221,000) -- a leading indicator -- hit their lowest level since February, the Adv. Q2 GDP report showed real GDP increasing at an annual rate of 2.4% that was up from 2.0% in the first quarter, and June Durable Goods Orders were up a robust 4.7%, driven by increases in most durable goods categories.
Only one of the S&P 500 sectors logged a gain -- communication services (+0.9%) -- while the real estate (-2.1%) and utilities (-1.7%) sectors registered the largest declines.
- Nasdaq Composite: +34.2% YTD
- S&P 500: +18.2% YTD
- Russell 2000: +11.0% YTD
- S&P Midcap 400: +10.9% YTD
- Dow Jones Industrial Average: +6.4% YTD
Reviewing today's economic data:
- Initial jobless claims for the week ending July 22 decreased by 7,000 to 221,000 (Briefing.com consensus 233,000). That is the lowest level since February. Continuing jobless claims for the week ending July 15 decreased by 59,000 to 1.690 million, also the lowest level since February.
- The key takeaway from the report is much the same: the low level of initial claims -- a leading indicator -- is a reflection of employers seeing demand holding up well enough such that they are reluctant to let go of employees in a tight labor market.
- The Adv. Q2 GDP report showed real GDP increasing at an annual rate of 2.4% (Briefing.com consensus 1.6%) following a 2.0% increase in the first quarter, although consumer spending slowed to an annual rate of 1.6% from a heady 4.2% in the first quarter. The GDP Price Deflator dropped to 2.2% from 4.1% in the first quarter.
- The key takeaway from the report is an obvious one: the U.S. economy was a long way from a recession in the second quarter. Real final sales of domestic product, which exclude the change in private inventories, were up 2.3%
- June durable goods orders increased 4.7% month-over-month in June (Briefing.com consensus 1.0%) following an upwardly revised 2.0% (from 1.7%) in May. Excluding transportation, durable goods orders increased 0.6% month-over-month in June (Briefing.com consensus 0.2%) following an upwardly revised 0.7% increase (from 0.6%) in May.
- The key takeaway from the report is that new orders were up across most durable goods categories, reflecting continued demand for an economy that continues in a growth mode.
- The June Adv. International Trade in Goods deficit narrowed to $87.1 billion from $91.1 billion. Separately, Adv. Retail Inventories were up 0.7% and Adv. Wholesale Inventories were down 0.3%.
Looking ahead to Friday, the June Personal Income and Spending Report, which features the Fed's preferred inflation gauge in the form of the PCE and core-PCE Price Indexes, will be released at 8:30 a.m. ET. Other economic data tomorrow includes:
- 8:30 ET: Q2 Employment Cost Index (Briefing.com consensus 1.1%; prior 1.2%)
- 10:00 ET: Final July University of Michigan Consumer Sentiment survey (Briefing.com consensus 72.6; prior 72.6)
Treasuries settle with sharp losses
27-Jul-23 15:35 ET
Dow -249.90 at 35270.13, Nasdaq -82.01 at 14045.66, S&P -29.48 at 4538.54
[BRIEFING.COM] The major indices remain near their worst levels of the session. Index levels losses have been paced by the Russell 2000, down 1.3%.
Treasuries settled with sharp losses. The 2-yr note yield rose nine basis points to 4.92% and the 10-yr note yield rose 16 basis points to 4.01%.
Looking ahead to Friday, the June Personal Income and Spending Report, which features the Fed's preferred inflation gauge in the form of the PCE and core-PCE Price Indexes, will be released at 8:30 a.m. ET. Other economic data tomorrow includes:
- 8:30 ET: Q2 Employment Cost Index (Briefing.com consensus 1.1%; prior 1.2%)
- 10:00 ET: Final July University of Michigan Consumer Sentiment survey (Briefing.com consensus 72.6; prior 72.6)
Sell off continues; 10-yr note yield rises past 4.00%
27-Jul-23 15:05 ET
Dow -216.63 at 35303.40, Nasdaq -74.11 at 14053.56, S&P -25.59 at 4542.43
[BRIEFING.COM] The major indices remain in a slow, steady decline.
Market internals reflect a fairly strong negative bias driving recent action. Decliners lead advancers by a nearly 3-to-1 margin at the NYSE and a better than 5-to-2 margin at the Nasdaq.
The 10-yr Treasury note yield rose back above 4.00% recently, up 16 basis points to 4.01%.
Separately, energy complex futures settled mixed. WTI crude oil futures rose 1.6% to $80.05/bbl and natural gas futures fell 3.5% to $2.60/mmbtu.
Earnings movers populate opposite ends of S&P 500
27-Jul-23 14:30 ET
Dow -164.53 at 35355.50, Nasdaq -19.65 at 14108.02, S&P -14.82 at 4553.20
[BRIEFING.COM] The markets continued to sell off in the last half hour, the S&P 500 (-0.32%) now down about 15 points.
S&P 500 constituents Align Tech (ALGN 382.52, +42.67, +12.56%), Textron (TXT 76.95, +8.55, +12.50%), and Seagate Tech (STX 62.93, +4.96, +8.56%) pepper the top of today's standings, all following earnings reports.
Meanwhile, London-based insurance firm Willis Towers Watson (WTW 211.83, -21.10, -9.06%) is near the bottom of the S&P following earnings/guidance.
Gold lower as dollar, yield gains weigh
27-Jul-23 14:00 ET
Dow -23.49 at 35496.54, Nasdaq +64.24 at 14191.91, S&P +5.13 at 4573.15
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+0.45%) remains atop the major averages, though hovers now near session lows.
Gold futures settled $24.40 lower (-1.2%) to $1,945.70/oz, pressured in part by higher treasury yields and strength in the greenback.
Meanwhile, the U.S. Dollar Index is up about +0.7% to $101.62.
Fed, earnings, and econ data create feel-good moment
It is all good for the stock market this morning -- or at least it feels that way.
Currently, the S&P 500 futures are up 34 points and are trading 0.8% above fair value, the Nasdaq 100 futures are up 206 points and are trading 1.4% above fair value, and the Dow Jones Industrial Average futures are up 91 points and are trading 0.3% above fair value.
The pacesetter for those moves is Meta Platforms (META). It is up 9.6% following its earnings report, which clearly exceeded expectations both in terms of the results and the guidance. This move has put a bid in other mega-cap stocks, which has provided some added ballast for the equity futures market.
It isn't just about Meta Platforms, though. The stock market is also keying off pleasing results from a litany of companies, such as McDonald's (MCD), Comcast (CMCSA), Lam Research (LRCX), AbbVie (ABBV), Mastercard (MA), and Royal Caribbean (RCL).
At the same time, it is keying off the hopeful view that the Fed is at, or near, the peak of its tightening cycle after digesting the remarks made by Fed Chair Powell at his press conference following the decision by the FOMC to raise the target range for the fed funds rate by 25 basis points to 5.25-5.50%.
The ECB followed suit this morning with a 25-basis points increase in its key policy rates, as expected.
Judging by the disposition of the equity futures market, investors are setting aside worries about a policy mistake of tightening too much, although this morning's data provided another reminder that the lag effect of prior rate hikes is, well, still lagging to a large extent.
- Initial jobless claims for the week ending July 22 decreased by 7,000 to 221,000 (Briefing.com consensus 233,000). That is the lowest level since February. Continuing jobless claims for the week ending July 15 decreased by 59,000 to 1.690 million, also the lowest level since February.
- The key takeaway from the report is much the same: the low level of initial claims -- a leading indicator -- is a reflection of employers seeing demand holding up well enough such that they are reluctant to let go of employees in a tight labor market.
- The Adv. Q2 GDP report showed real GDP increasing at an annual rate of 2.4% (Briefing.com consensus 1.6%) following a 2.0% increase in the first quarter, although consumer spending slowed to an annual rate of 1.6% from a heady 4.2% in the first quarter. The GDP Price Deflator dropped to 2.2% from 4.1% in the first quarter.
- The key takeaway from the report is an obvious one: the U.S. economy was a long way from a recession in the second quarter. Real final sales of domestic product, which exclude the change in private inventories, were up 2.3%
- June durable goods orders increased 4.7% month-over-month in June (Briefing.com consensus 1.0%) following an upwardly revised 2.0% (from 1.7%) in May. Excluding transportation, durable goods orders increased 0.6% month-over-month in June (Briefing.com consensus 0.2%) following an upwardly revised 0.7% increase (from 0.6%) in May.
- The key takeaway from the report is that new orders were up across most durable goods categories, reflecting continued demand for an economy that continues in a growth mode.
- The June Adv. International Trade in Goods deficit narrowed to $87.1 billion from $91.1 billion. Separately, Adv. Retail Inventories were up 0.7% and Adv. Wholesale Inventories were down 0.3%.
Treasury yields moved higher after the data. The 2-yr note yield is up four basis points to 4.87% and the 10-yr note yield is up four basis points to 3.89%.
The equity futures market, meanwhile, maintained its bullish stride, underpinned by good vibes related to earnings, the economy, and monetary policy in addition to a fear of missing out on further gains.
We suspect, too, that there is an abiding appreciation for the notion that the trend is your friend... until it isn't. The trend in the stock market has very much been the friend to bullish-minded traders, who look intent to keep riding it at today's open, putting the Dow Jones Industrial Average on course for its longest winning streak since 1897.
-- Patrick J. O'Hare, Briefing.com
Fed, earnings, and econ data create feel-good moment
It is all good for the stock market this morning -- or at least it feels that way.
Currently, the S&P 500 futures are up 34 points and are trading 0.8% above fair value, the Nasdaq 100 futures are up 206 points and are trading 1.4% above fair value, and the Dow Jones Industrial Average futures are up 91 points and are trading 0.3% above fair value.
The pacesetter for those moves is Meta Platforms (META). It is up 9.6% following its earnings report, which clearly exceeded expectations both in terms of the results and the guidance. This move has put a bid in other mega-cap stocks, which has provided some added ballast for the equity futures market.
It isn't just about Meta Platforms, though. The stock market is also keying off pleasing results from a litany of companies, such as McDonald's (MCD), Comcast (CMCSA), Lam Research (LRCX), AbbVie (ABBV), Mastercard (MA), and Royal Caribbean (RCL).
At the same time, it is keying off the hopeful view that the Fed is at, or near, the peak of its tightening cycle after digesting the remarks made by Fed Chair Powell at his press conference following the decision by the FOMC to raise the target range for the fed funds rate by 25 basis points to 5.25-5.50%.
The ECB followed suit this morning with a 25-basis points increase in its key policy rates, as expected.
Judging by the disposition of the equity futures market, investors are setting aside worries about a policy mistake of tightening too much, although this morning's data provided another reminder that the lag effect of prior rate hikes is, well, still lagging to a large extent.
- Initial jobless claims for the week ending July 22 decreased by 7,000 to 221,000 (Briefing.com consensus 233,000). That is the lowest level since February. Continuing jobless claims for the week ending July 15 decreased by 59,000 to 1.690 million, also the lowest level since February.
- The key takeaway from the report is much the same: the low level of initial claims -- a leading indicator -- is a reflection of employers seeing demand holding up well enough such that they are reluctant to let go of employees in a tight labor market.
- The Adv. Q2 GDP report showed real GDP increasing at an annual rate of 2.4% (Briefing.com consensus 1.6%) following a 2.0% increase in the first quarter, although consumer spending slowed to an annual rate of 1.6% from a heady 4.2% in the first quarter. The GDP Price Deflator dropped to 2.2% from 4.1% in the first quarter.
- The key takeaway from the report is an obvious one: the U.S. economy was a long way from a recession in the second quarter. Real final sales of domestic product, which exclude the change in private inventories, were up 2.3%
- June durable goods orders increased 4.7% month-over-month in June (Briefing.com consensus 1.0%) following an upwardly revised 2.0% (from 1.7%) in May. Excluding transportation, durable goods orders increased 0.6% month-over-month in June (Briefing.com consensus 0.2%) following an upwardly revised 0.7% increase (from 0.6%) in May.
- The key takeaway from the report is that new orders were up across most durable goods categories, reflecting continued demand for an economy that continues in a growth mode.
- The June Adv. International Trade in Goods deficit narrowed to $87.1 billion from $91.1 billion. Separately, Adv. Retail Inventories were up 0.7% and Adv. Wholesale Inventories were down 0.3%.
Treasury yields moved higher after the data. The 2-yr note yield is up four basis points to 4.87% and the 10-yr note yield is up four basis points to 3.89%.
The equity futures market, meanwhile, maintained its bullish stride, underpinned by good vibes related to earnings, the economy, and monetary policy in addition to a fear of missing out on further gains.
We suspect, too, that there is an abiding appreciation for the notion that the trend is your friend... until it isn't. The trend in the stock market has very much been the friend to bullish-minded traders, who look intent to keep riding it at today's open, putting the Dow Jones Industrial Average on course for its longest winning streak since 1897.
-- Patrick J. O'Hare, Briefing.com
Lam Research surges on energetic JunQ results and massive AI-related potential (LRCX)
Lam Research (LRCX +10%) is exploding to 52-week highs today after delivering huge upside on its bottom line in Q4 (Jun) while exceeding the midpoint of its prior revenue forecast. The semiconductor equipment supplier also guided Q1 (Sep) earnings and revs in line with consensus, a positive reversal from the previous two-quarters of bearish guidance. LRCX's impressive report is sending peers KLA Corp (KLAC) and Applied Materials (AMAT) to 52-week highs today.
The market has been pricing in a trough in terms of wafer fab equipment (WFE) spending, i.e., demand for LRCX's products and services for most of the year, illuminated by the stock surging over 50% YTD leading into Q4 results. Last month, Micron (MU) indicated that the worst of the global inventory glut was in the past. The AI frenzy has also played a significant role in powering LRCX's rally as investors look ahead at the tremendous opportunity AI presents. For example, LRCX noted that advanced AI servers contain much higher logic, memory, and storage content than traditional servers. This leads to every incremental 1% penetration of these AI servers driving $1.0-1.5 bln of additional WFE investment.
- AI remained under the spotlight in Q4. Management stated that generative AI is merely in its initial stages of adoption and will be foundational to fueling accelerated investments in memory and foundry logic fabs over the next several years.
- At the same time, LRCX reiterated that a bottom was in for WFE spending in 2023, repeating that the second half of 2023 should see WFE tracking higher than the first half. As a result, quarterly guidance finally aligned with consensus. LRCX expects Q1 adjusted EPS of $5.30-6.80 and revs of $3.1-3.7 bln.
- However, echoing the sentiment from MU, LRCX conceded that 2023 will remain a challenging year. This shows up in the company's headline results, as adjusted EPS tumbled 32.3% yr/yr to $5.98, and revs declined 30.8% to $3.21 bln. Inventory remains elevated from historic levels. LRCX continues to work through past order cancellations, taking more inventory than needed in the near term, causing stocks to stay higher than management would have liked this year.
- Still, LRCX achieved meaningful improvements in on-time delivery and backorder performance in Q4, returning these metrics to pre-pandemic levels. As such, the company saw substantial enhancements to its costs and efficiency, driving a solid 170 bp bump in gross margins yr/yr to 45.7% and paving the way for its widest earnings beat since 4Q22.
- China also bucked a recent downbeat trend witnessed across many tech names lately, comprising 26% of total revenue in the quarter, up 4 pts from Q3 (Mar). LRCX anticipates demand in the region to be a driving force behind its expectation of 2H23 outpacing 1H23, signaling decent recovery efforts.
The exuberance behind LRCX's red-hot rally is an energetic combination of WFE spending already bottoming and AI providing significant future upside. Although we urge caution chasing LRCX at current levels, it is hard to argue against its solid metrics in Q4 and exciting long-term growth potential.
Meta Platforms shifts from cost-cutting story to growth story in Q2, pushing stock higher (META)
This may be the "year of efficiency" for Meta Platforms (META) according to CEO Mark Zuckerberg, but it wasn't the company's cost-cutting or restructuring actions that really stood out in its better-than-expected 2Q23 earnings report. Rather, the reacceleration of META's growth is capturing the most attention today as revenue increased by 11% yr/yr -- the company's strongest growth since 4Q21. Better yet, META's Q3 revenue guidance of $32.0-$34.50 bln, which easily surpassed estimates, indicates that growth will sharply accelerate again to about 20% based on the midpoint of the range.
META's fortunes have changed dramatically following a rough FY22 that saw its revenue decrease on a yr/yr basis in each of the last three quarters of the year. The turnaround is reflected in the stock's incredible 170%+ year-to-date gain.
- Lowering costs to better align the company with its declining revenue base has been part of the turnaround equation. After spending freely in 2021 and 2022 to support the build out of the metaverse to the dismay of investors, Mr. Zuckerberg finally relented following META's dismal 3Q22 earnings report.
- In addition to reining in metaverse-related spending, META slashed about 20,000 jobs over the past several months.
- Simultaneously, META increasingly leaned on its expanding AI capabilities to mitigate the impact of Apple's (AAPL) iOS privacy changes. Through the use of AI technology, META can provide improved ad targeting, making its platform more appealing to marketers. On that note, ad impressions across META's family of apps jumped by 34% yr/yr.
- The rising competitive threat from TikTok, which was another major storyline in 2022, is also fizzling out a bit. This is partly due to concerns regarding TikTok's ties to China through its parent company ByteDance.
- With TikTok under scrutiny from the Committee on Foreign Investment in the United States (CFIUS), some advertisers are likely steering clear of the uncertainty surrounding the short-format video platform.
- However, META also deserves credit for growing and improving the monetization of its TikTok-like Reels app. During the earnings call, META said that it continues to make good progress on Reels monetization with AI delivering automated ad products.
One potential red flag, though, is that META lifted its FY23 expense guidance higher to $88-$91 bln from $86-$90 bln, while also warning that it anticipates expenses growing in 2024 as it invests in AI and the metaverse.
- Last year, this news likely would have sent shares spiraling lower, but since META's growth is now on the upswing, investors are taking it in stride.
- Still, it's somewhat unsettling that META expects losses in the Reality Labs segment to increase meaningfully next year as it pours money into its unprofitable virtual reality products.
The main takeaway is that META has reemerged as a compelling growth story with a few significant catalysts currently playing out including an AI-powered recovery in its ad business, improving monetization for Reels, and the recent launch of Threads. While the company currently has the wind at its back, one concern is that Mr. Zuckerberg will use the improving growth as a green light to ramp up spending on the metaverse -- a tactic that drove META shares to multi-year lows last October.
eBay shares auctioned off as margins and active buyer growth continue to disappoint in Q2 (EBAY)
eBay's (EBAY -8%) better-than-expected Q2 earnings and revenue growth is proving insufficient in attracting bidders today as shares erase the past two weeks of gains. EBAY has not garnered similar interest as some of its tech counterparts, with e-commerce giant Amazon (AMZN) soaring over +50% YTD while EBAY has edged just 8% higher. Physical retail giant Walmart (WMT) has also outstripped EBAY on the year, appreciating over 10%.
What happened in Q2? Gross Merchandise Volume (GMV) remained light, dropping 2% yr/yr and 1%, excluding FX headwinds, to $18.2 bln. Meanwhile, active buyers have not yet stepped up to the plate, slipping by 1 mln sequentially to 132 mln, marking the sixth-straight quarter of sequential declines, spurring some impatient investors today. Additionally, adjusted operating margins contracted by 180 bps yr/yr to 26.9%, with little improvement expected for the remainder of the year.
- Relative weakness in the U.S. weighed on GMV rates in the quarter, with the figure falling 4% organically. EBAY noted that domestic buyers continued favoring imports as global supply chain headwinds diminished, benefiting cross-border trade. As a result, International GMV ticked 1% higher, excluding FX impacts, a roughly 2 pt acceleration from the previous quarter. Still, e-commerce growth remains softer outside the U.S. due to more pronounced macroeconomic challenges.
- Encouragingly, active buyer counts have shown signs of stabilization, as sequential declines remain minor. In fact, when removing the adverse effects of M&A and EBAY's Turkey business, which ceased operations in July 2022, active buyers remained flat from Q1 at 131 mln. Furthermore, EBAY has seen four consecutive quarters of positive yr/yr growth in new and reactivated buyers, while churn has steadily improved throughout the year.
- Profitability has taken center stage following eight quarters of yr/yr adjusted operating margin declines. In Q2, EBAY chalked up the hit to its margins to a combination of eBay International Shipping (EIS), where EBAY acts as principal instead agent, recent M&A, including its purchase of Certilogo, and currency fluctuations.
- Looking ahead, margins will remain suppressed; EBAY anticipates EIS and M&A to act as a 1 pt headwind to margins in FY23, projecting 27.0-27.4%. Meanwhile, GMV is expected to hover around similar numbers as in Q2 at $17.6-18.0 bln. Finally, EBAY estimates adjusted EPS and revs of $0.96-1.01 and $2.46-2.52 bln, respectively, similar to the $1.03 and $2.54 bln posted in Q2.
Although EBAY registered upside on its top and bottom lines in Q2, multiple inconsistencies took the spotlight. There are promising developments in the works, such as generative AI, which EBAY has utilized extensively. For example, sellers can tap AI to autofill descriptions of products by just uploading pictures, unlocking more unique inventory. Also, EBAY's advertising business remains a highlight, with total ads growing 35% yr/yr while first-party revenue expanded around 50 bps faster than GMV. Nevertheless, EBAY will need to do better with its declining active buyer counts and operating margins to spark broader interest.
McDonald's had "quarter pounder" with largest EPS beat in years; Grimace shake was a big hit (MCD)
McDonald's (MCD +2%) is trading higher after reporting yet another nice EPS and revenue beat. In fact, this was MCD's largest EPS beat of any quarter in the past five years. What really stood out were MCD's Q2 global comps at +11.7% and that is despite lapping some pretty tough +9.7% comps a year ago. It was not quite the +12.6% comps we saw in Q1, but this was still a very good number.
- US comps also came in at a robust +10.3%, which again was not quite the level of the Q1 comps of +12.6%, but still very good. Also, consider that Q1 comps were aided by lapping easier numbers due to Omicron in January 2022. US comps in Q2 benefited from menu price increases and positive guest counts. Also, MCD had some effective marketing campaigns. Digital and delivery growth also contributed to strong comparable sales results.
- McDonald's again successfully went the nostalgia route in Q1 with all things Grimace. Grimace has been everywhere the past few months, including 3+ bln views on TikTok as customers wished Grimace a happy birthday with a Grimace shake. MCD again went the nostalgic route and repackaged it for a new generation with Grimace at the center. It quickly became one of MCD's most socially engaging campaigns of all time with millions of reactions on social media posts. This helped US comps.
- Outside of the US, International Operated Markets (IOM) comps increased +11.9%, led by UK and Germany. International Developmental Licensed (IDL) comps increased +14.0%, with strong sales in all geographic regions, led by China where about 90% of MCD's business is via digital channels.
- Expanding chicken is something that MCD sees as the core of its growth strategy. The UK offered limited time sauces. Spicy McNuggets, one of its most popular line extensions, were offered across various markets including Australia and Germany. MCD said this is yet another example of how it modernizes its core menu and adapts it to meet changing customer taste profiles. Finally, the McCrispy Chicken Sandwich has now scaled to more than 10 of its largest markets including Spain in Q2.
- In terms of its macro view, MCD sees a challenging environment, which includes rising interest rates and elevated costs. That is leading to volatile consumer confidence levels and puts pressure on consumer spending. Providing customers with an affordable option has always been core to McDonald's. Germany has been successful with its recently launched McSmart menu of entry level affordable meals. This contributed to MCD's best sales quarter ever in this market and lifted value perceptions with consumers. The UK unveiled a similar offering with its new saver meal deals in June.
We are a little surprised the stock is not trading even higher given the huge EPS beat and robust comps. MCD struck gold again with its nostalgia campaign. Recall in late 2022, its adult happy meals were a big hit and now Grimace's birthday was another great idea. It's clear that the nostalgia angle is a great idea and MCD has a lot of arrows in its quiver for future nostalgia ideas. Finally, the stock is getting close to that $300 level which has acted as resistance. Maybe this report can push it through.
Texas Instruments sinks; does not expect meaningful changes in end-market demand next quarter (TXN)
Texas Instruments' (TXN -5%) Q2 report felt essentially unchanged compared to the previous quarter. Declining yr/yr revs, mild quarterly guidance, and no trough in sight eclipsed the semiconductor firm's solid earnings beat. Management may have remained steadfast in its optimism toward long-term dynamics. However, continuously rising CapEx coinciding with relative sales underperformance discourages investors from humming to the same tune surrounding TXN's long-term fundamentals.
There were warning signs ahead of TXN's Q2 report, particularly chip giant Taiwan Semi (TSM) slashing its FY23 financial predictions. Still, with shares climbing over +15% from May lows leading into TXN's Q2 earnings, the market shrugged off potential concerns, anticipating TXN delivering improving numbers from the previous quarter. However, this did not materialize, igniting considerable selling pressure today.
- What happened? Weakness from Q1 carried through to Q2, hindering performance across many of TXN's end markets. The previously resilient industrial market, TXN's most prominent at 40% of FY22 sales, succumbed to macroeconomic pressures, delivering flat growth sequentially. Meanwhile, communication equipment and enterprise systems saw sales declines qtr/qtr.
- There were still a few silver linings. Automotive (25% of TXN's business) climbed by low-single digits from Q1. Likewise, after several quarters of sequential declines, personal electronics finally grew sequentially, up low-single digits. These two end markets helped TXN achieve sequential growth of 3.4% to $4.58 bln, surpassing the high end of its prior guidance of $4.17-4.53 bln.
- Meanwhile, EPS of $1.87 was at the high end of TXN's $1.68-1.88 forecast and exceeded analyst expectations by double-digits, its widest beat since 2Q22.
- Unfortunately for TXN, there was not much to cheer about beyond these highlights. Gross margins contracted 540 bps yr/yr due to another quarter of declining revs, which slipped 13.1% yr/yr, increased CapEx, which was up 49% on a TTM basis compared to the year-ago period, and the transition of LFAB-related charges to cost of revenue.
- Regarding the constant CapEx investments not resulting in corresponding sales growth, TXN commented that they are longer-term, which should eventually allow the company to produce products at a lower cost.
- Although this strategy has been in play for the past several years without much to show for it, TXN did not waver from its long-term thinking, stating that the semiconductor cycle takes place over decades, not a few quarters. The company also remained "extremely confident" in gaining market share due to its ongoing investments.
- Looking ahead, TXN targeted adjusted EPS of $1.68-1.92, the midpoint of which missed estimates, and revs of $4.36-4.74 bln. Discouragingly, the company does not expect significant changes in its end markets compared to Q2.
Bottom line, TXN registered quarterly results broadly consistent with Q1, with a few notable exceptions, such as the return to growth in personal electronics. Although Q2 was not without some highlights, investors are expressing a lack of patience regarding TXN's long-term vision.
Finally, TXN's Q2 report does not set a positive tone ahead of rival Analog Devices' (ADI) Q3 (Jul) report next month.
|
