Market Snapshot
| Dow | 34671.15 | +94.56 | (0.27%) | | Nasdaq | 13919.09 | +157.56 | (1.14%) | | SP 500 | 4487.19 | +29.70 | (0.67%) | | 10-yr Note | -1/32 | 4.29 |
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| | NYSE | Adv 1537 | Dec 1307 | Vol 776 mln | | Nasdaq | Adv 2235 | Dec 2086 | Vol 4.5 bln |
Industry Watch
| Strong: Consumer Discretionary, Communication Services, Materials, Financials, Consumer Staples, Utilities |
| | Weak: Energy, Industrials |
Moving the Market
-- Big gains in some mega cap stocks supporting the broader market
-- Below-average volume at the NYSE
-- Some hesitation in front of a busy week of econ data
--Digesting the New York Fed's August 2023 Survey of Consumer Expectations, which showed that households are less optimistic about their financial situation
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Closing Summary
11-Sep-23 16:30 ET
Dow +87.13 at 34663.72, Nasdaq +156.37 at 13917.90, S&P +29.97 at 4487.46
[BRIEFING.COM] The major indices started the week with gains, albeit on light volume at the NYSE. The S&P 500 and Nasdaq closed near their best levels of the day, which had both indices above their 50-day moving averages. Strength from some mega cap names provided a nice boost to the broader market.
The Nasdaq climbed 1.1% and the market-cap weighted S&P 500 rose 0.7% while the Invesco S&P 500 Equal Weight ETF (RSP) eked out a 0.2% gain. Tesla (TSLA 273.58, +25.08, +10.1%) was a notable outperformer, jumping 10% after being upgraded to Overweight from Equal Weight at Morgan Stanley.
Most of the S&P 500 sectors logged a gain, but consumer discretionary (+2.8%) was the top performer by a wide margin thanks to Tesla. The energy sector (-1.3%) fell to the bottom of the pack.
Market breadth was positive, but modestly so. Advancers led decliners by an 11-to-10 margin at the NYSE and the Nasdaq.
The lack of strong conviction on either side of the tape comes ahead of a busy week of economic data. This week's calendar features the August Consumer Price Index on Wednesday, followed by the August Producer Price Index and Retail Sales report on Thursday.
Another increase in market rates didn't deter the buying activity seen in mega cap stocks. The 2-yr note yield rose two basis points to 4.99% and the 10-yr note yield rose three basis points to 4.29%.
This morning's release of the New York Fed's August 2023 Survey of Consumer Expectations showed that households are less optimistic about their financial situation. Inflation expectations rose slightly at the short- and longer-term horizons and fell slightly at the medium-term horizon. Income growth perceptions declined in August, and job loss expectations rose sharply to its highest level since April 2021.
In other news, Bank of Japan Governor Ueda revealed that Japan's policy rate could be lifted out of negative territory this year, but it was unclear if he was referencing the end of the calendar year or the end of the fiscal year on March 31.
There was no U.S. economic data of note today.
- Nasdaq Composite: +33.0% YTD
- S&P 500: +16.9% YTD
- S&P Midcap 400: +6.1% YTD
- Russell 2000: +5.3% YTD
- Dow Jones Industrial Average: +4.6% YTD
Treasuries settle with losses
11-Sep-23 15:30 ET
Dow +86.55 at 34663.14, Nasdaq +172.19 at 13933.72, S&P +31.29 at 4488.78
[BRIEFING.COM] The S&P 500 and Nasdaq continue to hit fresh session highs.
Treasuries settled with losses across the curve. The 2-yr note yield rose two basis points to 4.99% and the 10-yr note yield rose three basis points to 4.29%.
There is no U.S. economic data of note on Tuesday.
Energy sector underperforms alongside falling oil prices
11-Sep-23 15:05 ET
Dow +94.56 at 34671.15, Nasdaq +157.56 at 13919.09, S&P +29.70 at 4487.19
[BRIEFING.COM] The S&P 500 and Nasdaq remain near their highs of the day, which has both indices positioned above their 50-day moving averages, powered by strong mega caps.
WTI crude oil futures settled 0.2% lower at $87.29/bbl and natural gas futures fell 0.3% to $2.60/mmbtu. The S&P 500 energy sector (-1.6%) sports the largest decline by a decent margin.
Elsewhere, the U.S. Dollar Index is down 0.5% to 104.56.
Kenvue higher on Deutsche upgrade, J.M. Smucker slips after Hostess deal
11-Sep-23 14:30 ET
Dow +96.64 at 34673.23, Nasdaq +156.96 at 13918.49, S&P +28.55 at 4486.04
[BRIEFING.COM] The S&P 500 (+0.64%) is ensconced in second place among the major averages.
S&P 500 constituents Kenvue (KVUE 22.15, +0.85, +3.99%), Stryker (SYK 300.81, +11.27, +3.89%), and Qualcomm (QCOM 100.29, +4.15, +3.91%) pepper the top of today's standings. KVUE is higher after Deutsche Bank upgraded the stock to a Buy, while QCOM jumps following news of a 5G modem supply agreement with Apple (AAPL 179.49, +1.31, +0.74%).
Meanwhile, J.M. Smucker (SJM 132.11, -9.47, -6.69%) is near the bottom of the index after the company agreed to buy Hostess Brands (TWNK 33.56, +5.45, +19.39%) for $34.25/share in cash and stock.
Gold modestly higher ahead of this week's inflation data
11-Sep-23 14:00 ET
Dow +88.02 at 34664.61, Nasdaq +151.54 at 13913.07, S&P +28.74 at 4486.23
[BRIEFING.COM] With about two hours left on Monday the tech-heavy Nasdaq Composite (+1.10%) is at HoDs, up about 151 points.
Gold futures settled $4.50 higher (+0.2) to $1,947.20/oz, helped in part by a decline in the greenback ahead of this week's inflation data.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $104.53.
Page One
Last Updated: 11-Sep-23 09:07 ET | Archive
Recovering after last week's losses
The S&P 500 futures are up 26 points and are trading 0.5% above fair value. The Nasdaq 100 futures are up 136 points and are trading 0.8% above fair value. The Dow Jones Industrial Average futures are up 107 points and are trading 0.3% above fair value.
Equity futures indicate a higher open after the market logged sizable declines last week. This week's calendar features some important economic releases, including the August Consumer Price Index on Wednesday, followed by the August Producer Price Index and Retail Sales report on Thursday.
Big pre-open gains in some mega cap stocks has provided support to the broader market.
Treasury yields are moving higher. The 2-yr note yield is up two basis points to 4.99% and the 10-yr note yield is up three basis points to 4.30%.
WTI crude oil futures are down 0.5% to $87.04/bbl.
There is no U.S. economic data of note today.
Tesla receives a jolt on Morgan Stanley upgrade, putting FSD technology in the spotlight (TSLA)
Shares of Tesla (TSLA) are receiving a charge today after Morgan Stanley (MS) upgraded the stock to Overweight from Equal Weight while also raising its price target to $400 from $250. That new price target indicates a near 50% move higher from current levels, reflecting the firm's very bullish stance. The main basis for MS's upgrade is its belief that TSLA's Dojo supercomputer, which will power its full self-driving (FSD) technology, is set to become a major growth catalyst as the EV maker moves closer towards selling software and services.
- Elon Musk raved about Dojo during the Q2 earnings call, stating that it will ultimately make the company's current financial metrics "look silly." Of course, taking Musk's comments with a grain of salt is typically advised given his propensity to make grandiose statements. However, his comments shouldn't be totally dismissed, either.
- Over the past few years, TSLA has accumulated a massive amount of driving video data while also spending billions in capital on computing to train its FSD technology. That gives TSLA a huge competitive advantage over up-and-coming EV makers who may be looking to replicate its FSD offering.
- There are still plenty of questions and uncertainties, though, revolving around FSD. For instance, Musk has claimed that TSLA will achieve full self-driving capability sometime this year, but that seems highly unlikely. Therefore, nobody really knows when FSD will fully move out of the beta version and into an actual sellable service. Furthermore, Musk has promised that FSD will eventually enable TSLA to launch a robotaxi service, but the timeline for that is also uncertain.
- In the meantime, TSLA has returned to its price-cutting ways with the company reducing the selling price on its Model 3 inventory by up to $5,500 earlier this month. Prior to that, the company cut Model Y and Model X prices in China back in August and July.
- With the economy souring -- especially in China, which is TSLA's second largest market -- the company returned to a familiar strategy of driving deliveries higher at the expense of margins. There was some hope that margins bottomed out last quarter after gross margin plunged by 682 bps yr/yr to 18.2%, but it seems that a trough hasn't been reached yet.
From Musk's perspective, sacrificing margins in the near term to push volume higher is a worthwhile trade off since more cars on the road now will equate to greater FSD-related revenue down the road. Market participants haven't exactly shared that sentiment, but MS's vote of confidence is helping to turn some doubters into believers.
Qualcomm's renewed deal with Apple sparks rally, but diversification efforts still key (QCOM)
Qualcomm (QCOM) announced that it will be supplying chips for at least the next three Apple (AAPL) iPhone launches, surprising many market participants who were anticipating a significant drop off in sales to AAPL in 2024 and beyond.
AAPL, which accounts for over 15% of QCOM's total revenue, has been working on building its own modems in-house in order to lessen its dependence on outside suppliers. It was widely believed that AAPL was close to making the transition to its own modems with QCOM CEO Cristiano Amon recently stating that he expects AAPL to launch its own modems next year. However, it seems that AAPL isn't quite ready to make the leap, which is good news for QCOM -- at least for the next few years.
- QCOM didn't offer many financial details regarding the renewed agreement, only stating that the terms and conditions are similar to the previous agreement. For some context, revenue from AAPL in FY22 totaled nearly $7.3 bln. That's a substantial amount, but QCOM has made it a priority to diversify its revenue streams and lessen its dependence on AAPL and other handset OEMs like Samsung (SSNFL).
- The company still has some work to do, though, on this objective. In Q3 (reported on August 2), revenue fell by over 22% mainly due to a 25% plunge in handset revenue to $5.3 bln. While sluggish consumer spending has hurt handset demand in the U.S., the weakness is even more pronounced in China, which accounts for about 60% of QCOM's sales.
- It's also worth noting that QCOM is still only expecting to supply about 20% of AAPL's iPhone chips by 2026. Therefore, the company's diversification strategy will continue to be critical in the coming years.
- A major piece of that strategy will be QCOM's expansion into AI technology. During the Q3 earnings call, Mr. Amon stated that "on-device AI has the potential to drive an inflection point across all our products." As an example, QCOM has been collaborating with Meta Platforms (META) on bringing META's Llama 2 large language model to smartphones and PCs, using QCOM's Snapdragon chipsets. This is set to begin in 2024.
The main takeaway is that this renewed chip agreement with AAPL comes as a positive surprise and it should provide a lift for QCOM's forward revenue and EPS estimates. Ultimately, though, AAPL does intend to transition to its own chips, so this new deal is really just postponing the inevitable. Therefore, QCOM's longer-term growth prospects will hinge on its ability to expand further into higher growth opportunities like electric vehicles and AI.
J.M. Smucker gobbles up Hostess Brands in bid to expand snacks business (SJM)
J M Smucker (SJM -7%) is adding to its tasty snacks portfolio with a deal to acquire Hostess Brands (TWNK +19%) for $34.25 per share, mostly in cash ($30/sh) but also some stock ($4.25/sh). The deal represents a total enterprise value of approximately $5.6 bln, which includes $900 mln of net debt. SJM currently has a market cap of $14.5 bln, so this is a very large acquisition for them. The deal is expected to close in SJM's Q3 (Jan).
- The transaction includes the Hostess Brands sweet baked goods brands (Hostess Donettes, Twinkies, CupCakes, DingDongs, Zingers etc) and the Voortman cookie brand, along with several manufacturing facilities.
- We definitely see the fit with SJM's portfolio of convenience brands. SJM already has well-known brands in attractive categories, like coffee (Folgers, Dunkin', Café Bustelo), peanut butter (Jif), frozen handheld, fruit spreads, dog snacks (Milk-Bone) and cat food (Meow Mix).
- Part of SJM's rationale for the deal is to accelerate its focus on serving consumers with convenient food/drinks across different meal and snacking occasions. SJM also wants to leverage Hostess Brands' strong positioning in convenience store distribution to help boost sales of its other products. SJM also sees the companies as sharing highly complementary brands and they are very similar in their core business principles and operations.
- In terms of the financials, TWNK will add around $1.5 bln in annual sales, with an estimated mid-single digit percentage annual growth rate. SJM expects annual run-rate cost synergies of approximately $100 mln achieved within the first two years. Adjusted EPS should be accretive in the first fiscal year. SJM also expects strong cash flow from the combined business will enable rapid deleveraging of debt.
Taking a step back, SJM is benefitting from people spending more time at home, and thus eating/snacking at home more often, so adding a snack brand like Hostess makes a lot of sense. Besides more snacking at home, there has also been increased consumption of at-home coffee and the pet category is benefitting from more pets and pet parents than ever as dog and cat ownership both increased significantly during the pandemic.
Overall, we like the deal and see how Hostess fits in nicely with SJM's other brands. SJM really wants to focus on the convenience category and this brand surely adds to that goal. We also like Hostess' strong positioning at convenience stores, which should help SJM get more shelf space for its other products.
In terms of the stock reaction, SJM is trading lower. The deal was not a surprise as there was a Reuters report in late August that TWNK was considering a sale. However, we suspect investors may not like the premium being paid (adjusted EBITDA multiple of 17.2x). Also, TWNK was trading just above $22 and trending lower when the Reuters report hit, so this purchases price represents a 50+% premium from that level.
Kohl's trading at attractive levels and dividend yield; worth a look despite tough landscape (KSS)
We wanted to profile Kohl's (KSS), a retailer trading at considerable discounts to future earnings and cash flows in a market where plenty of tech stocks have risen to relatively expensive valuations. KSS also pays an eye-catching 8.3% dividend yield, superior to many of its rivals, such as Macy's (M), Nordstrom (JWN), and Gap (GPS). As a result, KSS recently rose to number one on our Yield Leaders Rankings.
Trading at 2020 levels, KSS has not had a very hot year. The stock has barely budged in 2023 after selling off by nearly 50% in 2022. The retail landscape, particularly regarding discretionary items like apparel, has soured this year as inflation eats away at consumers' spending power and rising interest rates make carrying debt significantly more costly. At the same time, credit card delinquencies are beginning to tick up, an alarming sign for the state of the end consumer.
Although there are many reasons why KSS could be avoided, we think several plusses are currently being brushed aside that make KSS worth taking a second look.
- Valuations are attractive. KSS trades at 9.8x forward earnings, nearly identical to April 2020 levels. Likewise, KSS's forward cash flow multiple of 2.3x, albeit down significantly from 2021, is close to the 3x-4x multiple seen during the back half of 2020.
- Much of the uncertainty and accompanying volatility over the past year have cleared up. Numerous investment firms placed bids to acquire KSS, including Oak Street Capital, Franchise Group (FRG), and others. At the same time, key shareholders like Ancora Holdings were pushing to remove KSS's former CEO. After rejecting takeover offers and appointing Tom Kingsbury as CEO earlier this year after a stint as interim CEO, KSS can finally focus on improving its business.
- KSS's newly minted CEO has a solid resume. Mr. Kingsbury comes from Burlington Stores (BURL), where he served as CEO for over a decade, navigating a tumultuous demand backdrop during the Great Recession and taking the company public. Before this, he held management positions across various department stores. Mr. Kingsbury also detailed his top priorities to return to growth, centered around Sephora (LVMH), gifting, impulse, home décor, and longer-term new stores.
- Most of KSS's locations are not attached to regional malls, a retail model that has seen the demise of many past prominent department chains and continues to weigh on Macy's. In fact, 95% of Kohl's stores are either in strip centers or are freestanding. Furthermore, KSS owns approximately 35% of the real estate for its locations, giving it room for raising additional capital by potentially selling the land via a sale-leaseback. Oak Street Capital reportedly offered $2.0 bln last year for part of KSS's real estate holdings.
Physical retail still holds a place in an increasingly digital world. Even though Amazon (AMZN) and its peers continue to improve shipping times and customer returns, a physical store boasts instant gratification and fewer return hassles. There are still many obstacles standing in KSS's path toward a turnaround. However, current valuations are attractive, and prices may be carving out a bottom, especially with the chaotic past year KSS endured out of the way.
Zumiez zooming lower as consumer spending slowdown hits business worse than its peers (ZUMZ)
Zumiez (ZUMZ), an apparel retailer that primarily caters to the same younger crowd that Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEO) does, is selling off sharply despite topping Q2 EPS and revenue expectations. The issue, though, is that unlike ANF and AEO, the company provided downside guidance for the quarter ahead, while noting that business is still trending below year-ago levels as consumer demand remains under pressure.
- A clear point of weakness for ZUMZ was the North America market, which experienced a sales decrease of nearly 16% to $159.7 mln. This weakness caused ZUMZ's comparable sales to decline by 13% in Q2, badly underperforming ANF's impressive +13% performance. For further context, AEO's flagship American Eagle brand posted a comp decline of just 2%.
- It doesn't seem like ZUMZ's troubles are tied to bloated inventory levels. In fact, inventory was down by 3.5% in North America this quarter. Therefore, it appears that ZUMZ isn't doing quite as good of a job as staying on top of recent trends within the casual wear market.
- Relatedly, ZUMZ was more promotional than ANF or AEO as illustrated by a 70 bps drop in product margins. Overall, gross margin slipped by 240 bps yr/yr to 31.7% as lower sales drove deleverage in the company's fixed costs. In comparison, AEO's gross margin expanded by 680 bps yr/yr to 37.7%.
- On the positive side, ZUMZ's Q3-to-date is reflecting some improvement relative to Q2 as the back-to-school shopping season provides a lift. Specifically, Q3-to-date sales were down 7.7% through Labor Day, compared to an 11.6% decrease in Q2 and 17.1% decline in Q1. ZUMZ is encouraged that the bounce from the back-to-school shopping season offers a good indication that sales will also improve during the peak holiday shopping season.
- This bump in sales, though, wasn't strong enough to allow ZUMZ to provide upside guidance for Q3. Accordingly, shares are selling off as the company falls behind ANF and AEO.
The main takeaway is that ZUMZ's results and outlook were not as strong as key competitors ANF and AEO, indicating that the macro-related headwinds are taking a bigger toll on the company. Although sales trends have improved for ZUMZ, the company is still lagging behind and expects a challenging Q3, providing the impetus for today's sell-off.
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