Market Snapshot
briefing.com
| Dow | 33747.11 | +142.50 | (0.42%) | | Nasdaq | 13581.80 | +97.56 | (0.72%) | | SP 500 | 4361.31 | +25.65 | (0.59%) | | 10-yr Note | +33/32 | 4.66 |
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| | NYSE | Adv 2055 | Dec 771 | Vol 845 mln | | Nasdaq | Adv 2831 | Dec 1438 | Vol 4.3 bln |
Industry Watch
| Strong: Consumer Staples, Materials, Consumer Discretionary, Financials |
| | Weak: Energy |
Moving the Market
-- Drop in market rates and oil prices supporting the stock market, along with a weakening dollar
-- Uncertainty surrounding the situation in Israel and Gaza
-- Lingering feeling that stocks are due for a bounce from an oversold condition
-- Afternoon pullback coinciding with the $46 billion 3-yr note auction results reflecting relatively soft demand
| Closing Summary
10-Oct-23 16:30 ET
Dow +134.65 at 33739.26, Nasdaq +78.60 at 13562.84, S&P +22.58 at 4358.24
[BRIEFING.COM] The stock market closed with gains, bolstered by lower market rates, lower oil prices, and a weaker dollar. Those factors rose to the forefront in the absence of worst-case scenarios unfolding in the Israel-Hamas conflict.
The major indices spent most of the morning rising steadily, but dipped from their highs around 1:00 p.m. ET. That move coincided with Apple (AAPL 178.39, -0.60, -0.3%) and Microsoft (MSFT 328.39, -1.43, -0.4%) taking a turn lower and a $46 billion 3-yr note auction that was met with some relatively soft demand.
The 2-yr note yield settled seven basis points lower at 4.99% and the 10-yr note yield fell 12 basis points to 4.66%. These moves were partially a safe-haven bid related to the Israel-Hamas conflict, but they were also being fueled by a technical rebound from an oversold position. Gains in the Treasury market were also supported by assumptions that the jump in long-term rates has effectively tightened financial conditions enough to leave the Fed inclined to keep its policy rate on hold at the October 31-November 1 FOMC meeting.
The U.S. Dollar Index fell 0.3% to 105.76 and WTI crude oil futures fell 0.6% to $85.89/bbl.
Many stocks participated in today's rally, as evidenced by a 0.8% gain in the Invesco S&P 500 Equal Weight ETF (RSP). The market-cap weighted S&P 500 closed with a 0.5% gain. Ten of the 11 S&P 500 sectors closed with a gain while the energy sector (flat) closed just below the unchanged mark. The utilities (+1.4%), consumer discretionary (+1.1%), materials (+1.1%), and consumer staples (+1.1%) sector all jumped more than 1.0%.
The consumer staples sector was partially supported by a gain in PepsiCo (PEP 164.40, +3.04, +1.9%) after its better than expected earnings report and outlook.
The Russell 2000 was a relative outperformer, rising 1.1% today, which brings the index back into positive territory for the year (+0.8%).
Today's economic data featured the September NFIB Small Business Optimism survey, which fell to 90.8 from 91.3 in August, and the August Wholesale Inventories report, which reflected a 0.1% decline (Briefing.com consensus -0.1%) following a revised 0.3% decline in July (from -0.2%).
- Nasdaq Composite: +29.6% YTD
- S&P 500: +13.5% YTD
- S&P Midcap 400: +2.8% YTD
- Dow Jones Industrial Average: +1.8% YTD
- Russell 2000: +0.8% YTD
Looking ahead, Wednesday's economic calendar includes:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -6.0%)
- 8:30 a.m. ET: September PPI (Briefing.com consensus 0.3%; prior 0.7%) and core PPI (Briefing.com consensus 0.2%; prior 0.2%)
- 2:00 p.m. ET: September Treasury Budget (prior $89.2 billion) and FOMC Minutes from September 19-20
Treasuries settle with gains; economic calendar on Wednesday
10-Oct-23 15:35 ET
Dow +140.02 at 33744.63, Nasdaq +100.06 at 13584.30, S&P +25.85 at 4361.51
[BRIEFING.COM] The market is mostly moving sideways ahead of the close.
The 2-yr note yield settled seven basis points lower at 4.99% and the 10-yr note yield fell 12 basis points to 4.66%.
Looking ahead, Wednesday's economic calendar includes:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -6.0%)
- 8:30 a.m. ET: September PPI (Briefing.com consensus 0.3%; prior 0.7%) and core PPI (Briefing.com consensus 0.2%; prior 0.2%)
- 2:00 p.m. ET: September Treasury Budget (prior $89.2 billion) and FOMC Minutes from September 19-20
Energy sector underperforms; WTI crude oil futures settle lower
10-Oct-23 15:05 ET
Dow +142.50 at 33747.11, Nasdaq +97.56 at 13581.80, S&P +25.65 at 4361.31
[BRIEFING.COM] The major indices drifted slightly lower over the last half hour.
WTI crude oil futures fell 0.6% to $85.89/bbl and natural gas futures settled flat at $3.38/mmbtu.
On a related note, the S&P 500 energy sector (+0.3%) trades near the bottom of the pack.
Truist higher in S&P 500 amid chatter of unit stake sale, Tapestry dips as peer LVMH's results miss
10-Oct-23 14:30 ET
Dow +173.88 at 33778.53, Nasdaq +96.15 at 13580.39, S&P +27.87 at 4363.53
[BRIEFING.COM] The S&P 500 (+0.64%) is in second place on Tuesday afternoon, trading at about the middle of today's range.
S&P 500 constituents Truist (TFC 29.12, +1.69, +6.16%), First Solar (FSLR 150.69, +6.89, +4.79%), and Target (TGT 110.23, +4.47, +4.23%) pepper the top of today's trading. TFC is today's top gainer after reports the company is in talks to sell the remaining 80% stake in its insurance unit Stone Point for $10 bln, the beaten down solar sector gets a bit of a reprieve today, FSLR included, while TGT gets in on the beaten-down reprieve action as well.
Meanwhile, Tapestry (TPR 27.39, -0.80, -2.84%) is at the bottom of the S&P, sliding in sympathy to peer LVMH's (LVMUY 149.25, -2.27, -1.50%) underwhelming sales growth in today's Q3 report.
Gold continues Israel conflict, haven demand advance
10-Oct-23 14:00 ET
Dow +199.65 at 33804.30, Nasdaq +107.25 at 13591.49, S&P +33.23 at 4368.89
[BRIEFING.COM] With about two hours remaining on Tuesday the tech-heavy Nasdaq Composite (+0.80%) is modestly atop the major averages, having stepped higher with slightly more vigor than the S&P 500 (+0.77%) over the prior half hour.
Gold futures settled $11 higher (+0.6%) to $1,875.30/oz, helped once more by haven demand amid the ongoing conflict in Israel.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $105.85.
Unity Software receives a jolt following the retirement of its Chairman and CEO (U)
Unity Software (U +3%) receives a jolt today following last night's news of Chairman and CEO John Riccitiello's retirement, effective immediately. The video game development software provider also reaffirmed its Q3 revenue outlook of $540-550 mln. Stepping in to fill Mr. Riccitiello's shoes is outsider James Whitehurst, who will serve as Interim CEO until the company appoints a permanent successor. Taking on the Chairman position is Roelof Botha, currently the Board's Lead Independent Director.
Given former CEO John Riccitiello's nine-year tenure at Unity, overseeing the company's IPO in 2020, why are investors applauding news of his retirement today?
- Unity has not performed well since its IPO. After peaking in November 2021, shares have lost over 80% of their value and trade around 40% below their IPO price of $52. The rising interest rate environment has not been kind to Unity, as investors stopped paying a sizeable premium for companies struggling to reach profitability during an unfavorable demand environment. For perspective, Unity was trading at over 40x forward sales in late 2021 compared to just 5x currently.
- Mr. Riccitiello sparked controversy after announcing price hikes last month. The floated pricing model essentially eliminated the lowest-tier pricing model, which was free for developers, instead charging them once their game reached a specific download and revenue threshold. After backlash from developers, Unity walked back significant components of its new pricing model but still included new fees, primarily targeting its largest customers.
- Unity's M&A activity was not well-received. The company faced substantial selling pressure after agreeing to purchase app monetization provider ironSource, which was amid underwhelming growth prospects, for $4.4 bln last year. Unity expressed to investors that the idea behind the purchase was not revenue growth but market share growth, making the deal more long-term focused. Although management stated in August that its intentions were playing out exactly as expected, it has yet to spur meaningful buyer enthusiasm.
Alongside the broader market rally, Unity's leadership changes are generating excitement today. Given Unity's presence in the gaming industry, being the engine behind several popular titles, such as Among Us and Pokémon Go, the company has built an attractive foundation for future growth. Meanwhile, video game publishers, like Electronic Arts (EA) and Take-Two (TTWO), have observed signs of stabilization in JunQ after multiple quarters of waning demand, optimistic that comps would improve going forward, reflecting an encouraging demand landscape for Unity. Perhaps a leadership change is precisely what the company needs to capitalize on these favorable developments.
Honeywell the latest industrial company to simplify its business amid macro uncertainties (HON)
Simplifying and streamlining operations in order to focus more intently on core growth strategies has been a common theme among sprawling industrial companies in recent years and Honeywell (HON) is next in line to announce a significant restructuring. Following in the footsteps of General Electric (GE) and 3M (MMM), the industrial company and Dow component is realigning its business segments in a bid to more fully capitalize on what it sees as key megatrends that will drive its business for the foreseeable future.
Specifically, starting in 1Q24, HON will consist of the Aerospace Technologies, Industrial Automation, and Building Automation segments, which it believes better aligns the company with the automation, future of aviation, and energy transition megatrends.
One of those megatrends -- the future of aviation -- has been especially instrumental in offsetting some of the macroeconomic headwinds that have hindered other parts of HON's business, such as building product sales and building management systems. On that note, HON also reaffirmed its Q3 EPS and revenue guidance and its EPS forecast for FY23, commenting that its Aerospace segment was once again a source of strength, along with strong results in Performance Materials and Technologies.
- Similar to GE, HON's Aerospace division, which makes aircraft engines, avionics systems, and power systems, has greatly benefitted from the recovery and subsequent upswing in demand for travel. In Q2, Aerospace generated sales growth of 14% on an organic basis as revenue for commercial aviation aftermarket parts grew by 20% and original equipment revenue increased by 30%.
- After two years of robust growth, commercial airlines are now upgrading their fleets as they expand capacity and look for better fuel efficiency. As an example, last week, United Airlines (UAL) announced an order of 110 aircraft that included 50 Boeing (BA) 787-9s and 60 Airbus (EADSY) A321 neos.
- With the conflict in Israel and the Middle East flaring up, it's worth pointing out that the Aerospace segment also serves the defense and space markets.
- An area that HON appears to be deemphasizing is the oil and gas industry as it highlights energy transition as one of the primary trends that it will focus on. That is interesting because oil and gas giant Exxon Mobil (XOM) is taking an opposing view as it prepares to make a $60+ bln bet on fossil fuels via a possible acquisition of Pioneer Natural Resources (PXD), as recently reported by the Wall Street Journal.
- The oil and gas production industry has been another area of strength for HON recently. Last quarter, UOP (formerly known as Universal Oil Products) posted organic sales growth of 19% with gas processing equipment and refining catalyst shipments exhibiting particularly strong growth.
Based on the muted reaction following this announcement, it seems that market participants are not overly convinced that this realignment will move the needle in terms of HON's growth prospects. While we believe that HON's simplified structure is a prudent move, its growth will largely depend on the health of the global economy since most of its businesses are highly cyclical in nature.
Coherent sharply higher on sale of 25% stake in its SiC business; $4 bln valuation shows value(COHR)
Coherent (COHR +11.5%) is trading sharply higher today on news that Japan's DENSO and Mitsubishi Electric will each invest $500 mln for 12.5% stakes in its silicon carbide (SiC) business. Coherent will own the remaining 75% and it plans to separate the SiC unit into its own subsidiary. Recall that in May 2023, COHR announced a strategic review for its SiC segment.
- Investors clearly like the deal and particularly the $4 bln valuation this sets on the SiC unit. Coherent is best known as a supplier of engineered materials, optoelectronic components, optical and laser subsystems etc. However, COHR has described its SiC technology as a major growth opportunity, especially in terms of its value in EVs and hybrid vehicles. And we got proof of that with this deal.
- So, what is so great about its SiC technology? Coherent explains in tis 10-K filing that it's a leader in SiC substrates for power electronics that improve the energy efficiency of electric and hybrid vehicles. Power electronics based on SiC enable systems to achieve significantly improved power utilization and conversion efficiencies, lower operating temperatures, and reduced thermal loads. This in turn enables increased driving range or reductions in required battery capacity for a given range, which results in a significant cost reduction.
- Coherent will continue to control and operate the business. Also, these companies are not just investing money. The SiC business will also enter into long-term supply arrangements with DENSO and Mitsubishi Electric, providing them with a stable supply of SiC wafers. DENSO and Mitsubishi Electric are leaders in SiC power devices and modules. Mitsubishi Electric says demand for SiC power semis is expected to grow exponentially. With this supply deal in place, ME has decided to expand its SiC power semiconductor production capacity.
- Coherent cites market estimates indicating that the SiC total addressable market will grow from $3 bln in 2022 to $21 bln in 2030. Over the past two years, Coherent says it has invested aggressively in capital and R&D for SiC as part of its 10-year, $1 bln commitment announced in August 2021. This $1 bln investment will fund the manufacturing expansion of SiC substrates and epitaxial wafers. The transaction is expected to close in Q1 of calendar 2024.
Overall, investors are clearly happy with how the strategic review turned out. In particular, we think the $4 bln valuation this slaps on the SiC business was music to investors' ears and legitimizes the rosy comments Coherent has said in the past about its SiC technology in the past. Also, we are glad COHR did not simply sell the business, so the company will benefit from its robust growth in the coming years. But even more than the money, the deal adds two supply agreements with major consumers of SiC wafers, who are not only expanding capacity but also have a vested interest to see this SiC business succeed.
PepsiCo pops back to life on improving volumes in Q3 and upbeat guidance (PEP)
A double-digit Q3 earnings beat, a sequential uptick in volumes, and uplifting FY23 and FY24 guidance provide the spark PepsiCo (PEP +1%) needed to pop back to life today. Shares of the beverage and snack food giant have nosedived recently, as fears of weight-loss drugs, such as those from Novo Nordisk (NVO) and Eli Lilly (LLY), coinciding with inflationary-driven demand softness have triggered fears that consumers would keep their overall food consumption low. For example, Walmart (WMT) reported to Bloomberg last week that it noticed appetite-suppressing medications adversely impacting food-shopping demand.
However, Conagra (CAG) was not worried about weight-loss drugs clipping volumes over the near term, noting last week that trends tend to play out over years, giving it ample time to adjust snack sizes and ingredients. Meanwhile, General Mills (GIS) did not bother discussing weight-loss drugs and their potential impact during its AugQ earnings call last month, possibly underpinning little concern about their immediate effects.
PEP shared similar sentiments. Management stated that, thus far, the impact of the weight-loss treatments on its business is negligible. The company remarked that there are still many question marks regarding medical testing, scalability, and global adoption. Furthermore, PEP has constantly explored ways to transform its portfolio to align with consumer tastes, changing nutrients and launching additional products. At the same time, it was optimistic over the long-term snacking category, pointing to several tailwinds, such as an increased snacking lifestyle and meals becoming smaller and more unstructured.
- These tailwinds materialized in Q3, evidenced by PEP expanding its adjusted EPS by 14% yr/yr to $2.25 and improving revenue by 7% to $23.45 bln. Organic revs, which excludes FX impacts, advanced 9% higher yr/yr. Volumes saw a modest improvement from Q2; total Convenient Foods volumes edged just 1.5% lower yr/yr versus a 3% dip last quarter, while Beverages volumes were flat, improved from a 1% drop in Q2.
- Geographies remained mixed. In North America, Beverages experienced a 6% volume decline yr/yr. Meanwhile, Frito Lay and Quaker Foods volumes were flat and +1%, respectively. Latin America continued to see healthy demand for Beverages, leading to a 5% volume jump yr/yr. In contrast, Convenient Foods volumes fell 5%. Other regions, including Europe and Asia, saw volumes fairly consistent with PEP's overall figures.
- Looking ahead, PEP raised its FY23 earnings outlook, projecting adjusted EPS of $7.54, up from $7.47. Meanwhile, PEP reiterated its organic revenue growth forecast of +10%. Management acknowledged that consumers are more selective, trading down or choosing smaller sizes. However, across channels that tend to be leading growth indicators, including convenience and food service, PEP is seeing healthy demand.
- PEP also provided its FY24 outlook, expecting to deliver figures at the upper end of its long-term organic revenue and constant currency EPS growth targets of +4-6% and high-single-digit percentage yr/yr, respectively.
PEP shares have been under considerable stress lately as investors grow cautious of a sour combination of increased weight-loss drug usage and sticky inflation dragging down overall demand. However, PEP demonstrates its consistent brand loyalty by continually topping earnings estimates and improving volumes. As such, we think the recent sell-off is overdone, making current price levels an attractive entry point for buy-and-hold investors.
Tyson Foods struggles to take flight as shares hit fresh 52-week lows today (TSN)
Investors continue to give Tyson Foods (TSN -1%) the cold shoulder, sending shares to new 52-week lows. Although not new information, today's WSJ's report on the economic impact of TSN closing one of its plants in Missouri keeps the unfavorable demand backdrop in focus. TSN announced in early August, alongside its disappointing Q3 (Jun) results, that it would close four of its chicken facilities (in addition to two other plant closures previously mentioned) across the U.S. Furthermore, management did not rule out the possibility of additional closures, commenting that it is constantly evaluating its overall footprint and the surrounding demand.
While shares are trading back down around 2018, 2020, and 2023 lows, levels that saw a decent influx of buyers, several headwinds may keep TSN from taking flight, at least over the near term.
- An avian flu (HPAI) outbreak may again weigh on financials. During Q2 (Mar), HPAI did not significantly impact TSN's operations. However, it closed key export markets, hindering TSN's chicken-related operating margins, which fell to negative 5.8% from positive 4.8% in the year-ago period. We heard from Cal-Maine Foods (CALM) last week that the adverse effects of the HPAI outbreak from earlier this year seeped into Q1 (Aug), hurting profits in the quarter. CALM added that HPAI remains present in the wild bird population, increasing uncertainty surrounding further outbreaks.
- TSN is undergoing a restructuring, closing plants and laying off workers. While the company has already witnessed tangible benefits from its multi-point plan to modernize and streamline operations, CEO Donnie King conceded that it is not where it should be. These initiatives, coinciding with weak demand clipping prices, are a recipe for disappointing earnings to persist. Over the past two quarters, TSN registered EPS of $0.15 and $(0.04), a considerable difference from its typical triple-digit performances posted before 2023. Furthermore, TSN has endured seven straight quarters of contracting adjusted operating margins sequentially.
- TSN is competing against other food processors and cheaper protein alternatives. Since Tyson sells raw chicken, beef, and pork, commodities easily replicable, it likely does not carry meaningful brand loyalty. Instead, TSN competes on volume, given its global presence. Unfortunately, during the current lackluster demand environment, where the end consumer is seeking out lower-cost proteins, TSN has not realized many benefits from this advantage, as volumes have remained flat or declined yr/yr in five out of the past eight quarters.
Bottom line, the global economy is proving to be quite the hurdle for TSN to clear lately. While the market has priced in plenty of negativity, sending shares toward multi-year lows today, we continue to believe it is better to wait until confirmation that demand has stabilized before entering for the long term.
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