Market Snapshot
briefing.com
| Dow | 39069.23 | -62.30 | (-0.16%) | | Nasdaq | 15976.25 | -20.57 | (-0.13%) | | SP 500 | 5069.53 | -19.27 | (-0.38%) | | 10-yr Note | -4/32 | 4.30 |
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| | NYSE | Adv 1111 | Dec 1670 | Vol 889 mln | | Nasdaq | Adv 2330 | Dec 1943 | Vol 5.4 bln |
Industry Watch
| Strong: Energy, Consumer Discretionary, Information Technology |
| | Weak: Utilities, Communication Services, Real Estate, Health Care, Materials, Financials |
Moving the Market
-- Hesitation from buyers and sellers with a busy week ahead while indices sit near all-time highs
-- Some mega caps recover from early softness, providing some support to the broader market
-- Treasury yields moving higher after $63 billion 2-yr note sale and $64 billion 5-yr note sale met soft demand
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Closing Summary
26-Feb-24 16:30 ET
Dow -62.30 at 39069.23, Nasdaq -20.57 at 15976.25, S&P -19.27 at 5069.53
[BRIEFING.COM] The stock market saw mixed action today. Declining issues led advancing issues by a 3-to-2 margin at the NYSE, but advancers had a 4-to-3 lead over decliners at the Nasdaq.
The major indices were trading higher at their best levels of the day, albeit with fairly modest gains, but ultimately settled near their worst levels with declines ranging from 0.1% to 0.4%. Meanwhile, the Russell 2000 outperformed its peer, gaining 0.7% today.
The lack of conviction today was related to the understanding that stocks are sitting near all-time highs after a big run. There is also some potentially market-moving events on the horizon this week, including earnings from influential retailers and software companies, as well as the Fed's preferred measure of inflation on Thursday in the form of PCE Price Indexes.
Stocks hit an air pocket around mid-day in response to today's weak Treasury note sales. The $63 billion 2-yr note auction and the $64 billion 5-yr note sale were both met underwhelming demand. The 2-yr note yield settled one basis point higher at 4.73% and the 10-yr note yield rose four basis points to 4.30% in response to the weak offerings.
The major indices briefly recovered before selling picked up in front of the closing bell. The Invesco S&P 500 Equal Weight ETF (RSP) declined 0.4% and only three of the 11 S&P 500 sectors closed higher. The energy sector (+0.3%) saw the largest gain, benefitting from a jump in oil prices ($77.56/bbl, +1.04, +1.4%) and natural gas futures ($1.74/mmbtu, +0.04, +2.4%).
The heavily-weighted consumer discretionary sector (+0.2%) was the next best performer thanks in part to Domino's Pizza (DPZ 459.00, +25.35, +5.9%), which reported earnings, and Tesla (TSLA 199.40, +7.43, +3.9%).
The information technology sector also settled fractionally higher today despite declines in Apple (AAPL 181.16, -1.36, -0.8%) and Microsoft (MSFT 407.54, -2.80, -0.7%). NVIDIA (NVDA 790.92, +2.75, +0.4%) and other semiconductor stocks led the sector higher, continuing their outperformance.
Meanwhile, the utilities (-2.1%) and communication services (-2.1%) sectors slide more than 2.0% today.
- Nasdaq Composite: +6.4% YTD
- S&P 500: +6.3% YTD
- Dow Jones Industrial Average: +3.7% YTD
- S&P Midcap 400: +2.6% YTD
- Russell 2000: +0.1% YTD
Today's economic data was limited to the January new home sales report, which showed a 1.5% month-over-month increase to a seasonally adjusted annual rate of 661,000 units (Briefing.com consensus 690,000) from a downwardly revised 651,000 (from 664,000) in December. On a year-over-year basis, new home sales were up 1.8%.
- The key takeaway from the report is that new home sales activity was relatively soft in January, as the monthly increase was a byproduct of the downward revision to December's new home sales data.
Looking ahead, market participants will receive the following economic data on Tuesday:
- 8:30 ET: January Durable Orders (Briefing.com consensus -4.4%; prior 0.0%) and Durable Orders ex-transport (Briefing.com consensus 0.3%; prior 0.6%)
- 9:00 ET: December FHFA Housing Price Index (prior 0.3%) and December S&P Case-Shiller Home Price Index (Briefing.com consensus 6.0%; prior 5.4%)
- 10:00 ET: February Consumer Confid
Treasury yields settle higher after weak Treasury sales
26-Feb-24 15:30 ET
Dow -24.18 at 39107.35, Nasdaq +2.41 at 15999.23, S&P -11.83 at 5076.97
[BRIEFING.COM] The market is stuck in a lateral flow heading into the close.
The 2-yr note yield settled one basis point higher at 4.73% and the 10-yr note yield rose four basis points to 4.30%. This price action followed today's weak note sales after both the $63 billion 2-yr note auction and the $64 billion 5-yr note sale met underwhelming demand.
Looking ahead, market participants will receive the following economic data on Tuesday:
- 8:30 ET: January Durable Orders (Briefing.com consensus -4.4%; prior 0.0%) and Durable Orders ex-transport (Briefing.com consensus 0.3%; prior 0.6%)
- 9:00 ET: December FHFA Housing Price Index (prior 0.3%) and December S&P Case-Shiller Home Price Index (Briefing.com consensus 6.0%; prior 5.4%)
- 10:00 ET: February Consumer Confidence (Briefing.com consensus 114.6; prior 114.8)
Mixed market continues
26-Feb-24 15:05 ET
Dow -16.14 at 39115.39, Nasdaq +0.69 at 15997.51, S&P -12.09 at 5076.71
[BRIEFING.COM] There hasn't been much up or down movement at the index level over the last half hour. The market is moving sideways after recovering from a quick dip lower that coincided with the weak $64 billion 5-yr note offering.
The market-cap weighted S&P 500 is down 0.2% and the equal weight S&P 500 is down 0.3%.
Market breadth is still positive, though, at the Nasdaq. Advancers have a 4-to-3 lead over decliners, while decliners lead by a 5-to-3 margin at the NYSE.
Palo Alto Networks getting some play as Rep. Pelosi discloses options purchases
26-Feb-24 14:30 ET
Dow -15.54 at 39115.99, Nasdaq +23.88 at 16020.70, S&P -8.31 at 5080.49
[BRIEFING.COM] The S&P 500 (-0.16%) holds the worst percentage losses to this point among the major averages, slightly off lows of the day which were about -0.4%.
Elsewhere, S&P 500 constituents Palo Alto Networks (PANW 308.08, +25.99, +9.21%), Valero Energy (VLO 145.84, +4.26, +3.01%), and Illumina (ILMN 136.81, +3.81, +2.86%) are among today's top gain getters. PANW gets a nice boost after Nancy Pelosi (D-CA) disclosed on Friday afternoon the purchase of 70 options contracts of PANW with a $200 strike price expiring on 1/17/25.
Meanwhile, Insulet (PODD 169.46, -14.75, -8.01%) falls to the bottom of the standings despite a dearth of corporate news.
Gold lower as market eyes PCE reading later in the week
26-Feb-24 14:00 ET
Dow -53.31 at 39078.22, Nasdaq +1.99 at 15998.81, S&P -11.79 at 5077.01
[BRIEFING.COM] The tech-heavy Nasdaq Composite (+0.01%) has returned to positive territory in the last half hour, but only just.
Gold futures settled $10.50 lower (-0.5%) to $2,038.90/oz, pressured despite a split affair in the dollar (lower) and yields (higher); the yellow metal appears to be jockeying for position ahead of this week's PCE inflation data, due out Thursday morning.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $103.86.
PPG Industries slips on a strategic review of its U.S. and Canada architectural coatings unit (PPG)
PPG Industries (PPG -1%) slips after management kickstarts a strategic review of its architectural coatings business in the U.S. and Canada. The paints and coatings manufacturer will still retain its architectural coatings business across other global markets, including Latin America, Europe, and Asia Pacific.
The review follows PPG's strategic review of its silica products business from early January. However, this business comprises just 1-2% of PPG's annual sales, making the announcement relatively minor. Conversely, PPG's architectural coatings business is substantial, being the primary division within its Performance Coatings segment, which totaled 61% of FY23 revenue. Meanwhile, the U.S. and Canada makes up 41% of consolidated FY23 sales.
Despite today's price action, PPG's decision may prove to be ultimately what reenergizes quarterly performances.
- PPG's U.S. and Canada architectural coatings division has been weighing on the company's overall growth. CEO Tim Knavish remarked today that on a three-year pro forma basis, if not for this business, consolidated sales volume would have improved cumulatively by over 200 bps. A similar scenario materializes regarding segment margins in FY23. If not for the U.S. and Canada architectural coasting business, operating margins would have been 300 bps higher.
- Soft architectural demand across the U.S. has prevailed for several quarters, especially in DIY-related products, a theme prevalent within the home improvement retailing industry, as touched on repeatedly by Lowe's (LOW) and Home Depot (HD). With interest rates still at decade highs, keeping existing homeowners from exploring upgrade options, weak architectural coatings will likely linger throughout FY24. Several companies, from Louisiana-Pacific (LPX) to Stanley Black & Decker (SWK), discussed an unfavorable repair and remodel backdrop in FY24.
- Still, PPG noticed some encouraging developments in Q4, pointing to potential volume stabilization. As a result, it is leveraging this upward momentum to garner a compelling price for its U.S. and Canada architecture coatings business, which could be a lucrative addition for some of its peers, such as Axalta Coating Systems (AXTA) or RPM Inc (RPM).
PPG is determining that now may be the best time to let go of its relatively underperforming but still firmly established architectural coatings businesses in the U.S. and Canada. By divesting this unit, PPG can shift its focus toward its international brands, where it commands a top position in several key countries.
Broadcom divests former VMware business as it looks to focus on core virtualization products (AVGO)
When Broadcom (AVGO) issued Q4 results in early December, CEO Hock Tan disclosed during the earnings call that the company was looking to divest the end-user computing and Carbon Black businesses that it picked up through its VMware acquisition. Over the weekend, Reuters reported that AVGO was already closing in on a deal to sell one of those assets -- namely, the end-user business -- illustrating that AVGO had little trouble finding possible suitors.
- Indeed, after AVGO announced that KKR has agreed to purchase the business for approximately $4.0 bln, Reuters reported that a couple other private equity firms were also in the running for the acquisition. The healthy interest level probably didn't come as a major surprise to Mr. Tan, who called both businesses "very stable, good assets" during the Q4 earnings call, adding that "there are a lot of very interested parties who are more than happy to take those assets."
- This begs the question, then, if the end-user computing and Carbon Black businesses are so attractive, why is AVGO looking to part with them?
- The simple answer is that neither are considered to be core pieces to AVGO's business model and by divesting them, the company can devote its full attention to VMware's Cloud Foundation. The end-user computing business, which allows users to access PCs, laptops and applications from any device, has typically existed outside of VMware's primary compute, storage, and network virtualization offerings. The same can be said for Carbon Black, VMWare's security software unit.
- While these two businesses are sizable, combining for well over $2.0 bln in estimated revenue for FY24, they also aren't game-changers for AVGO on the top-line. For FY24, the company expects to generate revenue of approximately $50 bln, including contribution for VMware.
- Furthermore, over the past several years, AVGO has reshaped its business by expanding its enterprise software segment in order to lessen its dependence on the more volatile and unpredictable semiconductor industry. Through the acquisitions of CA Technologies in 2018, Symantec in 2019, and VMware in 2023, AVGO has succeeded in this mission with the software segment now expected to account for about half of its total revenue in FY24.
- AVGO also intends to change the composition of VMware's revenue, which would be more difficult to accomplish if the end-user computing business was still part of the overall mix. More specifically, CFO Kristen Spears commented during the Q4 earnings call that AVGO is working to convert an install base of licenses that is over 60% perpetual to one that is mostly subscriptions by the end of FY24. This initiative will significantly grow AVGO's recurring revenue base.
The main takeaway is that while AVGO is shedding a solid business, the divestiture not only brought in a sizable cash infusion that could potentially be used for share buybacks, but it also streamlines the company and positions it to generate stronger recurring revenue through VMware's Cloud Foundation platform.
Domino's makes dough for investors; Uber Eats, Emergency Pizza campaign bodes well for 2024 (DPZ)
Domino's Pizza (DPZ +6%) is trading sharply higher after reporting a nice EPS beat with in-line revs. But what seems to be really pushing the stock higher are the nice US comps and some commentary on the call about its 2024 outlook.
- US comps have been disappointing in recent quarters, but its Q4 US same store comp of +2.8% was notably better than -0.6% in Q3 and +0.1% in Q2. In fairness, DPZ was lapping easy +0.9% comps in the prior year period, but this was still a good comp number and Q3 was lapping a pretty easy number as well. International comps were a bit soft at +0.1%.
- Two key catalysts helped DPZ's results in Q4 comps:
- First, the company revamped its rewards program in September 2023. Basically, the minimum order to get loyalty points had been $10, but DPZ's national offer on carryout is $7.99. As such, many carryout customers, who are value-oriented, were not getting points. DPZ lowered the threshold to $5 to get points. As a result, DPZ has seen an uptick in active members since its rewards relaunch. This helped add to comps.
- Second, management was really singing the praises for its Emergency Pizza promotion during Q4. It offers a free medium 2-topping pizza whenever customers need it most. DPZ described it as a resounding success from a marketing perspective. DPZ has done buy one get one free before, but the response has been nothing like this. It boosted order count, it also drove people into the loyalty program because you need to be a loyalty member in order to get your emergency pizza.
- Its recently announced Uber Eats partnership is now fully rolled out across the US system. DPZ has gone live with marketing. Sales are building in line with increased marketing and DPZ expects orders to continue to grow more in 2024. The company remains excited about the UberEats partnership. It has estimated that approx 65% of those Uber customers are going to be incremental to DPZ. And Uber's customers tend to be more on the higher income side.
- Looking ahead to 2024, DPZ is expecting its 2024 US comps to be above the +3% long-term guide as a result of expected outsized catalysts from the Uber Eats partnership and the revamped loyalty program. Sales with Uber are expected to increase throughout the year as marketing and awareness increases. DPZ expects sales with Uber will start ramping up after Q1.
- It is not a uniformly good outlook. DPZ expects international comps to remain soft in 1H24 but improve in 2H24. The silver lining is that the pressures DPZ is seeing in Europe are generally transitory in nature. Several markets, but especially France, have seen some challenges. France is one of DPZ's larger markets in Europe. However, Australia and New Zealand are fantastic.
Overall, this was a very good report for DPZ. The highlights were the improved US comps in Q4 and, frankly, management's excitement about 2024. DPZ has some good tailwinds heading into 2024, led by Uber Eats, Emergency Pizza and the revamped loyalty program. In particular, DPZ sounds pretty confident Uber will bring in a lot of new customers, and they tend to be higher income. Investors definitely are excited about 2024.
Freshpet stays fresh in Q4; returns to profitability and stays on track to reach 2027 targets (FRPT)
Premium pet food maker Freshpet (FRPT +17%) keeps things fresh in Q4, returning to profitability for the first time since 3Q20, reflecting management's attention to margin improvement. One of the overarching themes of FRPT's past several earnings reports was lifting margins toward its long-term goal. With FRPT recovering 400 bps of adjusted gross margin during FY23, ahead of the pace needed to achieve its 2027 target of 45%, investors are happily placing outsized buy orders today, propelling shares of FRPT back to the $100 mark, levels not seen since April 2022.
- FRPT registered EPS of $0.31 in Q4, a massive leap over the $(0.15) delivered in Q3, $(0.35) in Q2, and $(0.52) in Q1. Adjusted gross margins advanced 810 bps yr/yr and 90 bps sequentially to 41.1%, supported by improved operating performance through increased business concentration alongside easing input and logistics costs.
- Another quarter of robust revenue growth of 29.9% yr/yr to $215.4 mln also aided FRPT's superb margin expansion. The company is proving that its premium pet foot stays atop consumers' shopping lists even during a turbulent economy where cumulative inflationary pressures spur heightened value-seeking behavior. However, not all premium pet food is created equally. For example, General Mills' (GIS) premium pet food banner Blue Buffalo is facing challenges; management remarked late last year that consumers continue to trade down.
- As such, FRPT is showcasing its competitive edge, particularly within the fresh frozen pet food category, where it commands a 96% share. However, it is worth noting that FRPT created this category as a subsegment of the dog food category, of which it has a minor 3% share. Nevertheless, FRPT's tiny slice of the dog food industry underscores tremendous upside potential as it looks to nudge consumers away from traditional pet food alternatives.
- Branded fridges play a significant role in FRPT's long-term strategy. After installing a record 5,251 fridges in Q4, FRPT commanded over 34,000 fridges at retail locations at the end of FY23. FRPT's fridges steadily carve out a wider economic moat, especially if competitors enter the fresh pet food industry more aggressively. Retail locations have limited space, which could gatekeep the competition or force competitors to pay for a share of FRPT's branded fridge space.
- Looking ahead to FY24, FRPT projected revs of at least $950 mln, above analyst forecasts. Given the elevated economic uncertainty, management is focused on managing capacity diligently this year, not overproducing.
FRPT's Q4 report underscored considerable brand loyalty and resilience within the premium pet food market. E-commerce pet food supplier Chewy (CHWY) remarked in December that it continues observing a shift from wet to dry pet food, but noted that it is not materializing among its customers engaged with premiumized assortments. FRPT's outperformance in Q4 and upbeat FY24 guidance illuminated this trend sticking around in FY24. As a result, we continue to like FRPT's positioning to capitalize on a tailwind within the premium pet food market as consumers refuse to cross Freshpet off their budgets.
Intuit flat despite strong results; investors wanted to see better guidance for tax season (INTU)
Intuit (INTU +0.6%) is trading roughly flat following its Q2 (Jan) earnings report last night. INTU focuses on small businesses and consumers (QuickBooks, TurboTax, Mint, Credit Karma, Mailchimp). INTU beat handily on EPS, its eight consecutive double-digit EPS beat. Revenue was just in-line. We knew all eyes would be on the Q3 (Apr) guidance because tax season is huge for Intuit. It was mixed, with downside EPS but upside revs. Intuit reaffirmed FY24 guidance.
- The star of the show was again its Small Business and Self-Employed Group (SBSE), which is mostly QuickBooks. Segment revenue grew 18% yr/yr to $2.2 bln. QuickBooks Online Accounting revenue grew 19%, driven primarily by customer growth, higher effective prices, and mix-shift towards higher end offerings. Online Services revenue grew 24%, driven primarily by growth in payroll, payments, and Mailchimp. Total international online ecosystem revenue grew 16% CC.
- Consumer Group segment (TurboTax, both DIY and assisted) revenue was down 5% yr/yr to $492 mln, driven by the later IRS opening this year. The IRS began accepting and processing returns starting January 29, compared to January 23 last year. Despite the revenue decline in Q2, Intuit reaffirmed FY24 revenue guidance for Consumer Group at +7-8%. While it's early in the season, Intuit says TurboTax Live Full Service is resonating with customers.
- Its Credit Karma segment has been a laggard in recent quarters with higher rates acting as a headwind. Revenue was flat yr/yr at $375 mln. But that was an improvement from a -5% revenue decline in Q1 (Oct) and -11% in Q4 (Jul). The trend is encouraging for investors. Growth in Credit Karma Money, credit cards, and auto loans, was offset by a decline in home loans, personal loans, and auto insurance.
- Intuit says partners were taking a conservative approach to extending credit in both personal loans and credit cards in Q2. Also, Q2 is typically the seasonally weakest quarter of the year for Credit Karma. Intuit expects Q3 to benefit from additional Credit Karma Money revenue during tax season. Intuit has been more deeply integrating Credit Karma and TurboTax. Credit Karma members can file with TurboTax directly in the Credit Karma app.
- And finally, its ProTax Group, which serves professional accountants, saw revenue grow 8% to $274 mln, reflecting the timing of when tax forms were delivered, which is a driver for revenue recognition.
Overall, this was a bit of a mixed quarter. Nice upside for Q2, but we think investors were somewhat disappointed in the Q3 guidance. And that is tax season, Intuit's largest revenue quarter every year, so it's particularly important. The revenue guidance was encouraging but the EPS guidance was a good bit below expectations. We think its SBSE unit performed well despite small businesses facing macro headwinds. Credit Karma will likely remain challenged until rates come down, but it was good to see that business trending better.
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