Market Snapshot
| Dow | 39005.49 | +235.83 | (0.61%) | | Nasdaq | 16265.64 | +246.36 | (1.54%) | | SP 500 | 5175.27 | +57.33 | (1.12%) | | 10-yr Note | -26/32 | 4.16 |
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| | NYSE | Adv 1526 | Dec 1245 | Vol 936 mln | | Nasdaq | Adv 1981 | Dec 2295 | Vol 5.1 bln |
Industry Watch
| Strong: Information Technology, Communication Services, Consumer Discretionary, Consumer Staples, Financials |
| | Weak: Utilities, Real Estate, Energy, Materials |
Moving the Market
-- Rebound action in some mega cap stocks that have underperformed recently
-- Digesting the February CPI, which was disappointing at the headline level, but showed an outsized impact of shelter inflation that is expected to lessen in coming months
-- Treasury yields moving higher in response
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Closing Summary
12-Mar-24 16:30 ET
Dow +235.83 at 39005.49, Nasdaq +246.36 at 16265.64, S&P +57.33 at 5175.27
[BRIEFING.COM] The stock market had a solid showing today. The Nasdaq Composite (+1.5%) and Dow Jones Industrial Average (+0.6%) each gained more than 200 points and the S&P 500 settled 1.1% higher at a fresh record high.
Strength in the mega cap and semiconductor spaces propelled index level gains. The PHLX Semiconductor Index (SOX) jumped 2.1% and the Vanguard Mega Cap Growth ETF (MGK) gained 1.8% today. NVIDIA (NVDA 919.13, +61.39, +7.2%), Microsoft (MSFT 415.28, +10.76, +2.7%), and Meta Platforms (META 499.75, +16.16, +3.3%) were top performers from the space after struggling under profit-taking activity yesterday.
The upside bias was also related to the February Consumer Price Index (CPI), which wasn't necessarily in-line with what the market wanted to see, but the report failed to upend rate cut expectations as well. Core-CPI was up 0.4% month-over-month and up 3.8% year-over-year.
This was slightly hotter than expected, but market participants didn't seem too worried due to the understanding that the index for shelter, which is expected to lessen in coming months, was the largest factor in the increase.
The likelihood of a rate cut at the June FOMC meeting stood at 71.6% yesterday and didn't move much in response to CPI, sitting at 69.8% now, according to the CME FedWatch Tool.
Treasuries settled with losses in reaction to the CPI report, but most stocks took the price action in stride. The 2-yr note yield rose seven basis points to 4.60% and the 10-yr note yield rose five basis points to 4.16%.
The rate-sensitive S&P 500 utilities (-1.0%) and real estate (-0.4%) sectors were the worst performers today in response to the jump in rates. Meanwhile, the information technology sector was the best performer by a wide margin, gaining 2.5%, thanks to its mega cap constituents and a big earnings-related gain in Oracle (ORCL 127.54, +13.41, +11.8%). ORCL was the top performing stock in the S&P 500 today.
- S&P 500: +8.5% YTD
- Nasdaq Composite: +8.4% YTD
- S&P Midcap 400: +3.2% YTD
- Dow Jones Industrial Average: +3.5% YTD
- Russell 2000: +1.9% YTD
Reviewing today's economic data:
- February NFIB Small Business Optimism 89.4; Prior 89.9
- February CPI 0.4% (Briefing.com consensus 0.4%); Prior 0.3%; February Core CPI 0.4% (Briefing.com consensus 0.3%); Prior 0.4%
- The key takeaway from the report is the isolated impact of the shelter index, which is expected to lessen in coming months given the moderation in rent prices; therefore, the market is willing to look past the headline disappointment for core CPI.
- The February Treasury Budget showed a deficit of $296.3 billion compared to a deficit of $262.4 bln in the same period a year ago. The deficit in February resulted from outlays ($567.4 billion) exceeding receipts ($271.1 billion). The Treasury Budget data is not seasonally adjusted so the February 2024 deficit cannot be compared to the January deficit of $21.9 billion.
- The key takeaway from the report is that the outlay for net interest in February once again exceeded the outlay for National Defense, reflecting the onerous impact of higher interest rates and the increased issuance to fund the government's chronic budget deficit.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 9.7%)
- 10:30 ET: Weekly crude oil inventories (prior +1.37 mln)
Treasuries settle with losses
12-Mar-24 15:35 ET
Dow +226.50 at 38996.16, Nasdaq +230.56 at 16249.83, S&P +56.39 at 5174.33
[BRIEFING.COM] The major indices are moving mostly sideways near session highs heading into the close.
Treasuries settled with losses in reaction to the February CPI report. The 2-yr note yield rose seven basis points to 4.60% and the 10-yr note yield rose five basis points to 4.16%.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 9.7%)
- 10:30 ET: Weekly crude oil inventories (prior +1.37 mln)
Rising rates clip rate-sensitive sectors
12-Mar-24 15:00 ET
Dow +287.56 at 39057.22, Nasdaq +226.56 at 16245.83, S&P +56.69 at 5174.63
[BRIEFING.COM] The S&P 500 (+1.1%) and Nasdaq Composite (+1.4%) are trading at or near session highs. The Russell 2000 continues to lag other major indices, trading down 0.1%.
Market breadth still reflects mixed action under the surface despite the indices sitting near session highs. Advancers lead decliners by an 11-to-10 margin at the NYSE while decliners have a 4-to-3 lead over advancers at the Nasdaq.
Only three of the S&P 500 sectors trade down now. The rate-sensitive utilities (-0.9%) and real estate (-0.4%) sectors are leading downside moves, clipped by rising Treasury yields.
The 10-yr note yield is up five basis points to 4.15%.
Treasury budget deficit swells in February
12-Mar-24 14:30 ET
Dow +248.83 at 39018.49, Nasdaq +210.03 at 16229.30, S&P +50.26 at 5168.20
[BRIEFING.COM] The major averages narrowly moved higher following the release of the February Treasury Budget which showed that the outlay for net interest in February once again exceeded the outlay for National Defense, reflecting the onerous impact of higher interest rates and the increased issuance to fund the government's chronic budget deficit; to this point, the S&P 500 (+0.98%) is near HoDs and firmly in second place.
The Treasury Budget for February showed a deficit of $296.3 bln versus a deficit of $262.4 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the February deficit cannot be compared to the deficit of $21.9 bln for January.
Total receipts of $271.1 bln grew 3.4% compared to last year while total outlays of $567.4 bln increased about 8.2% compared to last year.
The total year-to-date budget deficit now stands at $828.1 bln vs $722.6 bln at this point a year ago.
Gold ends lower following CPI reading
12-Mar-24 13:55 ET
Dow +208.20 at 38977.86, Nasdaq +169.36 at 16188.63, S&P +41.90 at 5159.84
[BRIEFING.COM] The major averages are all still in positive territory, the tech-heavy Nasdaq Composite (+1.06%) still leading as we approach the release of the February Treasury Budget, which is due out at the top of the hour.
Gold futures settled $22.50 lower (-1.0%) to $2,166.10/oz, pressured in part by a rise in yields following this morning's CPI reading.
Meanwhile, the U.S. Dollar Index up about +0.1% to $103.01.
Casey's General runs out of gas on a Q3 sales miss; long term still compelling (CASY)
Casey's General (CASY), a Midwest U.S. fuel station and convenience store chain, has been struggling to get going today despite exceeding Q3 (Jan) earnings estimates. A modest sales miss, registering a 0.1% drop yr/yr when analysts anticipated positive growth, is keeping a lid on shares today. Meanwhile, with the stock up a respectable +7% on the year, a meaningful gain for this steady-grower, CASY simply did not have much left in the tank.
Nevertheless, CASY delivered several bright spots in Q3, including robust inside same-store sales growth, decent margins, and continuous market share capture.
- Inside comp growth accelerated sequentially, expanding by +4.1% in Q3 compared to +2.9% last quarter, partly assisting a 20 bp margin bump to 41.3%. Prepared food and dispensed beverage was the standout category, boasting comps of +7.5% with an average margin of 59.6%, a 230 bp improvement yr/yr. Meanwhile, grocery and general merchandise enjoyed positive momentum, benefiting nicely from CASY's private label program.
- Margins were favorably impacted by easing commodity costs, primarily cheese (a key ingredient for CASY given its popular pizzas), alongside moderate menu pricing adjustments. These tailwinds underpinned CASY's double-digit earnings beat in the quarter, posting EPS of $2.33.
- On the fuel side, CASY registered a slight downtick in fuel gallon comps, edging -0.4% lower. Additionally, retail fuel sales fell by 11% yr/yr due to sliding average gas prices. As a result, CASY's overall top line missed the mark in the quarter. Still, fuel margins were solid, coming in at 37.3 cents per gallon, marking the company's 11th straight quarter with margins above 34.5 cents per gallon. Also, CASY's fuel volumes again exceeded its geographic market, with data indicating volumes in the Mid-Continent region slipping by 5% during the quarter.
- Looking ahead, CASY left its FY24 (Apr) financial goals unchanged, continuing to project inside comp growth of +3.5-5.0% with margins of 40-41% and same-store fuel gallons sold between negative 1% and positive 1%. Thus far through Q4, inside comps are trending near the high end of CASY's outlook, while fuel gallons are landing closer to the lower end.
While fuel comps are trending toward the lighter side of CASY's outlook for the year, potentially hindering top-line growth, there was still plenty to like from Q3. CASY continues demonstrating its competitive edge over competing gas stations and convenience stores through constant inside comp growth without compromising margins. Given its positioning in the Midwestern U.S., where many individuals live a driving distance from work, school, and social activities, we continue to like CASY as a solid buy-and-hold stock.
Southwest Airlines' exposure to Boeing plagues company as 737 delivery delays hit outlook (LUV)
A host of airlines provided updated guidance this morning, partly to reflect the impact of slightly higher-than-anticipated fuel costs, but it was Southwest Air's (LUV) disappointing update that's creating the most turbulence. Like American Airlines (), which now expects Q1 EPS to come in at the low end of its prior ($0.15-)-($0.35) guidance range, LUV bumped its Q1 fuel cost forecast higher, putting some pressure on its bottom line.
If the story ended there for LUV, it wouldn't be so bad, especially since the company still expects to generate record revenue in both Q1 and Q2. Unfortunately, though, the higher fuel costs are just one piece of the puzzle.
- LUV also disclosed that while business trends in Q1 continue to strengthen sequentially and that bookings for Q2 are currently ahead of seasonally normal trends, it acknowledged that it experienced lower-than-expected close-in leisure passenger volume. Unlike AAL or Delta Air Lines (DAL), which reaffirmed its Q1 and FY24 EPS guidance this morning, LUV doesn't have the luxury of relying on strong international travel demand to help offset a cool down in domestic leisure travel demand.
- Also, more so than virtually any other airline, LUV is at the mercy of Boeing (BA) and its production capabilities since its entire fleet is comprised of the 737 narrow-body aircraft. This reliance on one type of aircraft has allowed LUV to keep costs down and streamline its operations in the past, but this strategy is now coming back to haunt LUV as BA struggles through perhaps the worst stretch in its history following a string of incidents for the 737-MAX.
- With BA facing investigations over its manufacturing and quality control processes, and now also a criminal probe from the DoJ, the company has scaled back and delayed its production timelines. According to a recent Reuters report, BA is now expected to produce 47 737- MAX jets per month in January 2025, compared to its previous timeline of August 2024.
- Therefore, it doesn't come as a huge surprise that LUV is now expecting a reduction in 737-7 and 737-8 deliveries. Specifically, LUV disclosed that BA advised the company to expect 46 737-8 deliveries in 2024, down from the original expectation of 79 deliveries. Furthermore, LUV is now assuming no 737-7 aircraft deliveries for the year.
- Consequently, LUV is planning to reduce capacity, primarily in the back half of 2024, and it's also reevaluating all prior FY24 guidance.
The main takeaway is that the entire airline industry is facing some headwinds in the form of higher fuel costs and a cooling off of domestic leisure travel demand, but LUV's heavy exposure to BA is causing significant disruptions that are likely to persist throughout the remainder of the year.
Oracle charges higher after gap downs the last two quarters; Gen2 AI is booming (ORCL)
Oracle (ORCL +11%) came into this report having gapped lower in each of its two previous earnings reports. Investors were understandably nervous, as we were, heading into Oracle's Q3 (Feb) earnings report last night. However, the stock is up sharply following earnings. The headline numbers did not jump off the page with just a decent EPS beat, in-line revs and in-line EPS guidance for Q4 (May).
- We think the stock reaction is due to a combination of the numbers being better-than-feared, a robust RPO (Remaining Performance Obligations) result and some positive commentary on the call. The RPO metric really stood out. It grew 29% yr/yr to an all-time record of $80 bln, which also was up sharply from Q2's $65+ bln number. Oracle explained that some large new cloud infrastructure contracts signed in Q3 drove RPO higher.
- Importantly, Oracle expects to continue receiving large contracts reserving cloud infrastructure capacity because the demand for its Gen2 AI infrastructure substantially exceeds supply. And that is despite the fact that Oracle is opening new datacenters and expanding existing cloud datacenters very rapidly. Oracle expects that 43% of its current $80 bln of RPO will be recognized as revenue over the next four quarters. Oracle also expects its Gen2 Cloud Infrastructure business will remain in a hypergrowth phase (+53% in Q3) for the foreseeable future.
- While the Q4 guidance was decent but not great, we think investors are gravitating to some bullish longer term guidance comments. Oracle said that, as demand for its cloud services continues getting stronger, its pipeline is growing even faster and its win rates are going higher as well. As its supply constraints ease, Oracle expects revenue growth rates will accelerate as capacity expands in FY25. In addition, Cerner has been a significant headwind in FY24, but Oracle expects a return to growth in FY25. And what maybe caught our attention most was Oracle saying that its previously stated goals for FY26 might prove to be too conservative given its current momentum.
- Non-GAAP operating margin is a metric we like to track. In Q3, it grew to 44% from 42% a year ago and 43% in Q2. As Oracle continues to drive more efficiencies, operating expenses continue to trend down as a percentage of revenue. Oracle expects to continue to expand margins as it continues to benefit from economies of scale in the cloud and drives Cerner profitability to Oracle standards.
After two gap downs in Q1 and Q2, investors are clearly relieved to see Oracle's Q3 results. The numbers did not blow us away, but the robust RPO metric and some comments on the call about FY25-26 were really positive. Investors seem to be focusing on that. Oracle's Gen2 AI infrastructure business is booming and it sounds like that will be a huge tailwind for the foreseeable future. The stock has been in the doldrums, trading mostly sideways since June 2023. However, this report has propelled ORCL to a new 52-week high and hopefully a sustained break above this recent trading range.
On stumbles as FX headwinds weigh on Q4 results and FY24 guidance (ONON)
On (ONON -13%), a recent entrant into the premium footwear, apparel, and accessories industry focused on running and other physical activities, stumbled in Q4. The Swiss company, founded just 14 years ago, was enjoying an excellent run to start 2024, with shares climbing over +25% higher. However, misses across the board in Q4, as well as bearish FY24 guidance, set an ominous tone for the rest of the year, resulting in a significant correction today.
- ONON registered its first net loss in two years, posting CHF (0.05), well below consensus, which anticipated a positive quarter. The paltry bottom-line performance came on a sharp slowdown in revenue growth at 21.9% compared to +46.5% in Q3, falling short of analyst estimates. Although, it should be noted that ONON was lapping over +90% growth in Q4 compared to just around +50% last quarter.
- What happened? The earnings miss in the quarter resulted primarily from unfavorable FX impacts as ONON still expanded its gross margins by 190 bps yr/yr to 60.4%. Management remarked that revaluing its U.S. Dollar balance sheet items drove meaningful unrealized FX losses, dragging its net income down considerably. However, ONON anticipates a partial reversal of these losses and a corresponding gain in FY24.
- Currency fluctuations are a constant variable for ONON, eroding top-line growth numerous times since the company's late 2021 IPO. When backing out FX impacts, ONON grew sales by 31% in the quarter, with solid gains across all geographies. The APAC region was a notable standout, with constant currency growth of over 75%. Meanwhile, the Americas achieved its strongest quarter ever, expanding by 29% on a currency-neutral basis. Finally, the EMEA region posted 36% constant currency sales growth.
- Also, regarding EMEA, ONON continues to close more wholesale doors, shifting focus toward bolstering its DTC channel, which commands higher margins. However, most of ONON's sales come from wholesale, adding near-term risk.
- FX headwinds will continue hindering top-line growth for ONON in FY24, albeit to a lesser degree than it endured in Q4. Still, for the year, ONON anticipates revs of CHF 2.25 bln, a 26% jump yr/yr, below analyst estimates.
Today's sell-off stems from disappointing headline results and guidance. However, when peeling back the top layer, ONON primarily suffered from a relatively strong U.S. dollar. The company still registered healthy demand while optimizing its inventory and taking additional market share in the DTC channel, going from 36.4% to 37.5%. Furthermore, ONON raised its CAGR through 2026 to 30% from 26%, excluding currency fluctuations. The company is also on track toward reaching adjusted EBITDA margins of 18+% by 2026.
Therefore, we view today's pullback as an attractive buying opportunity. ONON's impressive run to start the year overextended shares, and the strengthening U.S. dollar throughout the quarter was all that was needed to ignite a sell-off. While reducing its wholesale exposure in favor of the higher-margin DTC channel could weigh on sales growth over the near term, so far, the demand for the DTC channel has more than offset door closures on the wholesale side.
Bilibili reaches new highs this year following an upgrade at JP Morgan today (BILI)
Shares of Bilibili (BILI +15%), a Chinese online video, social media, and gaming developer, are reaching their highest prices all year after an upgrade at JP Morgan, which has more than eclipsed a downgrade at Citigroup today. The stock is returning to highs, as seen the day BILI registered solid Q3 earnings in late November, which immediately faded. This was followed by constant selling pressure, resulting in an over 30% drop over the next two months.
However, Briefing.com notes that BILI's prospects are looking much greener after so much selling pressure, setting up the company for plenty of upside if it can stay on track to achieve its financial targets this year.
- BILI has been focused on becoming a profitable organization for several quarters, delivering a loss of RMB 1.34 per share in Q4, substantially improved from the RMB 3.34 loss posted in the year-ago period. Eyeing areas of its business where costs could be slashed have benefited BILI's bottom line enormously over the past couple of years. For FY23, these actions increased gross margins by 660 bps yr/yr. BILI projects further improvement in FY24.
- Advertising is a critical component of BILI's business model, comprising around a third of total revenue. During Q4, the company improved its ad revs by 28% yr/yr, underpinned by robust growth in performance-based ads, which skyrocketed by over 60%. BILI continues to enhance its ad infrastructure to keep this growth trending positively, enabling advertisers to improve their influence over user purchasing decisions. Embedding generative AI for ad material creation will be a focus point for BILI in FY24.
- Alongside video and social media, BILI commands a lucrative gaming portfolio. In Q4, gaming revs saw a 2% bump compared to Q3. Revenue may continue expanding sequentially as BILI has three titles in its pipeline that have been approved for release over the coming quarters.
Economic obstacles have disrupted BILI's ability to return to the exceptional +50-90% top-line growth it delivered throughout the pandemic. However, even though sales growth was still relatively stale in Q4 at just 3.4%, made worse by a sequential deterioration in daily active users (DAUs), which went from 102.8 mln to 100.1 mln, investors may have overlooked a few encouraging developments. Primarily, BILI is making solid strides toward achieving profitability despite a lackluster economic backdrop. While the spending environment in China could take an extended period before recovery, BILI is progressing nicely in terms of what it can control, targeting continuous improvement in profitability this year.
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