| | | Market Snapshot
| Dow | 39170.24 | -396.61 | (-1.00%) | | Nasdaq | 16240.45 | -156.38 | (-0.95%) | | SP 500 | 5205.81 | -37.96 | (-0.72%) | | 10-yr Note | -4/32 | 4.36 |
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| | NYSE | Adv 697 | Dec 2079 | Vol 1.0 bln | | Nasdaq | Adv 1193 | Dec 3083 | Vol 4.7 bln |
Industry Watch
| Strong: Energy, Utilities, Communication Services |
| | Weak: Health Care, Real Estate, Information Technology, Consumer Discretionary, Communication Services |
Moving the Market
-- Jump in market rates keeping stock market in check
-- Normal consolidation activity after stellar start to the year for many stocks
-- Weakness in health care stocks on updated Medicare Advantage rate
-- Softness in mega cap and semiconductor stocks
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Closing Summary
02-Apr-24 16:35 ET
Dow -396.61 at 39170.24, Nasdaq -156.38 at 16240.45, S&P -37.96 at 5205.81
[BRIEFING.COM] The stock market had a weak showing. The S&P 500 (-0.7%), Dow Jones Industrial Average (-1.0%), and Russell 2000 (-1.8%) extended this week's losses while the Nasdaq Composite gave back yesterday's modest gain and then some, sliding 1.0%. The major indices closed off their session lows thanks to some afternoon improvement with no specific catalyst.
Today's selling was driven by normal consolidation activity following a strong start to the year for many stocks. Another jump in market rates as participants continue to rethink rate cuts amid solid economic data and sticky inflation figures also played an integral role in today's trade. The 10-yr note yield rose another four basis points today to 4.37%.
Outsized losses in health insurers also contributed to the negative bias after the CMS left its originally proposed payment rate increase for Medicare Advantage plans for 2024-2025 unchanged at 3.70% against expectations for an increase. Humana (HUM 304.33, -47.12, -13.4%), CVS Health (CVS 73.82, -5.74, -7.2%), and UnitedHealth (UNH 458.14, -31.56, -6.4%) were the worst performing stocks in the S&P 500.
Retailers were another weak area in the market following after disappointing quarterly results and outlook from PVH Corp (PVH 108.68, -31.05, -22.2%) that stirred some uncertainty about consumer spending activity. PVH is not an S&P 500 component, but many retailers pulled back in sympathy and the SPDR S&P Retailer ETF (XRT) settled 2.8% lower.
The S&P 500 health care (-1.6%) and consumer discretionary (-1.3%) sectors were the worst performers today while the energy sector outperformed, jumping 1.3%. This action was related to commodity prices. WTI crude oil futures climbed 1.7% to $85.18/bbl amid geopolitical tension in the Middle East.
- S&P 500:+9.1% YTD
- Nasdaq Composite: +8.2% YTD
- S&P Midcap 400: +7.4% YTD
- Dow Jones Industrial Average: +3.9% YTD
- Russell 2000: +1.9% YTD
Reviewing today's economic data:
- February Factory Orders 1.4% (Briefing.com consensus 1.0%); Prior was revised to -3.8% from -3.6%
- The key takeaway from the report is that there was a pickup in new orders in February for durable and nondurable goods, demonstrating that there has not been a lingering drop-off in demand.
- February JOLT - Job Openings 8.756 mln; Prior was revised to 8.748 mln from 8.863 mln
Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Index (prior -0.7%)
- 8:15 ET: March ADP Employment Change (Briefing.com consensus 150,000; prior 140,000)
- 10:30 ET: Weekly crude oil inventories (prior +3.17 mln)
Stocks move slightly higher in front of close
02-Apr-24 15:35 ET
Dow -385.62 at 39181.23, Nasdaq -161.65 at 16235.18, S&P -37.40 at 5206.37
[BRIEFING.COM] The major indices moved slightly higher in recent with no specific catalyst to account for the improvement. The indices are still trading lower, however, leading the S&P 500 to sport a 0.7% decline.
Some heavily-weighted names are trading up now, providing some offsetting in a mostly negative trade. Meta Platforms (META 496.37, +5.13, +1.0%) and Eli Lilly (LLY 764.45, +3.90, +0.5%) are winning standouts in that respect.
Elsewhere, Treasuries settled mostly lower. The 10-yr note yield rose another four basis points today to 4.37%.
Energy sector outperforms
02-Apr-24 15:00 ET
Dow -424.41 at 39142.44, Nasdaq -189.89 at 16206.94, S&P -45.99 at 5197.78
[BRIEFING.COM] The major indices were trading in a lateral flow over the last half hour.
Only one S&P 500 sector remains in positive territory. The energy sector is trading up 1.0% while the other ten sectors show losses ranging from 0.1% to 1.8%.
Separately, San Francisco Fed President Mary Daly (FOMC voter) said in a fireside chat that she sees no urgency to adjust rates, saying inflation is coming down, but its "bumpy" and "slow."
Norwegian Cruise Line dips; Phillips 66 performers well in S&P 500 after renewable diesel expansion
02-Apr-24 14:30 ET
Dow -454.73 at 39112.12, Nasdaq -181.97 at 16214.86, S&P -45.21 at 5198.56
[BRIEFING.COM] The S&P 500 (-0.86%) is today's shallowest declining major average, down about 45 points.
Elsewhere, S&P 500 constituents Norwegian Cruise Line (NCLH 19.31, -1.63, -7.78%), V.F. Corp (VFC 14.21, -1.09, -7.12%), and American Airlines (AAL 14.44, -0.97, -6.29%) pepper the bottom of today's trading. Press reports of a NCLH cruise leaving some late passengers behind in Africa have circulated today, while VFC follows broader consumer discretionary weakness, and AAL is today's worst-performing airline stock.
Meanwhile, Phillips 66 (PSX 167.95, +4.61, +2.82%) is atop the standings after announcing the expansion of commercial scale production of renewable diesel at its Rodeo Renewable Energy Complex.
Gold continues rally amid Middle East tensions
02-Apr-24 14:00 ET
Dow -482.02 at 39084.83, Nasdaq -187.94 at 16208.89, S&P -47.39 at 5196.38
[BRIEFING.COM] With about two hours to go on Tuesday, the tech-heavy Nasdaq Composite (-1.15%) is in second place, just off today's highs yet still down about 188 points.
Gold futures settled $24.70 higher (+1.1%) to $2,281.80/oz, demand for safe haven gold fueled once more by ongoing tensions in the Middle East; reports out over the last 24 hours suggest that Israeli airstrikes in Syria killed several senior Iranian commanders.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $104.81.
Tesla's disappointing Q1 deliveries put growth concerns back under the spotlight (TSLA)
After Tesla (TSLA) reported disappointing Q1 deliveries that fell short of expectations, growth concerns for the leading EV maker are back under the spotlight, driving shares lower once again. For the year, TSLA is now down by about 33%, reflecting participants diminished expectations for earnings and revenue growth in FY24.
- On that note, Q1 deliveries declined by 8.5% yr/yr to 433,000, representing TSLA's first yr/yr decline since the pandemic-impacted year of 2020. Importantly, that decrease is partly due to extraordinary events that were out of TSLA's control.
- For instance, in early March, TSLA's Berlin factory was forced to shut down after a fire broke out at a nearby power pylon, causing a power outage. The suspected arson attack caused the factory to be shut down for more than a week. Additionally, shipping diversions caused by the Red Sea conflict created parts shortages, leading TSLA to halt production at the Berlin plant for about two weeks.
- However, it was evident even before these events occurred that sales were sluggish for TSLA, particularly in China, where competition is especially fierce. On March 4, Bloomberg reported that shipments from TSLA's Shanghai factory fell to their lowest level in over a year, diving by 19% yr/yr. What's especially concerning about the shipment drop is that it comes as TSLA keeps its foot on the accelerator when it comes to price cuts and incentives.
- This scenario suggests that the intensifying competitive landscape is taking an even bigger toll on TSLA. Yesterday, several Chinese EV makers reported March delivery figures that were better-than-expected. NIO (NIO), for example, disclosed that deliveries increased by 14.3% in March to 11,866, while Li Auto (LI) and XPeng (XPEV) achieved growth of 39% and 29%, respectively. Those companies have participated in the price war that TSLA instigated a year ago, cutting into margins and profits, but it's clear that they are picking up some share against TSLA.
- When TSLA reported downside Q4 results on January 24, it warned that vehicle volume growth in 2024 may be notably lower than the growth achieved in 2023. As that prediction begins to come to fruition, TSLA is turning to its full self-driving (FSD) platform to try to spark demand. The company recently announced a 1-month free trial for FSD, banking on high attach rates to push sales higher.
- From a longer-term perspective, FSD is central to TSLA's growth strategy as the company attempts to transition to a software/AI company. TSLA has been pouring billions into the technology, which has cut further into its profits. Following a 43% jump in Q3, operating expenses were up 27% in Q4, causing operating income to plunge by nearly 50% yr/yr to $2.1 bln. Considering TSLA's hefty investments in FSD, investors are anxious to see a pay off, but it could be several quarters before software revenue is really moving the needle.
The main takeaway is that TSLA's disappointing Q1 deliveries further solidified the notion that FY24 will likely be a difficult year for the company as its expected growth catalysts -- mass market Model 2 vehicle and FSD software revenue -- remain a year or more away.
UnitedHealth and peers pull back aggressively on an unchanged Medicare Advantage rate (UNH)
Health insurance giants, including UnitedHealth (UNH), Elevance Health (ELV), CVS Health (CVS), Centene (CNC), Humana (HUM), and Molina (MOH), are gapping lower today after the Centers for Medicare & Medicaid Services (CMS) finalized payment updates for 2025 Medicare Advantage (MA) and Medicare Part D programs yesterday after the close.
The reason for such a strong reaction today to the update was that payments from the government to MA plans are expected to tick up by just an average of 3.70%. While this was the number already proposed earlier this year, the market was hoping for a higher rate given the pressure the health insurance industry was putting on the current administration, thus driving today's aggressively negative response.
- What does a lower-than-anticipated rate mean? In Medicare Advantage, the government signs with private insurers to provide Medicare benefits to enrollees, paying these insurers a specific amount per enrollee each month. Health insurers rely on these government funds to help cover MA costs. Without a higher payout rate from the government, costs for health insurers will rise, potentially clipping earnings forecasts.
- The unchanged rate for 2025 could disadvantage some health insurers more than others. For example, UNH remarked in January that the reduced MA funding outlook was a significant factor in how it prepared for 2024 through 2026. UNH's MA business may not carry huge margins, but it has become a rapidly growing part of its overall business. Meanwhile, CNC noted in February that the initial MA rates were insufficient, given rising medical cost trends. CNC's MA business may be a fraction of its overall operations, but the company stated it represented a meaningful margin expansion opportunity.
- Care costs are already rising, making the unchanged MA rate all the more worrisome. A recurring trend among insurers in Q4 was a bubbling medical care ratio (MCR), the percentage of premiums used to cover claims. Part of this emerged from increased activity in outpatient care for seniors. Higher care costs were considerable for HUM, which increased its MA adjusted benefit ratio by nearly 200 bps ahead of its Q4 results, reflecting higher than expected MA medical expenses. Management stated in January that it was navigating unprecedented increases in medical cost trends.
Bottom line, although the current MA funding rate increased by the number initially floated to start the year, the market was expecting the health insurance industry to push back enough to convince the government to raise its forecast. Unfortunately for health insurers, the government held its ground, driving a sharp sell-the-news reaction today. With healthcare costs rising across the board, an unchanged MA rate was precisely what insurers were looking to avoid. The development could spur lowered FY24 earnings forecasts. Most insurers report Q1 earnings within the next few weeks. A clearer picture will likely be provided at that time.
General Electric completes successful transformation with spinoff of GE Vernova (GE)
With today's spinoff of its power and renewable energy businesses, General Electric's (GE) massive transformation plan that began three years ago is now complete, resulting in three separate companies: GE Aerospace (GE), GE Vernova (GEV), and GE HealthCare (GEHC), which was spun-off in January 2023.
- CEO Larry Culp, who will now head up GE Aerospace, envisioned a streamlined aerospace business that was free to fully capitalize on the resurgence of the commercial airline industry and the rise in defense budgets around the world. That vision has already paid huge dividends to the tune of an 84% yr/yr gain in GE shares, fueled by strengthening financial results due to robust demand in the aviation segment and a recovery in the power and energy segments.
- Those power and energy segments are now known as GE Verona and officially began trading today under the "GEV" ticker symbol. As expected, GEV has been well received by investors with shares trading higher, exhibiting notable relative strength in a weak tape. While the aerospace segment has received most of the accolades for GE's vastly improved financials, the power and renewable energy businesses have experienced a meaningful turnaround and momentum is building.
- Aided by the passage of the Inflation Reduction Act in August of 2022, demand for wind turbines has rebounded. In Q4, renewable energy generated revenue growth of 14%, while its operating loss shrunk to ($317) mln from ($934) mln in the year-earlier quarter.
- Meanwhile, the power segment, which manufactures and services gas turbines that generate energy, is also on the upswing, driven by services and higher equipment orders for heavy-duty gas turbines. Revenue increased by 12% in Q4, while profit was over $750 mln with segment margin of 13.1%.
- The future looks bright for both GE and GEV. On March 7, GE hosted a presentation ahead of the spinoff, reaffirming FY24 revenue guidance of $34-$35 bln for GEV while forecasting mid-single-digit organic revenue growth and 10% EBITDA margin by 2028. GE also reaffirmed its FY24 revenue guidance, forecasting low-double-digit growth (or more) and operating profit of $6.0-$6.5 bln. Looking further out, GE expects a high-single-digit CAGR for revenue in 2025-2028 with operating profit of approximately $10.0 bln.
Overall, the breakup of GE, which was once an iconic industrial conglomerate, was a bold move, but it's also been a clear success. Separating each business has unlocked the value in each of those businesses, enabling them to create a growth strategy that's specifically tailored to capitalize on individual underlying trends.
Paychex rebounds as lowered FY24 revenue guidance attributed mainly to potential legislation (PAYX)
Paychex (PAYX) registered its second consecutive sales miss in Q3 (Feb) and projected FY24 (May)revenue growth below analysts' expectations, prompting today's initial sell-the-news reaction. Shares of the payroll services and human capital management (HCM) firm erased 2024 gains, sliding toward early November levels before bouncing back aggressively.
The revenue shortfall in the quarter primarily resulted from a lower contribution from PAYX's Employee Retention Tax Credit (ERTC) service (legislation could end the program this year) stacked against the year-ago period. As such, when excluding this impact, PAYX actually toppled revenue estimates. However, because of the uncertainty surrounding whether legislation could end this program, PAYX removed it from its FY24 revenue growth outlook, shifting it lower by 1 pt to +5-6% yr/yr from +6-7%.
Other obstacles, including higher interest rates making it challenging for small and medium-sized businesses (SMBs) to afford capital, a tight labor market, and sticky inflationary pressures, continue creating issues for PAYX. These headwinds grew worse than PAYX originally anticipated, also contributing to its disappointing FY24 outlook.
- PAYX still delivered positive revenue and earnings growth in Q3, expanding its top line by 4.2% yr/yr to $1.44 bln and adjusted EPS by 7.0% to $1.38. If not for the adverse ERTC impact, PAYX's revenue improved by 7.0%, a decent uptick from the +5.7% posted in Q2 (Nov). Management noted that alongside healthy new client volumes, its client and revenue retention met expectations.
- Unfortunately, although the macroeconomic environment is somewhat stable, PAYX is noticing moderation in job growth, which first cropped up in Q2 and carried into Q3. The moderation can be largely attributed to a dwindling qualified workforce. This leads to employers struggling to fill positions since they are hesitant to hire underqualified individuals amid wage inflation. PAYX added that the market has increased hiring choppiness across all customer segments and industries.
- On a more uplifting note, PAYX stated that demand for its HR technology remains robust, evidenced by solid new client volumes. At the same time, PAYX is witnessing a shift back towards its Professional Employer Organization (PEO) offering, which enjoyed an 8% jump in revs yr/yr in Q3. This trend tends to bode well for the longer term, especially as clients attach insurance benefits.
After an initial sell-off today, PAYX shares are amid an impressive comeback. The headline of lowered FY24 revenue guidance triggered an immediate panic. However, upon further investigation, it became clear that PAYX was being prudent in removing further contributions from its ERTC service, given that current legislation was pending review in the Senate. While economic woes also weighed on PAYX's outlook, ERTC was the main underlying factor. As such, investors are warming back toward PAYX as its quarterly report's weak points were more due to government legislation than alarming demand problems.
PVH disappoints investors with weak guidance; Europe and wholesale channels are main culprits (PVH)
PVH Corp. (PVH -23%) is under pressure after reporting Q4 (Jan) results. This fashion apparel company (Calvin Klein, Tommy Hilfiger) beat on EPS and revs, however, its Q1 (Apr) and full year guidance was well below analyst expectations. The company did approve a $2 bln increase to its share repurchase program, but that does not seem to be swaying reaction to the weak guidance. Of note, PVH completed its sale of its intimate apparel business which should allow it to focus on its two core brands.
- Revenue in Q4 was flat yr/yr at $2.49 bln, although -1% CC. In North America, revenue in the Tommy Hilfiger and Calvin Klein businesses combined was down 2%, as strong growth in direct-to-consumer (company stores/online) was more than offset by a decline in wholesale revenue. Wholesale customers continue to take a cautious approach.
- International sales increased 4% yr/yr as strong growth in Asia Pacific more than offset a continued challenging macro environment in Europe, particularly for wholesale. Gross margin improved nicely to 60.3% from 55.9% in the prior year period, reflecting lower freight costs, a favorable shift in regional and channel mix and lower product costs.
- Direct-to-consumer revenue increased 9% yr/yr, with growth in all regions in both the company's owned and operated stores and digital commerce business. Owned and operated digital commerce revenue increased 10%. However, wholesale revenue decreased 10% yr/yr, which includes a 3% reduction related to the sale of the intimates business, as wholesale customers continue to take a cautious approach.
- Turning to the weak guidance, PVH saw a softening consumer backdrop in January and February and a conservative wholesale environment. Consumer sentiment has slowed further across Europe, especially in its two biggest markets, Germany and the UK. Wholesale partners there have become even more cautious. As such, PVH has taken a cautious approach to planning for 2024 with guidance for a 6-7% revenue decline.
- A bright spot within its guidance is that it expects its North America Calvin Klein and Tommy Hilfiger businesses combined to be up low single digits with mid-single-digit growth in DTC, tempered by wholesale. Asia Pacific is expected to grow high single digits on a constant currency (CC) basis. However, consumer sentiment in Europe slowed further in January and February, and its fall 2024 order books are increasingly cautious.
Overall, this was not a good way to wrap up FY23. The reaction in the share price makes it clear investors were not expecting guidance to be this weak heading into 2024. Wholesale generally and the European region are the main problem areas. Between OXM yesterday and now PVH, we have a couple of retailers that cater to higher income customers that reported weak results/guidance. It makes us a bit more nervous for consumer-related names as we head into Q1 earnings season in a few weeks.
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