| | | Market Snapshot
| Dow | 38459.08 | -2.43 | (-0.01%) | | Nasdaq | 16442.20 | +271.84 | (1.68%) | | SP 500 | 5199.06 | +38.42 | (0.74%) | | 10-yr Note | -2/32 | 4.56 |
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| | NYSE | Adv 1394 | Dec 1356 | Vol 862 mln | | Nasdaq | Adv 2333 | Dec 1874 | Vol 4.7 bln |
Industry Watch
| Strong: Information Technology, Communication Services, Consumer Discretionary, Real Estate |
| | Weak: Financials, Industrials, Energy, Health Care, Utilities, |
Moving the Market
-- Reacting to cooler-than-expected March PPI data
-- Relative strength in mega caps and chipmakers
-- Early resilience to selling efforts
-- Calm behavior in Treasuries
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Closing Summary
11-Apr-24 16:35 ET
Dow -2.43 at 38459.08, Nasdaq +271.84 at 16442.20, S&P +38.42 at 5199.06
[BRIEFING.COM] The stock market started the session mixed following yesterday's CPI-induced sell-off. The S&P 500 and Nasdaq Composite were trading slightly higher, benefitting from strength in mega cap and semiconductor components, while the Dow Jones Industrial Average traded slightly lower. The market found some upside momentum in the afternoon, though, leaving the major indices near session highs.
The afternoon improvement was due in part to rebound action after yesterday's retreat, helped by today's inflation data, which was cooler-than-expected on a month-over-month basis (actual 0.2%; expected 0.3%). Total PPI still accelerated to 2.1% in March from 1.6% in February.
Early resilience to selling activity also helped the afternoon improvement, along with the calm behavior in the Treasury market. The 10-yr note yield settled two basis points higher at 4.58% and the 2-yr note yield declined one basis point to 4.96%. Treasuries didn't react much to today's weak $22 billion 30-yr Treasury bond reopening.
Just about everything participated in the upside moves, but mega caps and semiconductor stocks had an outsized impact on the broader market. The Vanguard Mega Cap Growth ETF (MGK) climbed 1.6% and the PHLX Semiconductor Index (SOX) jumped 2.4%.
Five of the S&P 500 sectors registered gains while six declined. The financials sector was the worst performer, dropping 0.6%, in front of earnings news from big banks ahead of the open tomorrow. This price action was due in part to a sizable loss in shares of Morgan Stanley (MS 86.84, -4.81, -5.3%) after The Wall Street Journal indicated its wealth unit is being investigated by federal regulators.
- Nasdaq Composite: +9.5% YTD
- S&P 500:+9.0% YTD
- S&P Midcap 400: +5.9% YTD
- Dow Jones Industrial Average: +2.0% YTD
- Russell 2000: +0.8% YTD
Reviewing today's economic data:
- Weekly Initial Claims 211K vs Briefing.com consensus of 218K; Last Week was revised to 222K from 221K
- Weekly Continuing Claims 1.817 mln (Last Week was revised to 1.789 mln from 1.791 mln).
- The key takeaway from the report is that claims remain in a sideways range near the 210,000 level, which is not reflective of any sudden weakening in the labor market.
- March PPI 0.2% vs Briefing.com consensus of 0.3%; February was 0.6%
- March Core PPI 0.2% vs Briefing.com consensus of 0.2%; February was 0.3%
- The key takeaway from the report is that even with the smaller than expected month-over-month increases, the year-over-year growth rates for PPI and core PPI accelerated.
Friday's economic calendar features:
- 8:30 ET: March Import Prices (prior 0.3%), Import Prices ex-oil (prior 0.2%), Export Prices (prior 0.8%), and Export Prices ex-agriculture (prior 0.8%)
- 10:00 ET: Preliminary April University of Michigan Consumer Sentiment (Briefing.com consensus 78.8; prior 79.4)
Stocks sit near highs ahead of close
11-Apr-24 15:30 ET
Dow +73.56 at 38535.07, Nasdaq +274.96 at 16445.32, S&P +45.50 at 5206.14
[BRIEFING.COM] The major indices are little changed over the last half hour, moving mostly sideways at session highs.
The 10-yr note yield settled two basis points higher at 4.58% and the 2-yr note yield declined one basis point to 4.96%.
Friday's economic calendar features:
- 8:30 ET: March Import Prices (prior 0.3%), Import Prices ex-oil (prior 0.2%), Export Prices (prior 0.8%), and Export Prices ex-agriculture (prior 0.8%)
- 10:00 ET: Preliminary April University of Michigan Consumer Sentiment (Briefing.com consensus 78.8; prior 79.4)
Stocks hit fresh session highs
11-Apr-24 15:05 ET
Dow +93.94 at 38555.45, Nasdaq +253.53 at 16423.89, S&P +44.41 at 5205.05
[BRIEFING.COM] Stocks continue to make fresh session highs. Early resilience to selling activity has acted as its own upside catalyst, along with the calm behavior in the Treasury market.
The 10-yr note yield is up one basis points to 4.57% and the 2-yr note yield is down two basis points to 4.95%. Treasuries didn't react much to today's weak $22 bln 30-yr Treasury bond reopening.
Just about everything is coming along for upside moves. The Invesco S&P 500 Equal Weight ETF (RSP) is up 0.2% and eight of the 11 S&P 500 sectors are higher.
Paramount atop S&P 500 on Skydance talks; Globe Life crushed on short report
11-Apr-24 14:30 ET
Dow +105.73 at 38567.24, Nasdaq +253.65 at 16424.01, S&P +45.85 at 5206.49
[BRIEFING.COM] The S&P 500 (+0.89%) is in second place once more on Thursday afternoon, the average up now about +9.2% YTD.
Elsewhere, S&P 500 constituents Paramount (PARA 11.30, +0.80, +7.62%), GE HealthCare (GEHC 88.85, +3.46, +4.05%), and Gartner (IT 477.87, +14.09, +3.04%) pepper the top of today's standings. PARA is higher after reports that Skydance is going to begin due diligence on the company next week, Mizuho was out earlier with a favorable note on GEHC, and IT caught a UBS upgrade to Buy.
Meanwhile, Texas-based life insurance firm Globe Life (GL 59.78, -45.15, -43.03%) is getting walloped by a Fuzzy Panda short report.
Gold higher after soft PPI reading
11-Apr-24 14:00 ET
Dow +54.01 at 38515.52, Nasdaq +223.26 at 16393.62, S&P +37.33 at 5197.97
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+1.38%) holds a commanding lead over its major counterparts. The Nasdaq is at HoDs in current trading, up more than 220 points.
Gold futures settled $24.30 higher (+1.0%) to $2,372.70/oz, finishing with decent gains after this morning's cooler-than-expected PPI data.
Meanwhile, the U.S. Dollar Index is mostly flat at $105.28.
General Mills' recent pullback offers attractive entry, especially after improved Q3 results (GIS)
Resting at number #39 on our most recent Yield Leaders rankings, General Mills' (GIS) recent pullback following Q3 (Feb) results last month offers a compelling entry point for investors seeking meaningful upside potential and an attractive annual dividend yield of 3.5%. The consumer packaged goods giant enjoyed uplifting trends during Q3, resulting in an initial pop in its share price.
However, we warned that a few lingering headwinds would likely cause the market to eventually fade the initial buoyant reaction. With shares now down around 10% from highs reached on Q3 numbers, tagging their 200-day moving average (67.14), we view now as a solid time to buy in, especially after food away-from-home prices have continued to edge higher while at-home prices have remained flat for the past two months following the March CPI report. In fact, over the trailing twelve months, at-home prices have edged just 1.2% higher compared to a 4.2% bump in the away-from-home category.
- One significant and stubborn headwind facing GIS is inflation, making the flat month/month uptick in at-home food prices so important. Higher prices have resulted in constant volume declines for GIS, delivering its 12th straight quarterly drop in Q3. However, although volumes dropped by 2 pts yr/yr in Q3, it was far better than the 4 pt decline in Q2 (Nov), especially considering that GIS was lapping flat growth in Q3 compared to a 12 pt dive in Q2. This notable improvement reflects healthy brand loyalty.
- Speaking of which, despite the substantially improved on-shelf availability of private labels, GIS's off-brand competitors have not materially enhanced their overall market share. Management remarked last month that private label shares are tracking essentially in-line with pre-pandemic levels. Private labels, which compete in only around 10% of the categories GIS is in, struggling to encroach on the company's position in an inflationary environment speaks to the competitive advantages GIS's brands hold over less expensive substitutes.
- Inflation also creates issues on the supply side, leading to GIS's Holistic Margin Management (HMM) cost-savings initiative. This program centers on finding areas across numerous product lines where costs could be cut, such as using just one lid color for multiple yogurt flavors. It also focuses on limiting supply chain disruptions. The result has been solid gross margin expansion recently, bumping the figure up by 100 bps yr/yr in Q3.
While GIS left its FY24 (May) financial goals unchanged last quarter, continuing to project organic net sales growth of negative 1% to flat yr/yr and adjusted EPS growth of +4-5% in constant currency, the final quarter of the year contained unfavorable yr/yr comparisons. Once GIS clears this headwind, it should be staring at sunnier skies, particularly given the improving performance in its two major segments, North America Retail and Pet, alongside healthy volume improvements and firm brand loyalty, which could provide meaningful upward momentum heading into FY25. As always, a 15-20% stop loss should be used.
Costco's golden touch continued in March as company rings up strong comps (COST)
Coming off a disappointing Q2 earnings report in which Costco (COST) fell short of net sales expectations, the membership warehouse retailer bounced back in March, generating impressive adjusted comparable sales growth of 7.5% for the month. COST stores were humming in March with comparable traffic increasing by 7.2% yr/yr, up from February's increase of 6.2%. Rising gas costs tend to lure more customers to its stores as members look to take advantage of discounted gas prices, but that's not the only driver behind COST's strong comps.
- The 28.0% surge in eCommerce comps immediately stands out. It's worth pointing out that COST lapped a favorable -11.6% comp in the year-earlier period, which saw a steep drop in sales for big-ticket items, like appliances, consumer electronics, and jewelry. As a reminder, big-ticket categories account for about 50-60% of COST's total eCommerce sales. However, there's more to the story than just an easy yr/yr comparison.
- For example, during COST's Q2 earnings call, former CFO Richard Galanti, who stepped down from that role on March 15, noted that the company rolled out a new mobile application home page on Apple's (AAPL) iOS. One notable improvement is that the page loads in less than two seconds compared to eight seconds previously. COST also introduced Apple Pay to all online members on February 28.
- The initiatives were clearly a success as app downloads increased by 2.8 mln in Q2 for a total of 33.0 mln. Members aren't just simply checking out the new digital features, they're also making big-ticket item purchases again once on the website and app. Last quarter, appliance sales in particular were "very, very strong", according to Mr. Galanti.
- That momentum for big-ticket purchases seemed to continue into March, but there's yet another factor behind the robust eCommerce comps. Last October, COST began selling gold bars exclusively online and to say that demand has been healthy would be an understatement. In Q4, COST sold $100 mln worth of gold bars and it's believed that the company is now selling at least that much on a monthly basis. COST also introduced silver coins in March and sales of silver are also off to a hot start, according to Mr. Galanti.
The main takeaway is that COST capitalized on a combination of company-specific (new mobile app home page, Apple Pay rollout) and macro-related factors (rising fuel, gold, and silver prices) in March. From a bigger-picture perspective, COST continues to be a share gainer in the retail space and its strong March comps illustrated that once again.
CarMax's FebQ performance hurt by weak volumes despite falling average selling prices (KMX)
While disinflation is unfolding across several categories in the U.S., deflation has become more commonplace within the used car industry, and CarMax (KMX -13%) is no exception. The used vehicle dealer has faced declining average selling prices across its used and wholesale vehicles for four consecutive quarters following another yr/yr drop in Q4 (Feb). Unfortunately for KMX, the lower prices have not spurred a meaningful uptick in sales volumes, leading to the company's second straight revenue miss in Q4.
On top of the sales miss was KMX's first earnings shortfall since 3Q23 (Nov), hurt by sliding gross profits per retail and wholesale unit in the quarter. What makes KMX's earnings miss all the more deflating is that management has repeatedly emphasized margin preservation over market share capture. As such, shares of KMX are reversing the past two months of gains, flirting with mid-February lows.
- KMX's 1.7% revenue decline yr/yr in Q4 to $5.63 bln did mark an improvement over the 5.5% drop in Q3. However, analysts anticipated a return to positive growth in the quarter, likely supported by decent volumes. While KMX's used vehicle sales edged 1.3% higher to over 172K, the company's wholesale volumes moved 4% lower to 115K despite average selling prices falling by 2.3% and 3.2% across used and wholesale units, respectively.
- These minor dips in average selling prices are insufficient to overcome affordability issues among KMX's customers. An elevated cost of capital continues to act as an obstacle too tall for consumers to avoid. For example, KMX has been tightening its lending standards within its financing division, which management remarked has acted as a definite headwind.
- At the same time, the supply of new automobiles has improved considerably, giving customers broader options. AutoNation's (AN) total new vehicle inventory levels of 36 days in DecQ increased from 19 last year. AN anticipates new vehicle inventories will continue expanding in 2024. Coinciding with improving new auto supply has been lower net transaction prices accompanied by subsidized lending rates, making new autos more compelling.
- Making matters worse for KMX was its double-digit earnings miss, delivering EPS of just $0.32, a 27% contraction yr/yr, well below analysts' forecasts of positive growth. Lower per-unit margins were the culprit. Additionally, availability across the used auto market remains tight -- AN discussed this trend, noting that this will likely persist throughout 2024, making it harder for KMX to purchase used cars from customers and snag them at reasonable prices.
The immediate road ahead for KMX appears rocky, especially with interest rates not meaningfully budging from peak levels. KMX is confident that a longer timeframe will result in healthy performance, outlining its long-term goals, including selling over 2 mln combined units annually, achieving $33 bln in annual revs, and commanding over 5% nationwide market share in the 0-10 year-old used vehicle category. However, the current market volatility is already extending its selling goal while making the timeline for its market share target cloudy.
Bottom line, conditions could worsen before they improve for KMX, potentially keeping a cap on its share performance in the near term.
Constellation Brands' investors raise a glass to company's beer business, which shined again (STZ)
This past Sunday was National Beer Day and alcoholic beverage maker Constellation Brands (STZ) had good reason to celebrate as its beer brands continue to see strong demand and outperform the competition. The strength of STZ's beer business was on display this morning when the company delivered a solid beat-and-raise Q4 earnings report as its premium Mexican beer brands, including Modelo Especial and Pacifico, were standout performers yet again.
- Overall, net sales for the beer business grew by nearly 11% with depletions up by about 9%, representing an acceleration from last quarter's net sales growth of 4%. Modelo Especial, Pacifico, and Corona Extra, which achieved Q4 depletion growth of 14%, 22%, and 1%, respectively, have been on a role over the past few years, but that momentum has hit a higher gear due to Anheuser-Busch InBev's (BUD) troubles.
- In the wake of last year's marketing controversy for BUD, Modelo Especial climbed ahead of Bud Light as the top selling beer in the U.S. STZ noted in the earnings press release that its beer business remained the top dollar sales share gainer in the category and the high-end segment.
- The company doesn't expect much of a slowdown in FY25, either, forecasting net sales growth of 7-9% for the beer business. In addition to cost savings initiatives, lower marketing expense, and favorable pricing, which pushed beer operating margin higher by 30 bps in Q4, the consistently strong demand for STZ's beer brands enabled the company to provide a bullish overall outlook for FY25.
- Specifically, STZ guided for FY25 enterprise net sales growth of 6-7% and EPS of $13.50-$13.80, which exceeded expectations. The better-than-expected outlook comes even as STZ's wine and spirts business continues to struggle.
- Wine and spirits net sales declined by 6% in Q4 due to ongoing weak marketplace conditions, especially for STZ's largest premium brands. That's discouraging because the key facet behind STZ's turnaround strategy for wine and spirits rests on its premium brands. Over the past couple of years, the company has focused on divesting its lower-priced brands, such as E.J. Gallo Winery, while prioritizing higher end brands like The Prisoner Wind Company, Meiomi, and Casa Nobel Tequila.
- On the positive side, STZ is anticipating a stabilization for wine and spirits in FY25, guiding for a net sales decline of 0.5% to growth of 0.5%. Also, net sales in international markets are already rebounding, increasing by 14% as wholesale destocking has largely played out.
The main takeaway is that the story essentially remained the same in Q4 as STZ's beer business once again led the way, offsetting ongoing weakness on the wine and spirits side. STZ expects that momentum for beer to continue in FY25, but what's especially encouraging is that it also expects net sales to finally improve for wine and spirts.
Fastenal loses some speed following Q1 report; seeing poor underlying demand in key markets (FAST)
Fastenal (FAST -4%) is losing some speed today following its Q1 report following a slight miss on EPS. Revenue rose 1.9% yr/yr to $1.90 bln, which was in-line. Unfortunately, the company does not provide guidance. As one of the largest distributors of fasteners and related industrial and construction supplies (bolts, nuts, screws, rivets, etc.), Fastenal has high exposure to industrial / manufacturing.
- Fastenal experienced higher unit sales in Q1, primarily due to growth with larger customers and Onsite locations opened in the last two years. Incremental pricing actions over the past 12 months have been modest, resulting in mostly stable price levels through Q1.
- Q1 is a seasonally slow period to begin with, but severe weather in January and an earlier Easter impacted sales. However, FAST said the primary challenge remains poor underlying demand. Industrial production declined slightly in January and February but the components that most directly affect Fastenal such as machinery were much weaker than the overall index. Also, non-residential construction and reseller markets continued to contract, although at moderating rates.
- From a product standpoint, Fastenal has three categories: fasteners, safety supplies, and other product lines. FAST says it continued to experience a divergence in the performance of its fastener vs non-fastener product lines in Q1. The company notes that fasteners are more heavily oriented toward production of final goods than maintenance. That hurts fastener sales during periods of weaker industrial production. Also, pricing for fasteners has decelerated at a faster pace than non-fastener products.
- In terms of metrics, we play close attention to operating margin, which declined in Q1 to 20.6%, up from 21.2% a year ago. FAST explained that stronger growth from large customers, including Onsite customers, and non-fastener products, each of which tend to have lower gross margins, impacted overall margins. We also monitor signings at its Onsite locations, where FAST has a sales office on-premise of its larger customers. During Q1, FAST signed 102 new Onsite locations, up from 58 in Q4.
- While the overall economy has been strong, a key manufacturing/industrial economic metric has not performed well. Fastenal has been dealing with a sub-50 Manufacturing PMI for more than a year. Readings above 50 indicate an expansion in activity while readings below 50 indicate a contraction. The good news is that the ISM manufacturing PMI recently posted a reading of 50.3 in March, up from February's 47.8. March was the first time manufacturing activity had expanded since October 2022. We will get April's data on May 1.
Overall, investors are pretty disappointed in Fastenal's Q1 report due to the EPS miss and margin compression. As has been the case in recent quarters, Fastenal continues to be impacted by soft industrial production, particularly in Fastenal-related categories such as fabricated metal and machinery. We had hoped with that PMI metric ticking higher in March, we would get a more optimistic outlook.
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