| | | Market Snapshot
| Dow | 38496.59 | -189.73 | (-0.49%) | | Nasdaq | 16777.98 | +42.95 | (0.26%) | | SP 500 | 5271.91 | -5.60 | (-0.11%) | | 10-yr Note | +30/32 | 4.40 |
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| | NYSE | Adv 1286 | Dec 1460 | Vol 934 mln | | Nasdaq | Adv 2181 | Dec 2140 | Vol 5.4 bln |
Industry Watch
| Strong: Information Technology, Health Care |
| | Weak: Energy, Industrials, Financials, Utilities, Materials, Consumer Staples |
Moving the Market
-- Solid gain in NVIDIA (NVDA) after introducing new products limiting downside moves in major indices
-- Meme stocks surge after "Roaring Kitty" posted a screenshot showing a big position in GME
-- Mixed action under index surface
-- Growth concerns stirred by the ISM Manufacturing Index for May, which showed a faster pace of contraction than expected
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Closing Summary
03-Jun-24 16:25 ET
Dow -189.73 at 38496.59, Nasdaq +42.95 at 16777.98, S&P -5.60 at 5271.91
[BRIEFING.COM] Stocks experienced mixed action on the first session of the new month. The S&P 500 (-0.1%) and Dow Jones Industrial Average (-0.5%) settled lower while the Nasdaq Composite logged a 0.3% gain.
A solid gain in NVIDIA (NVDA 1150.00, +53.67, +4.9%), which introduced new products, limited downside moves in the major indices, but concerns about economic growth kept the broader market in check.
The aforementioned concerns were stirred by this morning's release of the ISM Manufacturing Index for May, which reflected a faster pace of contraction than the market expected (actual 48.7%; expected 49.6%). A reading below 50% indicates a contraction in activity.
Yields moved lower in response. The 10-yr note yield fell 11 basis points to 4.40% and the 2-yr note yield fell seven basis points to 4.82%. Dropping market rates had been a source of support for equities recently, but worries about an economic slowdown that could affect earnings prospects drove stock market action today.
On a related note, the Atlanta Fed GDPNow model estimate for Q2 real GDP growth is now 1.8%, down from 2.7% on May 31, in response to the soft data.
WTI crude oil futures ($74.29/bbl, -2.79, -3.6%) settled sharply lower in another manifestation of slowdown concerns, which could translate to weaker demand for oil.
This price action contributed to the selling in the S&P 500 energy sector. It was the worst performing sector by a decent margin, dropping 2.6%. The utilities (-1.2%) and industrial (-1.3%) sectors were the next worst performers.
Meanwhile, the information technology sector (+1.0%) led the pack by a decent margin, followed by the health care sector (+0.7%).
Separately, there was some speculative buying activity in the meme stock space after "Roaring Kitty" posted a screenshot showing a big position in GameStop (GME 28.00, +4.86, +21.0%).
- Nasdaq Composite: +11.8% YTD
- S&P 500:+10.5% YTD
- S&P Midcap 400: +6.4% YTD
- Dow Jones Industrial Average: +2.1% YTD
- Russell 2000: +1.6% YTD
Reviewing today's economic data:
- May S&P Global US Manufacturing PMI - Final 51.3; Prior 50.0
- May ISM Manufacturing Index 48.7% (Briefing.com consensus 49.6%); Prior 49.2%
- The key takeaway from the report is that it showed a faster pace of contraction in manufacturing activity that will stir worries about the economy missing its mark with a soft landing.
- April Construction Spending -0.1% (Briefing.com consensus 0.2%); Prior -0.2%
- The key takeaway from the report is that nonresidential spending was down in both private and public construction markets, which will be a drag on Q2 GDP growth.
Tuesday's economic calendar features:
- 10:00 ET: April Factory Orders (Briefing.com consensus 0.6%; prior 1.6%) and April job openings (prior 8.488 mln)
WTI crude oil futures, Treasury yields settle lower
03-Jun-24 15:30 ET
Dow -193.51 at 38492.81, Nasdaq +44.11 at 16779.14, S&P -5.33 at 5272.18
[BRIEFING.COM] The major indices improved slightly in recent trading.
WTI crude oil futures settled sharply lower after the ISM Manufacturing Index for May stirred concerns about economic growth, which could lower demand. WTI crude oil futures declined 3.6% to $74.29/barrel.
This price action contributed to the underperformance of the S&P 500 energy sector, which is the weakest performer, down 2.6%.
Growth concerns also sent Treasury yields sharply lower. The 10-yr note yield fell 11 basis points to 4.40% and the 2-yr note yield fell seven basis points to 4.82%.
S&P 500 in second place once again, Paramount higher on latest of Skydance offer reports
03-Jun-24 14:30 ET
Dow -242.08 at 38444.24, Nasdaq +22.39 at 16757.42, S&P -12.54 at 5264.97
[BRIEFING.COM] The S&P 500 (-0.24%) is middle of the pack among the major averages on Monday afternoon, down a bit shy of 13 points.
Elsewhere, S&P 500 constituents Paramount Global (PARA 12.94, +1.03, +8.65%), Autodesk (ADSK 213.23, +11.63, +5.77%), and Carnival (CCL 15.66, +0.58, +3.85%) are some of today's top gain getters. PARA rises after reports of a $23/share Skydance proposal, ADSK is strong after its Audit Committee completed its investigation and the company gave preliminary Q1 results and business outlook, while CCL was the subject of favorable analyst comments.
Meanwhile, Tractor Supply (TSCO 263.75, -21.54, -7.55%) is at the bottom of the S&P, pressured by vague comments from analysts about softer April/May demand.
Gold rises following weak ISM Manufacturing PMI
03-Jun-24 14:00 ET
Dow -322.30 at 38364.02, Nasdaq +3.61 at 16738.64, S&P -20.94 at 5256.57
[BRIEFING.COM] The tech-heavy Nasdaq Composite (+0.02%) is clinging to narrow gains as the markets host a split card on Monday afternoon.
Gold futures settled $23.50 higher (+1.0%) to $2,369.30/oz, aided by this morning's weaker-than-expected ISM Manufacturing PMI for May which has served to reinvigorate rate cuts bets.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $104.20.
DJIA rising a bit off lows; Chevron, Dow among top laggards
03-Jun-24 13:30 ET
Dow -319.90 at 38366.42, Nasdaq +6.53 at 16741.56, S&P -21.35 at 5256.16
[BRIEFING.COM] The Dow Jones Industrial Average (-0.83%) is rising a bit off lows, still down about 320 points.
A look inside the DJIA shows that Chevron (CVX 157.05, -5.25, -3.23%), Dow (DOW 55.83, -1.80, -3.12%), and Caterpillar (CAT 328.49, -10.03, -2.96%) are among today's top laggards.
Meanwhile, Boeing (BA 181.96, +4.35, +2.45%) is atop the average.
The DJIA is now about +1.80% higher year-to-date.
Science Applications takes out 2024 lows as organic growth becomes more 2H25-weighted (SAIC)
Investors apply significant selling pressure to Science Applications (SAIC -10%) today despite the U.S. government IT services provider delivering Q1 (Apr) results consistent with analyst forecasts while reiterating its FY25 (Jan) guidance. SAIC was steadily recovering from a dismal Q4 (Jan), moving over 17% higher from lows on March 18. However, in-line Q1 results were not what the market was looking for, especially given the encouraging trends that unfolded last quarter.
- SAIC posted Q1 adjusted EPS of $1.92 on a top-line contraction of 8.8% yr/yr to $1.85 bln. Organic growth inched just 0.4% higher yr/yr, a sharp slowdown from the +7.4% jump last quarter and below SAIC's FY25 forecast of +2-4%. The meaningful pullback in organic growth in Q1 explains much of today's adverse reaction, as it places significant weight on the back half of the year. Management remarked that organic growth will remain flattish around the front half of FY25, ramping up to mid-single-digit growth toward 2H25.
- SAIC's organic growth cadence for the year shifted toward being more back-half-weighted as the material sales SAIC anticipated would manifest in Q2 move into Q3. Still, headwinds from recompete losses and benefits from contract growth give SAIC confidence it can achieve an organic growth rate similar to what it outlined last quarter, albeit more back-end loaded than it initially expected.
- While not showing up in today's price action, SAIC delivered notable quarter highlights. The company submitted proposals with a total contract value (TCV) of over $8.0 bln, which, combined with its in-line performance in Q1, keeps it on track to its targeted value of $22.0 bln worth of submission in FY25, a solid uptick from the $17 bln in FY24. At the same time, two-thirds of what SAIC expects to submit this year is new business.
- SAIC is also confident that its growth strategy outlined in April will produce meaningful shareholder returns in FY26 and FY27, including revenue of $7.95-8.10 bln by FY27, an 8% improvement from its prediction for FY25. SAIC is focused on five specific government imperatives: domain warfighting, the space citizen experience, the border, and underwater dominance. The company is shifting its portfolio to ensure it is the perfect fit to capture the opportunities presented by these longer-term government initiatives.
After bucking the broader market sell-off in 2022, gaining over +30%, only to sustain that momentum throughout 2023 and the first couple months of 2024, SAIC has been running into some turbulence lately. The company has historically toppled earnings expectations consistently each quarter, making last quarter's miss shocking. However, by steadily recovering since, investors expressed optimism that perhaps it was just a one-off miss, especially given the accelerating growth SAIC enjoyed in Q4. Therefore, by delivering Q1 numbers merely in line with analyst estimates while relying more heavily on a robust second half of the year regarding organic growth, investors are worried that the trends seen in Q4 may be a more troubling sign of structural weakness rather than a minor hiccup.
Autodesk jumps after completing its audit investigation and issuing upbeat guidance (ADSK)
Autodesk (ADSK +6%) completes its ongoing audit investigation, resulting in no restatement or adjustment of any of its previous financial statements, providing quite a bit of relief among investors today. The architecture and construction software developer announced in early April that it would perform an internal investigation surrounding its free cash flow and non-GAAP operating margin procedures, prompting a sharp sell-off that culminated in a more than 30% correction from multi-year highs reached on March 1 following upbeat Q4 (Jan) results. Coinciding with the completion of ADSK's audit was uplifting near-term guidance, projecting Q1 (Apr) and Q2 (Jul) numbers ahead of consensus. Meanwhile, the company also bumped up its FY25 adjusted EPS forecast and reiterated its FY25 revenue and billings targets. ADSK also announced a new CFO, replacing former CFO Deborah Clifford, who transitioned to Chief Strategy Officer.
With the internal audit behind it, ADSK is working to formally issue its Q1 results and hold a conference call, which could alleviate further investor angst. However, given the magnitude of ADSK's sell-off over the past two months, the company has significant ground to make up, which could be tricky given it remains in a shift to billing multi-year customers on an annual contract basis instead of an upfront basis. At the same time, macroeconomic trends remain uncertain.
Nevertheless, several positive indicators could sustain today's buoyant momentum.
- Most of ADSK's revenue stems from architectural, engineering, and construction (AEC) end markets. Therefore, healthy demand across the AEC industry is crucial for ADSK to sustain today's momentum. On that note, companies exposed to the construction industry have had positive remarks, including Steel Dynamics (STLD), which is optimistic about additional construction spending this year and throughout 2025 due to the Inflation Reduction Act programs. Similarly, Fluor's (FLR) pipeline through the end of 2025 represents a total installed cost of 14 times the size of its current backlog of $32.7 bln.
- However, favorable construction demand is only half the battle for ADSK as it still needs to sell its software to an industry that can be hesitant to transition from legacy software. While businesses are steadily moving toward the cloud, there are sections of the global economy where ADSK remains underpenetrated, such as the U.S. public sector. ADSK commented in March that it is working to capitalize on the federal government's incentives for the Federal and State Departments of Transportation to become more digital and shift their work to the cloud.
- Penetrating new markets and expanding within existing ones still depends on customers becoming familiar with ADSK's software. ADSK's training camps can assist in attracting more businesses toward its offerings. The compelling factor of ADSK's software is that it is costly to switch off, as it would involve learning a competitor's software as well as shifting existing workflows to their system.
Bottom line, ADSK cleared many of the clouds hanging over its stock following the completion of its audit investigation. There are still uncertainties on the horizon, especially given the high interest rate environment. However, as companies continue moving toward a more digital ecosystem, ADSK stands to benefit, keeping FY25 as a possible turning point for the company following several quarters of stagnant growth.
JetBlue Airways flying higher after issuing brighter Q2 outlook as demand remains healthy (JBLU)
JetBlue Airways (JBLU) became the latest airline to issue updated Q2 guidance and the New York City based carrier had positive news to share. Fueled by healthy overall demand trends and solid cost execution, JBLU bumped its revenue guidance higher to a yr/yr decline of 6.5% to 9.5% from its prior outlook of down 6.5% to 10.5%, while also lowering its CASM-ex forecast to an increase of 5.0% to 7.0%. Previously, the company was anticipating an increase of 5.5% to 7.5%.
- Recall that last Tuesday, American Airlines (AAL) cut its Q2 EPS, adjusted operating margin, and TRASM guidance due to softening bookings and a weaker domestic pricing environment caused by a supply and demand imbalance in the domestic business. However, AAL's disappointing outlook is also a function of company-specific issues, including its strategy to trim is workforce on the corporate sales side, and its greater focus on expanding its domestic network rather than its international business.
- JBLU's improved guidance provides further evidence that demand trends are still favorable in the airline industry and that AAL's slowdown is more the exception than the norm. On that note, United Airlines (UAL) quickly reaffirmed its Q2 EPS guidance following AAL's discouraging update.
- For JBLU, its modestly improved outlook helps lessen concerns that rising capacity across the industry will cut into its bookings, pricing power, and profits to the point that its business is in serious jeopardy. Those concerns were in the spotlight last quarter when JBLU issued weak Q2 and FY24 revenue guidance, mainly as a result of elevated capacity in its Latin market. Ultra low-cost carrier Spirit Airlines (SAVE), for instance, is one carrier that's facing an uncertain future as industry overcapacity squeezes its margins, while significant debt obligations also loom on the horizon.
- JBLU isn't out of the woods just yet -- analysts are forecasting net losses in each remaining quarter for FY24 -- but its route realignment efforts in which it removed unprofitable routes in order to focus on more profitable ones is paying dividends.
- The company's operational performance is also strong with a completion factor of 99% in Q2. This combination of solid cost execution, strong operating performance, and healthy demand should translate into a better-than-feared performance on the bottom line for Q2. It also doesn't hurt that fuel prices have eased in Q2, as reflected in JBLU's updated fuel price per gallon forecast of $2.85-$2.95 from $2.98-$3.13.
Overall, JBLU is still contending with significant challenges, most notably those arising from overcapacity, but in terms of factors that it can control, the company is executing well, and it ultimately could become a beneficiary if troubled airlines don't survive.
Waste Mgmt expands reach into attractive medical waste industry with deal to acquire Stericycle (WM)
There was some M&A news in the waste industry this morning. Waste Management (WM -2%) announced a definitive agreement to acquire Stericycle (SRCL +15%) for $62 per share in cash, representing a total EV of $7.2 bln when including $1.4 bln of Stericycle's net debt. The deal price represents a 20% premium to SRCL's closing price on Friday. The transaction was unanimously approved by both boards of directors and is expected to close as early as Q4.
- Waste Management provides collection, recycling and disposal services to millions of residential, commercial, industrial and municipal customers. It has the largest disposal network and collection fleet in North America. Stericycle is a bit different because it focuses on medical waste and compliance services. This deal will expand WM's environmental service offerings and increases its presence in the attractive medical waste industry.
- In terms of the rationale, WM noted that the deal provides a complementary business platform in the healthcare market, a sector with attractive growth dynamics. It also allows WM to offer customers the opportunity to partner with a single service provider with a comprehensive suite of environmental waste services. Given the growth outlook for healthcare services in North America, WM expects Stericycle to deliver revenue growth that surpasses its core solid waste business.
- On the cost side, WM expects the transaction to generate more than $125 mln in annual run-rate synergies. For example, Stericycle should benefit from WM's logistics expertise and its track record of using technology to optimize operating and SG&A costs. The acquisition is expected to be accretive to WM's earnings and cash flows within one year of close.
- WM said it intends to finance the transaction using a combination of bank debt and senior notes. In the near term, WM expects its net debt-to-EBITDA ratio to increase to 3.4x. However, WM says it remains committed to a strong balance sheet and solid investment grade credit profile. As such, it plans a temporary suspension of share repurchases to get its leverage ratio back into its targeted range of 2.75x to 3.0x approximately 18 months after closing.
Overall, we think the deal makes sense for both companies. For WM, it greatly expands its exposure to medical waste, which has higher growth prospects than its core business. Plus we see the value in being a one-stop shop for its customers' waste needs. Medical waste is a highly regulated area, but that also limits competition and allows for premium services. Perhaps the high price and its using debt to finance the deal may be weighing on WM today.
The deal also makes sense for Stericycle. The stock has been stuck trading sideways for much of the past year. It has posted yr/yr revenue declines in each of the past four quarters and has been hit-or-miss on earnings in recent quarters. The company has also been going through some layoffs. There was a Bloomberg report on May 23 that the company was considering a sale, so this deal was not a total surprise. However, even after that report the stock was trading in the high $40s to low $50s. We think investors were surprised to see Stericycle be able to snag a $62 per share all-cash deal price. So the deal looks good for both sides.
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