| | | Market Snapshot
| Dow | 39134.76 | +299.90 | (0.77%) | | Nasdaq | 17721.59 | -140.64 | (-0.79%) | | SP 500 | 5473.17 | -13.86 | (-0.25%) | | 10-yr Note | -24/32 | 4.256 |
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| | NYSE | Adv 1314 | Dec 1438 | Vol 102 mln | | Nasdaq | Adv 1851 | Dec 2425 | Vol 6.3 bln |
Industry Watch
| Strong: Energy, Utilities, Consumer Discretionary, Communication Services |
| | Weak: Real Estate, Information Technology |
Moving the Market
-- NVIDIA (NVDA) turning lower after initial gains
-- Losses in some other mega caps supporting index performance
-- Expectation for some consolidation after record highs
-- Digesting today's economic releases
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Closing Summary
20-Jun-24 16:30 ET
Dow +299.90 at 39134.76, Nasdaq -140.64 at 17721.59, S&P -13.86 at 5473.17
[BRIEFING.COM] The stock market was trading up in the early going, benefitting from a solid gain in NVIDIA (NVDA 130.78, -4.80, -3.5%). Shares had been up as much as 3.8% earlier, propelling the S&P 500 past the 5,500 level for the first time. The Nasdaq Composite was up as much as 0.4%, but closed with a 0.8% decline.
The major indices hit session lows as NVDA shares turned negative for the day. Declines in some other heavily-weighted names also had an outsized impact on index performance. Apple (AAPL 209.68, -4.61, -2.2%), Broadcom (AVGO 1734.56, -67.96, -3.8%), and Microsoft (MSFT 445.70, -0.64, -0.1%) were standouts in that respect.
Many stocks participated in the pullback, though, due to normal consolidation efforts after a solid run this month. Decliners led advancers by an 11-to-10 margin at the NYSE and by a 4-to-3 margin at the Nasdaq.
Still, the Dow Jones Industrial Average settled 300 points higher despite the downside bias elsewhere. A nice gain in Salesforce (CRM 241.80, +9.99, +4.3%) contributed to the outperformance of the Dow.
Some of the S&P 500 sectors also closed higher. The energy sector led the pack, jumping 1.9% amid rising oil prices ($81.34/bbl, +0.63, +0.8%). The utilities (+0.9%) and financials (+0.9%) sectors were the next best performers.
The information technology sector was the worst performer, logging a 1.6% decline due to losses in its mega cap components.
Rising market rates acted as another limiting factor today. The 2-yr note yield settled three basis points higher at 4.73% and the 10-yr note yield climbed four basis points to 4.25%.
- Nasdaq Composite: +18.1% YTD
- S&P 500:+14.8% YTD
- S&P Midcap 400: +5.0% YTD
- Dow Jones Industrial Average: +3.8% YTD
- Russell 2000: -0.5% YTD
Reviewing today's economic data:
- Weekly initial jobless claims totaled 238,000 (Briefing.com consensus 237,000) following a revised count of 243,000 last week (from 242,000). Continuing claims came in at 1.828 million following last week's revised count of 1.813 million (from 1.820 million).
- The key takeaway from the report is that jobless claims have moved up a notch from lower levels to connote some softening in the labor market.
- Housing starts totaled 1.277 million in May (Briefing.com consensus 1.385 million) following a revised count of 1.352 million in April (from 1.360 million). Building permits totaled 1.386 million in May (Briefing.com consensus 1.455 million) following a count of 1.440 million in April.
- The key takeaway from the report is that it suggests the housing market will remain subject to inventory constraints that will create affordability pressures, barring a stronger pickup in listings of existing homes for sale that has been tough to come by with mortgage rates remaining high.
- The Philadelphia Fed Index dropped to 1.3 in June (Briefing.com consensus 6.5) from 4.5 in May.
- The key takeaway from the report is that the indexes for new orders, shipments, and employment all remained negative while the prices paid component increased from 18.7 to 22.5.
- The Q1 Current Account Balance widened to -$237.6 billion (Briefing.com consensus -$203.0 billion) from a downwardly revised $221.8 billion (from -$194.8 billion).
- The key takeaway from the report is that the widening in the deficit mostly reflected an expanded deficit on goods.
- The weekly EIA Crude Oil Inventories showed a draw of 2.55 million barrels versus last week's build of 3.73 million barrels
Looking ahead, Friday's economic calendar includes:
- 9:45 ET: Flash June S&P Global U.S. Manufacturing PMI (prior 51.3) and flash June S&P Global U.S. Services PMI (prior 54.8)
- 10:00 ET: May Existing Home Sales (Briefing.com consensus 4.10 mln; prior 4.14 mln) and May Leading Indicators (Briefing.com consensus -0.3%; prior -0.6%)
- 10:30 ET: Weekly natural gas inventories (prior +75 bcf)
Treasuries settle with losses
20-Jun-24 15:35 ET
Dow +309.56 at 39144.42, Nasdaq -125.83 at 17736.40, S&P -10.11 at 5476.92
[BRIEFING.COM] Things are little changed at the index level in recent trading.
The 2-yr note yield settled three basis points higher at 4.73% and the 10-yr note yield climbed four basis points to 4.25%.
Looking ahead, Friday's economic calendar includes:
- 9:45 ET: Flash June S&P Global U.S. Manufacturing PMI (prior 51.3) and flash June S&P Global U.S. Services PMI (prior 54.8)
- 10:00 ET: May Existing Home Sales (Briefing.com consensus 4.10 mln; prior 4.14 mln) and May Leading Indicators (Briefing.com consensus -0.3%; prior -0.6%)
- 10:30 ET: Weekly natural gas inventories (prior +75 bcf)
Market breadth skews negative, but equal-weighted S&P 500 shows slim gain
20-Jun-24 15:05 ET
Dow +327.56 at 39162.42, Nasdaq -174.05 at 17688.18, S&P -17.80 at 5469.23
[BRIEFING.COM] There hasn't been much up or down action at the index-level in recent trading. The Dow Jones Industrial Average maintains a nearly 400 point gain while the S&P 500 sports a 0.2% decline.
Notably, the equal-weighted S&P 500 shows a 0.2% gain, but market breadth is negative at both the NYSE and at the Nasdaq. Decliners lead advancers by an 11-to-10 margin at the NYSE and by a 4-o-3 margin at the Nasdaq.
Mega cap stocks have an outsized impact on index losses. The Vanguard Mega Cap Growth ETF (MGK) is down 0.8%.
Jabil slips on industry commentary, Gilead higher in S&P 500 after favorable HIV trial data
20-Jun-24 14:30 ET
Dow +366.39 at 39201.25, Nasdaq -110.65 at 17751.58, S&P -4.97 at 5482.06
[BRIEFING.COM] The S&P 500 (-0.09%) is in second place, hovering just off afternoon highs in recent trading.
Elsewhere, S&P 500 constituents Jabil (JBL 112.90, -13.33, -10.56%), Enphase Energy (ENPH 109.62, -9.39, -7.89%), and Chipotle Mexican Grill (CMG 3219.84, -207.77, -6.06%) dot the bottom of the average. JBL is lower despite upside results/guidance as cautious comments related to the automotive and healthcare industries are weighing on shares, while ENPH dips after peer SMA Solar Tech AG cut its earnings and sales guidance for FY24.
Meanwhile, Gilead Sciences (GILD 68.04, +4.89, +7.74%) is atop the standings, propped up by news that its Phase 3 PURPOSE 1 trial for twice-yearly injectable HIV-1 capsid inhibitor, lenacapavir, demonstrated 100% efficacy for HIV prevention in cisgender women.
Gold cozies up to two-week highs
20-Jun-24 14:00 ET
Dow +280.07 at 39114.93, Nasdaq -147.48 at 17714.75, S&P -14.71 at 5472.32
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.83%) remains the top lagging major average.
Gold futures settled $22.10 higher (+0.9%) to $2,369.00/oz, this following a batch of economic data this morning which served to propel the yellow metal to a near two-week high.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $105.63.
Commercial Metals' Q3 results lifted by improving or stable construction demand (CMC)
Commercial Metals (CMC +4%) constructs a solid Q3 (May) report supported by improving or stable demand across its global markets. While the steel rebar producer, a material used across the construction industry, merely delivered in-line EPS while squeaking out a top-line beat, a recent stock correction lowered the bar ahead of Q3 results. Shares gave up roughly 15% from mid-May highs as of Tuesday's close as worries grew over red flags from steel producers alongside a constantly high cost of capital.
Nevertheless, we remarked last week that as part of our Value Leaders stocks, CMC's sell-off presented a compelling buying opportunity, especially given the several tailwinds that management touched on last quarter, such as sustained demand across the North American construction landscape and expected stability across many of CMC's European markets.
- Even though it did not show up in top-line numbers in Q3, as EPS contracted by 50% yr/yr to $1.02 on an 11% drop in revs to $2.08 bln, these uplifting developments carried into Q3. Also, management reiterated that its margins and earnings are normalizing sustainably above pre-pandemic levels. The company cited two factors underpinning its view: industry consolidation and an improved trade environment (more skilled workforce).
- In CMC's North America Steel Group, net sales slid by 8% yr/yr but improved by 12% sequentially to $1.67 bln, supported by healthy underlying market fundamentals and shipment levels of finished steel products. CMC also remarked that it enjoyed stability in its downstream backlog volumes. In its Europe Steel Group, CMC neared breakeven regarding its adjusted EBITDA margins, delivering a 250 bp improvement sequentially to (2)%.
- The road ahead continues to contain fewer potholes, especially in North America, where CMC commented that construction activity remains sound. The company is heading into the seasonally strong spring and summer months, which should continue to provide a favorable backdrop for stable to modestly improving steel product margins. Management added that it continues to see a solid pipeline of upcoming construction projects, aided by the Infrastructure Investment and Jobs Act.
- In Europe, which comprises only around 10% of annual sales, the economic picture has not changed much compared to last quarter, which marked a meaningful improvement from late FY23 (Aug) and early FY24. Consumption of long steel products is stable, albeit well below historic levels. Management is upbeat about the longer-term dynamics, citing a current supply/demand balance, providing a foundation for greater stability in steel pricing and margins.
CMC's Q3 report underscored a resilient construction market across North America and, to a lesser extent, Europe. By operating primarily within the infrastructure construction industry, CMC is well-positioned to extract significant benefits from city and state budgets that are flush with resources due to the Infrastructure Investment and Jobs Act. CMC cites several promising developments across Texas and Oregon, leading to a long-lasting tailwind in highway and street construction. As such, we continue to like CMC at current levels.
Honeywell aims to capitalize on strong defense market with acquisition of CAES Systems Holding (HON)
The aviation and defense end markets have been a source of strength for Honeywell (HON), which manufactures engines, power systems, navigation hardware, and a vast array of components for military equipment in its Aerospace Technologies segment. With this morning's $1.9 bln acquisition of CAES Systems Holdings from private equity firm Advent International, HON is looking to capitalize even further on the strong demand trends within the defense sector.
- The addition of CAES will bolster HON's defense and space product portfolio, particularly in end-to-end radio frequency signal management, radar, and sensing technologies. These components will not only open up new revenue generation opportunities, but they'll also enable HON to upgrade and improve current programs, such as its F-35 fighter jet and Advanced Medium Range Air-to-Air (AMRAAM) missile systems.
- Therefore, acquiring CAES provides HON's Aerospace Technologies segment with another growth catalyst. In Q1, organic sales growth increased by 18% in that segment, with the defense and space markets growing by 16%.
- Supply chain improvements allowed HON to more fully capitalize on the robust demand trends, which are expected to remain strong due to the conflicts in Ukraine and the Middle East.
- However, given HON's sheer size, this acquisition likely won't move the needle much, at least in the near term. For some perspective, HON is expected to generate nearly $39 bln in revenue in FY24. Also, while the press release was short on details regarding CAES' financials, HON did disclose that the buyout price represents approximately 14x estimated 2024 EBITDA on tax adjusted basis.
- This indicates that CAES is expected to achieve EBITDA of about $135 mln in FY24, which is a relative drop in the bucket for HON.
- Still, HON expects the acquisition to be accretive in the first full year of ownership. The fact that this is an all-cash deal certainly helps in that regard.
Overall, while not necessarily a game-changer, this looks like a solid acquisition from both a strategic and financial standpoint. HON bolsters an already strong defense business, diversifies its revenue streams, and does so at a reasonable price that doesn't require issuing new debt or equity.
Darden Restaurants tasting pretty good to investors on Q4 results and dividend hike (DRI)
Darden Restaurants (DRI +2%) is heading modestly higher today after wrapping up FY24 on positive note. This operator of several restaurant chains (Olive Garden, LongHorn Steakhouse, Ruth's Chris) reported decent upside for both EPS and revenue with its Q4 (May) report this morning. The company also increased its dividend by 6.9% to $1.40 per share.
- Our initial thought is that it was good to see DRI get back to reporting EPS upside following a rare miss in Q3 (Feb). The stock had been pulling back since the Q3 miss in March and we think investors were nervous heading into this report. And in Q3, it was not just the EPS miss but some cautionary comments on the Q3 call. As such, while the Q4 upside was fairly modest, we think this report calmed some nerves that DRI might report back-to-back misses.
- Turning to same-restaurant sales, a key metric, DRI reported flat consolidated comps. This was comprised of Olive Garden at -1.5%, Longhorn Steakhouse at +4.0%, Fine Dining at -2.6% and Other at -1.1%. That was a bit better than DRI's Q3 comps of -1.0% (OG -1.8%; LH +2.3%; Fine Dining -2.3%). DRI notes that while its overall comps were flat, that still outpaced the industry by 80 basis points and same-restaurant guest counts exceeded the industry by 130 bps. DRI feels this was impressive when you consider the increased levels of discounting and promotional activity by some competitors within casual dining.
- DRI guides only for full year comps, so it was important that we got our first look at FY25 comp guidance: +1-2%. That is roughly similar to FY24's comp of +1.6% (OG +1.6%, LH +4.7%, FD -2.4%). DRI started to see a little bit more weakness in the back half of FY24, which impacted FY25 guidance. However, DRI expects traffic tends to gradually improve throughout the year. It did note that Thanksgiving shifts from Q2 into Q3. So its Q2 comp might look better while Q3 will be the opposite.
- DRI says consumers are generally concerned about inflation, and they are becoming more concerned about the job market. As such, DRI is seeing some behavior shifts that it had already started to see. In Q4, transactions from lower income consumers were lower than last year and that was even more pronounced with consumers below $50,000. These impacts were even greater in its Fine Dining brands.
Overall, this was a good quarter for Darden. We think the bar was pretty low with some negativity priced in, as evidenced by the pullback in the stock since the Q3 report. We think investors were happy to see DRI get back to reporting EPS upside. Also, comps got back to flat after a rare negative comp in Q3. We also think investors are ok with Darden's +1-2% comp guidance for FY25. We were a bit fearful we could see negative comp guidance. And finally, we view the pretty hefty dividend hike as a sign of confidence from management. When you combine the impact from the share price pullback with the dividend raise, that computes as a nice yield of 3.6%.
Winnebago packs up, heads to 52-week lows following disappointing MayQ results (WGO)
Reflecting continued headwinds within the RV industry, Winnebago (WGO -3%) missed top and bottom-line estimates in Q3 (May), registering another quarter of double-digit yr/yr declines across both metrics. Investors were partly braced for a weak quarter following rival Thor Industries' (THO) underwhelming AprQ numbers last week. Additionally, elevated interest rates and cost of ownership led to dismal quarterly projections from analysts.
However, even against a lowered bar, WGO still fell short, underscoring just how challenging market conditions remain. As shares pack up and head for 52-week lows today, it is clear that investor optimism surrounding a swift uptick in demand within the RV industry has languished.
- As has been the case for multiple quarters, the unfavorable demand backdrop was illuminated by WGO's 47% plunge in adjusted EPS yr/yr to $1.13 and 12.7% drop in revs to $786 mln in Q3. Towable RVs did enjoy a 0.6% bump in revs yr/yr. However, this was dwarfed by a 20.1% decrease in Motorhome RV sales and a 31.8% decline in Marine sales. Furthermore, WGO recorded another yr/yr decline in backlog across each segment, as dealers remain highly wary of picking up too much inventory.
- On the bright side, profitability enjoyed a sequential lift, with adjusted EBITDA margins ticking 30 bps higher to 7.4%. Meanwhile, gross margins remained stable qtr/qtr at 15.0%. Helping the cause were sequential bumps in Towable RV and Marine adjusted EBITDA margins.
- WGO does not provide formal guidance, but it did leave its previous mid-cycle organic growth targets unchanged, including revs of $4.5-5.0 bln, a solid jump from the $3.5 bln delivered in FY23 (Aug), gross margins of 18.0-18.5%, North American RV market share of over 13%, and U.S. aluminum pontoon market share of 13%.
Despite shares of WGO jumping last quarter on a moderate earnings beat and in-line revenue growth, we were cautious, as overall results still pointed to unwavering issues across the RV landscape. Even if interest rates decline meaningfully, it is unclear if this will be enough to generate a rapid reacceleration of demand. While RVs are often financed, maintenance, storage, and fuel costs are still involved. Although inflation has cooled, its cumulative effects could produce hesitation among potential RV buyers and upgraders for longer than WGO and its peers expect.
That said, given how far the stock has fallen since reaching one-year highs in December, which followed an impressive rally on hopes of several interest rate cuts this year, WGO is beginning to look attractive. Near-term challenges could keep shares from mounting a rapid turnaround. However, the increased interest in the RV lifestyle sparked by the pandemic should not be so quickly discounted. WGO is engaged in the premiumization of its product suite, helping bolster its margins over a longer timeframe and better cushioning it against economic downturns as higher-income consumers are not as often deterred by a rising cost of ownership compared to a lower-income demographic. Its rival THO, whose shares have held up relatively better, is also beginning to possibly carve out a bottom as it continues to endure post-AprQ selling pressure.
Patterson Companies gives investors something to smile about after stock got drilled (PDCO)
Shareholders of Patterson Companies (PDCO) haven't had much to smile about this year with the stock down by about 20% on a year-to-date basis entering today's session, but a better-than-feared Q4 earnings report is giving investors something positive to chew on. The dental and animal health product maker and distributor met EPS and revenue expectations, while also issuing in-line FY25 EPS guidance, providing some relief that PDCO expects business to remain stable, despite the persistently high interest rates and macroeconomic uncertainties.
- Those macro-related headwinds did have an impact in Q4, however. In particular, PDCO's dental equipment business had a tough quarter with internal sales declining by 12% due to soft demand in the CAD/CAM categories. A moderation in equipment spending, combined with unfavorable yr/yr comparisons, weighed on growth.
- Making matters worse, a major cybersecurity attack at Change Healthcare -- PDCO's claims processing vendor -- resulted in many of the company's dental practices being unable to use Change Healthcare's services. In turn, this created a setback for PDCO's value-added services business, which generates claims management fees through its software integration with Change Healthcare.
- PDCO noted that the cybersecurity attack caused a $0.04 negative impact to adjusted EPS.
- Overall, though, revenue for PDCO's Dental segment decreased by just 3.8% as strength in the consumables business helped to offset these issues. On a yr/yr basis, the consumables portfolio delivered growth of nearly 4%, and if the deflationary effect on certain infection control products is excluded, the growth was even stronger at nearly 6%.
- Turning to Animal Health, internal sales grew by approximately 3%, driven by strength in the production animal business. This segment also achieved operating margin expansion as a result of positive sales mix and disciplined cost management. On a company-wide basis, though, gross margin contracted by 90 bps yr/yr to 21.8%, mainly due to the revenue shortfall in Dental that's related to the cybersecurity incident.
- Looking beyond the Q4 results, PDCO's long-term strategy remains in place and that plan includes driving above-market revenue growth by expanding its investments in software and value-added services. During the earnings call, the company commented that its investments in FY24 are yielding meaningful progress on the software side.
- A couple notable examples include the recently introduced Patterson CarePay+, a one-stop-shop for patient financing, dental insurance, and payment solutions, and a recent agreement with Pearl to integrate a pathology detection feature set called Second Opinion into PDCO's practice management software.
The main takeaway is that while PDCO's results weren't necessarily sparkling, they were good enough to provide a strong dose of Novocain with the stock trading near multi-year lows heading into the print.
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