| | | Market Snapshot
| Dow | 39118.86 | -45.20 | (-0.12%) | | Nasdaq | 17732.60 | -126.08 | (-0.71%) | | SP 500 | 5460.48 | -22.39 | (-0.41%) | | 10-yr Note | -3/32 | 4.34 |
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| | NYSE | Adv 1651 | Dec 1179 | Vol 3.37 bln | | Nasdaq | Adv 2262 | Dec 1970 | Vol 9.06 bln |
Industry Watch
| Strong: Financials, Real Estate, Energy, industrials |
| | Weak: Utilities, Consumer Discretionary, Communication Services, |
Moving the Market
--Personal income and spending report for May is market friendly
--Consumer sentiment for June ticks up from preliminary reading, but inflation expectations stuck at 3.0%
--Treasury yields reverse from lower levels
--Nike (NKE) issues disappointing FY25 sales outlook
--Quarter-end activity
| Closing Stock Market Summary
28-Jun-24 16:20 ET
Dow -45.20 at 39118.86, Nasdaq -126.08 at 17732.60, S&P -22.39 at 5460.48
[BRIEFING.COM] The last day of the second quarter started with a bit of a bang but ultimately ended with a whimper. The major indices, up between 0.7% and 1.0% at their highs off the morning that had the S&P 500 and Nasdaq Composite in record territory, retreated from those levels in an orderly fashion and closed the session in red figures with the exception of the Russell 2000 (+0.5%). The latter had a late surge associated with the reconstitution of the Russell indices that was responsible for today's much heavier than average trading volume.
A pleasing Personal Income and Spending Report for May, which featured increases in real disposable personal income and real personal spending to go along with a moderation in inflation pressures, provided a headline bang that sent Treasury yields lower and equity futures higher.
It was a welcome offset to the dismal showing from Dow component Nike (NKE 75.36, -18.83, -20.0%), which greatly disappointed investors with its FY25 sales outlook, and the cloud of uncertainty hanging over the presidential election with Politico suggesting Democrats are actively considering replacing President Biden on the Democratic ticket after his debate performance.
Mega-cap stocks and semiconductor issues took charge at the open, but there was broad-based participation in the early move. None of that lasted without challenge, however, as a stark reversal in Treasury yields and quarter-end activity took the steam out of the stock market.
The 2-yr note yield, which went from 4.72% just before the Personal Income and Spending Report to 4.66% after its release, settled the session unchanged at 4.72%. Similarly, the 10-yr note yield went from 4.30% to 4.26%, but settled the session up six basis points to 4.34%.
There were only four S&P 500 sectors that finished higher. The biggest gainer was the real estate sector (+0.6%) followed by the financial (+0.4%) and energy (+0.4%) sectors. Standouts on the losing side included the communication services (-1.6%), consumer discretionary (-1.4%), and utilities (-1.1%) sectors. The information technology sector, up 1.6% at one point, finished the day down 0.4%. Still, for the quarter it was the best-performing sector with a 13.6% gain.
The Vanguard Mega-Cap Growth ETF (MGK) lost 0.9% today, but still ended the quarter up 9.6%. The mega-cap leadership was instrumental in the 3.9% quarterly gain for the market-cap weighted S&P 500. The equal-weighted S&P 500, on the other hand, declined 3.0% in the second quarter.
- Nasdaq Composite: +18.1% YTD
- S&P 500: +14.5% YTD
- S&P Midcap 400: +5.3% YTD
- Dow Jones Industrial Average: +3.8% YTD
- Russell 2000: +1.0% YTD
Reviewing today's economic data:
- Personal income increased 0.5% month-over-month in May (Briefing.com consensus 0.4%) following a 0.3% increase in April and personal spending increased 0.2% month-over-month (Briefing.com consensus 0.3%) following a downwardly revised 0.1% increase (from 0.2%) in April. The PCE Price Index was unchanged on the heels of a 0.3% increase in April, leaving it up 2.6% year-over-year versus 2.7% in April. The core-PCE Price Index, which excludes food and energy, was up 0.1% month-over-month after a 0.3% increase in April, leaving it up 2.6% year-over-year versus 2.8% in April.
- The key takeaway from the report is that it was right on the mark with numbers supporting a soft landing and moderating inflation, which will keep alive the market's hope for a Fed rate cut before the November election.
- The final Index of Consumer Sentiment for June checked in at 68.2 (Briefing.com consensus 65.6) versus the preliminary reading of 65.6. The final reading for May was 69.1. In the same period a year ago, the index stood at 64.2. Year-ahead inflation expectations fell to 3.0% from the preliminary reading of 3.3%, versus the 2.3-3.0% range seen in the two years before the pandemic. Long-run inflation expectations came in at 3.0% versus the preliminary reading of 3.1%. They have held between 2.9% and 3.1% in 31 of the last 35 months. In the two years pre-pandemic, long-run inflation expectations were in the 2.2-2.6% range.
- The key takeaway from the report is that consumers were generally feeling better about short- and long-run business conditions due to expectations of softening interest rates.
- The June Chicago PMI improved to 47.4 from 35.4. A number below 50.0 denotes contraction, so the June reading implies a continuing contraction for manufacturing activity in the Chicago Fed region but at a slower pace than the prior month.
Sitting at the lows
28-Jun-24 15:35 ET
Dow -157.04 at 39007.02, Nasdaq -49.36 at 17809.32, S&P -14.48 at 5468.39
[BRIEFING.COM] The indices are pinned near their lows for the day heading into the closing stretch of trading (last 30 minutes) as the mega-cap stocks and information technology sector (-0.2%) have lost their leadership positions. It has been a steady and orderly decline since session peaks were reached around 10:15 a.m. ET. Treasury yields reversed a winning course and started heading higher just before that.
The 10-yr note yield swung from 4.26% to 4.34%. The latter is up six basis points from yesterday's settlement, leaving it up eight basis points for the week. The 10-yr note yield dropped 17 basis points in June but rose 14 basis points for the quarter.
With the pullback in the indices, market breadth has come in noticeably from better levels earlier that favored advancers by a fairly large margin. Currently, advancers and decliners are about even at the NYSE while decliners lead advancers by a slim 11-to-10 margin at the Nasdaq.
Fading away at quarter end
28-Jun-24 15:00 ET
Dow -137.00 at 39027.06, Nasdaq -34.45 at 17824.23, S&P -10.80 at 5472.07
[BRIEFING.COM] Today marks the last trading day of the second quarter and there is no denying that it has been a good period for the S&P 500 (+4.2%) and Nasdaq Composite (+8.8%). The returns for the Dow Jones Industrial Average (-1.9%) and Russell 2000 (-3.8%), on the other hand, don't look so swell.
The stark contrast in the performance of the mega-cap stocks during the quarter and the "rest of the market" can be seen in the S&P 500 indices. The market-cap weighted S&P 500 is up 4.1% for the quarter, whereas the equal-weighted S&P 500 is down 3.2%.
In terms of today, the Dow, Nasdaq, and S&P 500 have faded back into red figures in a steady fashion while the Russell 2000 (+0.2%) is trying to stay green with an hour to go in the day, week, month, and quarter as far as the stock market is concerned.
Estee Lauder dips on L'Oreal sympathy; Synchrony atop S&P 500 after Baird note
28-Jun-24 14:30 ET
Dow -103.57 at 39060.49, Nasdaq -36.70 at 17821.98, S&P -5.67 at 5477.20
[BRIEFING.COM] The S&P 500 (-0.10%) is the "best" performing major average on Friday afternoon, down just 6 points.
Elsewhere, S&P 500 constituents AES (AES 17.46, -1.63, -8.54%), HCA (HCA 322.00, -21.29, -6.20%), and Estee Lauder (EL 105.89, -4.97, -4.48%) dot the bottom of the standings. AES and HCA underperform despite a dearth of corporate news, while EL is down in sympathy to yesterday's guidance cut out of L'Oreal (LRLCY 87.69, -2.91, -3.21%).
Meanwhile, Synchrony Financial (SYF 46.64, +2.41, +5.45%) is atop the average after Baird initiated coverage on the stock at Outperform.
Gold adds modestly to weekly gains on Friday
28-Jun-24 14:00 ET
Dow -66.07 at 39097.99, Nasdaq -18.11 at 17840.57, S&P -2.39 at 5480.48
[BRIEFING.COM] All three major average have succumbed to afternoon selling pressure, the tech-heavy Nasdaq Composite (-0.10%) in second place with about two hours to go.
Gold futures settled $3.00 higher (+0.1%) to $2,339.60/oz, ending the week up about +0.6%, today's move kept shallow amid a mixed move in the dollar/yields.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $105.83.
Hello Group not yet waving goodbye as its priorities lay the groundwork for long-term growth (MOMO)
As a new addition to our most recent Value Leaders Rankings, Hello Group (MOMO) seemingly came out of nowhere to command the #2 position on our leaderboard. The stock sank to one-year lows late last month after a disappointing Q1 report spooked investors. However, the selling pressure was short-lived. Since hitting a bottom last month, the stock has climbed by over +25%.
However, despite the recent appreciation, MOMO still trades at decent multiples, boasting an attractive 6.1x forward earnings valuation, a 1.3x EV to EBITDA multiple, and a respectable 21% free cash flow yield. While MOMO is trading at half where it was just one year ago, reflecting a persistently stubborn macroeconomic landscape, there were silver linings in the company's Q1 report, potentially setting it up for outsized appreciation going forward.
- What is MOMO? A China-domiciled organization, MOMO operates three distinct but similar businesses: Momo, its core social media app; Tantan, a dating app; and several standalone apps launched globally. The Momo app, which makes up nearly all of the company's profits and around 75% of its revenue, offers users numerous social media-related options, from live streaming to location-based social interactions.
- Why did Q1 trigger a sharp pullback? Revenue continued to contract as a weak macroeconomic backdrop weighed on consumer sentiment. Meanwhile, MOMO proactively reduced revenue-oriented competition events in live streaming and other value-added services experiences to limit what it referred to as unhealthy monetization approaches. Additionally, seasonality from the Chinese New Year only exacerbated revenue-related headwinds.
- MOMO anticipates that its actions will foster long-term growth. MOMO has been making steady progress in implementing its strategic priorities across its businesses, which center around improving efficiency. These efforts resulted in MOMO's Q1 costs falling faster than revenue, culminating in yr/yr margin expansion.
- Encouraging developments elsewhere unfolded in Q1. For instance, MOMO has been enriching its core app, applying AI technology across the user experience and introducing new interactive features, which have already started to drive organic revenue growth, partly offsetting the overall drop in Q1. Also, regarding Tantan, its user base started to recover gradually during March after external headwinds began to ease. MOMO is also stepping up its marketing and innovation campaigns to strengthen the Tantan app.
- Also worth mentioning is MOMO's overseas efforts. The company continues to enter new markets, which, albeit could pressure short-term profitability, should ultimately lay the foundation for future top and bottom-line growth.
MOMO's performance this year has been disappointing. An alarming Q4 report in March snapped MOMO's upward momentum, setting an extended period of selling pressure in motion. However, management identified areas of weakness at that time, quickly looking to optimize its cost structure and maintain user and revenue growth. While macroeconomic pressures have thrown a wrench in MOMO's short-term goals, MOMO is taking the proper steps to enhance profitability and construct a more substantial foundation for longer-term growth. As always, a 15-20% stop loss is recommended.
NIKE getting dunked on as sluggish sales puts competition concerns under the spotlight (NKE)
In the sports world, no fan is ever very excited when a general manager talks about "rebuilding" when it comes to their favorite teams. Likewise, in the stock market world, when an executive talks about a "transition year" for their company, shareholders generally aren't too thrilled about their investment. Such is the case for NIKE (NKE), which not only missed Q4 revenue expectations, but it also lowered its FY25 revenue outlook, prompting CEO John Donahoe to dub FY25 as a transition year for the company.
- Thanks to some cost-cutting efforts, including a round of 750 layoffs in April at its Beaverton, Oregon headquarters, and $1.0 bln worth of share buybacks in Q4, NKE topped EPS estimates for the fourth consecutive quarter. The EPS winning streak, though, is taking a back seat to NKE's ongoing struggles on the top-line as sales dipped by 1.6%, amplifying concerns that rivals such as adidas (ADDYY), On (ONON), Puma, and Deckers' (DECK) HOKA are cutting into its market share.
- Once an underdog itself, before Michael Jordan catapulted NKE's popularity into the stratosphere, it's both surprising and alarming to see the company's smaller competitors gain ground due to self-inflicted issues. Mr. Donahoe has acknowledged that the company is not performing up to its standards and at the core of its struggles is a lack of innovation.
- In recent years, NKE has banked on its best-selling products -- most notably including the Air Force 1 shoe -- while scaling back on new product development and advertising. Given the considerable supply chain disruptions that materialized during and after the pandemic, it's understandable that NKE would take a more conservative approach, but it's apparent that it has been too slow to reignite the innovation engine.
- This is made apparent by the 8% sales decline in NKE's direct-to-consumer business and the 1% drop in overall sales in the key North America market. A leaner inventory situation at NKE's retail partners helped push gross margin higher by 110 bps to 44.7%, but even that metric fell a bit short of expectations.
- What's really weighing on the stock, however, is the company's downwardly revised FY25 revenue guidance. After initially guiding for positive growth in FY25, NKE is now forecasting a mid-single-digit decline, with a 10% drop expected in Q1. Essentially, NKE's weak outlook suggests that the product innovation initiatives that its undertaking won't bear much fruit this calendar year, generating plenty of disappointment among investors.
The one silver lining is that CFO Matthew Friend stated that he expects meaningful, sequential improvement in 2H25 compared to 1H25, driven by the launch of new products. That optimistic view is providing little solace to NKE shareholders today, though, many of whom aren't willing to stick around for the transition year to play out.
Kura Sushi heads sharply lower on weak guidance; consumers eating out less often
Kura Sushi USA (KRUS -24%) is trading sharply lower today after providing downside revenue guidance for Q3 (May) last night. This Japanese restaurant chain expects Q3 revs to be about $63.1 mln, which would still represent yr/yr growth of +28% and sequential growth of +10%. However, analysts were looking for more.
- In addition, KRUS lowered its FY24 revenue outlook to $235-237 mln from $243-246 mln prior guidance. The new full year guidance reduction was by more than the Q3 downside, which implies a guide down for Q4 (Aug) as well. Doing the numbers and based on the guidance ($108.87 mln in 1H + $63.1 mln in Q3), we compute Q4 revenue guidance at $63.1-65.1 mln, whereas analyst expectations are just north of $70 mln.
- Not surprisingly, the Q3 comparable restaurant sales guidance was not great either at +0.6%. That is below the +3.0% comp in Q2 (Feb) and +3.8% in Q1 (Nov). We never like to see comps trending lower like this. We did not get full year comp guidance, so we are not sure what to expect for Q4. However, based on the total revenue guidance, we suspect comps will be weak again in Q4.
- In terms of what happened, we appreciate the candor from CEO Hajime Uba. Basically, he conceded that KRUS's Q3 results did not meet internal expectations. This was due largely to unanticipated softness in the California market. The silver lining is that KRUS believes these sales pressures are transitory and consumer strength will normalize over time. Its view on the long-term potential of Kura Sushi remains unchanged.
- Another silver lining is that KRUS guided to pretty healthy margins. The company expects Q3 restaurant-level operating margin to be approximately 20% of sales. This is a bit better than Q2's 19.6% level. The higher sales level in Q3 relative to Q2 likely helped with margins.
- This guidance kind of takes us a bit by surprise. KRUS has been showing good growth lately and has been lauded as an early stage, attractive restaurant concept. So this was a bit of a stumble. Also, on the Q2 call, KRUS did not guide for Q3 comps, but did say it was happy with how April was shaping up. So this weak comp surprised us a bit. Granted, KRUS's Q2 report was on April 4, so the month was just starting. However, it seems that comps may have weakened later in April and perhaps May.
Overall, clearly investors are disappointed with this Q3 and full year guidance, which portends a weak result in Q4 as well. We did not get a lot of detail, other than California, where KRUS has high exposure, was weak. However, there has been a lot of press on consumers pulling back on eating out, especially lower income consumers and at fast food restaurants.
McDonald's (MCD) and Taco Bell just rolled out value options this week. Also, spice giant McCormick (MKC) reported earnings yesterday and said people are cooking at home more. We suspect KRUS is feeling the pinch from this trend as well. KRUS is a small player, but given the totality of recent events, we are cautious on restaurant names as we head into earnings season in a few weeks.
Infinera rockets higher after agreeing to be acquired by Nokia (NOK) for $2.3 bln (INFN)
Investors push shares of Infinera (INFN +17%) toward one-year highs today following Nokia's (NOK +1%) agreement to purchase the company for $6.65 per share, or around $2.3 bln, representing a roughly +26% premium over INFN's closing price yesterday of $5.26. NOK agreed to at least 70% of the purchase price being financed with cash, with the remainder stemming from stock. However, NOK's board committed to increasing its repurchase plan to mitigate stockholder dilution. NOK anticipates the acquisition to be accretive to its comparable EPS in the first year following closure, expected by the first half of 2025. By 2027, NOK projected over 10% comparable EPS accretion.
While not acting as strongly, NOK investors are also liking the deal. The price tag is reasonable at approximately 7.5x EBIT when incorporating €200 million of target synergies. Furthermore, a merger between the two firms can produce several benefits for NOK, which has endured a lengthy battle with macroeconomic and competitive headwinds.
- INFN and NOK operate in the networking equipment market, a highly fragmented industry led by Huawei, Cisco (CSCO), and Ciena (CIEN). Within this industry, NOK and INFN believe that scale and vertical integration are keys to success and the best way forward to fully support the increasing demand for new AI workloads.
- Adding INFN fortifies NOK's geographical footprint. Over 70% of NOK's annual sales emanate from Europe, EMEA, Latin America, and Asia Pacific, with just around 20% coming from the lucrative U.S. market. Conversely, INFN's U.S. sales stand at around 60%, significantly strengthening NOK's global presence in the optical markets.
- Over the past few quarters, NOK and INFN have not just been competing with rivals but also with an unfavorable macroeconomic landscape. The optical market has stayed soft since around the second half of 2023 and has yet to escape stagnation thus far in 2024. However, NOK anticipates a return to growth in 2025, as the need to invest in optimal transport remains elevated due to AI and cloud workflows. As a result, now may be the best time to begin integrating and fully capitalize on potentially explosive growth over the next several years.
With INFN trading modestly below NOK's purchase price, the market could be wary of possible counterbids from bigger fish in the networking equipment industry. While this is not off the table, it seems somewhat unlikely given regulatory issues in the U.S., as CSCO and CIEN each have formidable domestic presences, which could be seen as anticompetitive by regulators if they were to try to scoop up INFN.
Overall, the combination of NOK and INFN makes sense. The networking equipment market may be currently encountering a lull period. However, most in the industry, including NOK, INFN, CIEN, and CSCO, anticipate a return to growth in 2025, generating urgency for NOK to act swiftly to extract as much as possible from an expected AI and cloud-related boom.
McCormick is spicing it up on strong Q2 upside; says it's energized for grilling season (MKC)
McCormick (MKC +4%) is spicing it up today as investors approve of its Q2 (May) earnings results this morning. This supplier of spices, seasoning mixes, and condiments reported it largest EPS beat in any quarter for the last three years. Revenue dipped 1% yr/yr to $1.64 bln, which was generally in-line. MKC also reaffirmed FY24 EPS and revenue guidance.
- MKC operates two segments: Consumer (56% of 1HFY24 revs) and Flavor Solutions (44%), which caters to food manufacturers and foodservice customers. In Q2, volume growth in its Consumer segment was offset by declines in Flavor Solutions related to softness in some of its QSR and packaged food customers volumes.
- Consumer segment sales decreased 1% yr/yr to $904.5 mln. Volumes improved substantially from Q1. In the Americas, MKC has delivered solid sequential volume improvement for three consecutive quarters. FS segment sales also declined 1% to $738.8 mln where a 1% increase from pricing was offset by a 2% decline in volume and product mix. Although certain parts of its FS business are pressured, MKC expects volume trends to improve in 2H.
- MKC says that consumers continue to exhibit value seeking behavior, especially mid to low income households. Consumers continue to buy just what they need and make more frequent trips to the store. On the positive side, consumers are cooking at home more. As a result, certain categories such as Spices & Seasonings, as well as condiments and sauces are seeing a benefit amid these trends.
- The company says it's energized for grilling season and expects its Flame and Flavor marketing campaign that launched in Q2 will drive incremental consumer demand. MKC also said its Cholula salsas and recipe mixes that launched in 2023 are driving new buyers to the category and continues to exceed expectations since launch. In 2024, MKC is launching nearly 4x more grilling rubs and seasonings compared to 2023. On the FS side, inflation in the foodservice channel is leading to softness in food-away-from-home consumption. That is impacting restaurant traffic particularly with QSRs.
Overall, after some lackluster results in recent quarters, MKC's results in the first half of 2024 were welcome news. We think the robust EPS beat and positive comments on the call are driving shares today. Also, the share price has been lackluster since the Q1 report. As such, we think sentiment was low heading into this report, so the big EPS beat generated some excitement.
The Big Picture
Last Updated: 28-Jun-24 15:09 ET | Archive
A P/E multiple needs a growth rate to go with it
The S&P 500 hit yet another record high this week. As of this writing, it is trading at 21.2x next twelve-month earnings, which is a 16% premium to its 10-year average, according to FactSet data.
That P/E multiple is the benchmark for determining whether a stock or a sector is "overvalued" or "undervalued" relative to "the market." There is more to it than that, however.
The P/E multiple is a a convenient reference point, but the underlying earnings growth rate needs to be taken into account when thinking about whether a stock or sector is overvalued or undervalued relative to the market. This is where the price-to-earnings-growth rate, or "PEG rate," comes into play. The PEG rate is determined by dividing the P/E multiple by the earnings growth rate. The current PEG rate for the S&P 500 is 1.28.
A sector trading at 24x next twelve-month earnings might look expensive relative to a market trading at 21.2x, but if that sector is expected to deliver 20% earnings growth, the corresponding PEG rate of 1.20 suggests it trades at a more attractive multiple than the market when its expected earnings growth rate is taken into account.
Below we provide a snapshot of a valuation breakdown for the 11 S&P 500 sectors centered around the P/E multiple and PEG rates. Even then, there is still more to consider in terms of a valuation analysis, but because earnings and earnings estimate trends drive the market, no P/E multiple is complete without an understanding of the earnings growth rate.
Valuation Snapshot
- 32.45% weight in S&P 500
- Trades at 30.4x next twelve month earnings -- a 54% premium to the 10-yr average
- Next twelve month PEG ratio is 1.4
- 12.32% weight in S&P 500
- Trades at 14.9x next twelve month earnings -- a 5% premium to the 10-yr average
- Next twelve month PEG ratio is 1.1
- 11.68% weight in S&P 500
- Trades at 19.4x next twelve month earnings -- an 18% premium to the 10-yr average
- Next twelve month PEG ratio is 1.0
- 10.05% weight in S&P 500
- Trades at 25.3x next twelve month earnings -- a 3% discount to the 10-yr average
- Next twelve month PEG ratio is 1.6
- 9.46% weight in S&P 500
- Trades at 19.73x next twelve month earnings -- a 4% premium to the 10-yr average
- Next twelve month PEG ratio is 1.1
- 8.09% weight in S&P 500
- Trades at 20.6x next twelve month earnings -- a 9% premium to the 10-yr average
- Next twelve month PEG ratio is 1.5
- 5.77% weight in S&P 500
- Trades at 20.4x next twelve month earnings -- a 5% premium to the 10-yr average
- Next twelve month PEG ratio is 2.6
- 3.62% weight in S&P 500
- Trades at 12.0x next twelve month earnings -- a 7% premium to the 3-yr average
- Next twelve month PEG ratio is 2.0
- 2.28% weight in S&P 500
- Trades at 16.6x next twelve month earnings -- a 5% discount to the 10-yr average
- Next twelve month PEG ratio is 2.0
- 2.15% weight in S&P 500
- Trades at 19.5x next twelve month earnings -- a 17% premium to the 10-yr average
- Next twelve month PEG ratio is 2.1
- 2.13% weight in S&P 500
- Trades at 16.8x next twelve month earnings -- a 14% discount to the 5-yr average
- Next twelve month PEG ratio is 2.7
-- Patrick J. O'Hare, Briefing.com
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