Market Snapshot
| Dow | 39358.23 | +50.23 | (0.13%) | | Nasdaq | 18355.36 | +167.06 | (0.92%) | | SP 500 | 5565.58 | +28.56 | (0.52%) | | 10-yr Note | +7/32 | 4.278 |
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| | NYSE | Adv 1082 | Dec 1678 | Vol 285.0 mln | | Nasdaq | Adv 1828 | Dec 2353 | Vol 3.43 bln |
Industry Watch
| Strong: Communication Services, Information Technology, Consumer Discretionary, Consumer Staples |
| | Weak: Energy, Financials, Industrials, Materials |
Moving the Market
-- Gains in mega cap stocks supporting index performance
-- Digesting the June Employment Report, which reflected some softening in labor market conditions that may translate into lower earnings growth
-- Treasury yields lower after jobs report, reflecting optimism about a Fed rate cut in the near term
| Treasuries settle with gains
05-Jul-24 15:40 ET
Dow +50.23 at 39358.23, Nasdaq +167.06 at 18355.36, S&P +28.56 at 5565.58
[BRIEFING.COM] The market is little changed at the index level in recent action.
Treasuries settled with solid gains. The 10-yr note yield declined eight basis points to 4.27% and the 2-yr note yield fell 12 basis points to 4.60%.
Looking ahead, Monday's economic lineup is limited to the May Consumer Credit report (Briefing.com consensus $9.5 bln; prior $6.4 bln) at 15:00 ET.
Small caps and value stocks underperform
05-Jul-24 15:00 ET
Dow +55.28 at 39363.28, Nasdaq +155.35 at 18343.65, S&P +27.13 at 5564.15
[BRIEFING.COM] The three major indices are near their best levels of the day.
Small and mid cap stocks continue to lag the broader market on growth concerns stoked by this morning's release of the June jobs report. The Russell 2000 is trading 0.7% lower and the S&P Mid Cap 400 is trading down 0.9%.
Value stocks are also lagging compared to the index performance and compared to growth stocks. The Russell 3000 Growth Index is 0.9% higher while the Russell 3000 Value Index is showing a 0.3% loss.
Advanced Micro up on analyst comments, Baxter gains in S&P 500 after subsidiary sale speculation
05-Jul-24 14:30 ET
Dow +15.21 at 39323.21, Nasdaq +154.62 at 18342.92, S&P +25.03 at 5562.05
[BRIEFING.COM] The S&P 500 (+0.45%) is in second place on Friday afternoon, up about 25 points.
Elsewhere, S&P 500 constituents Advanced Micro (AMD 171.74, +7.84, +4.78%), Baxter (BAX 34.21, +1.05, +3.17%), and WestRock (WRK 51.70, +1.95, +3.92%) pepper the top of today's standings. AMD benefits from a New Street note wherein analysts downgraded NVIDIA (NVDA 127.23, -1.05, -0.82%) and called AMD and TSMC (TSM 183.68, +1.19, +0.65%) the most attractive AI stocks, while BAX was the subject of an afternoon WSJ story suggesting Carlyle (CG 40.36, -0.23, -0.57%) had eyes on its kidney care business.
Meanwhile, Southwest Air (LUV 27.26, -1.32, -4.62%) is the average's worst laggard after Raymond James cut their target on the stock.
Gold higher into the weekend
05-Jul-24 14:00 ET
Dow +0.51 at 39308.51, Nasdaq +147.61 at 18335.91, S&P +22.89 at 5559.91
[BRIEFING.COM] The tech-heavy Nasdaq Composite (+0.81%) is atop the major averages with about two hours remaining on Friday.
Gold futures settled $38.60 higher (+1.6%) to $2,397.50/oz, pushing weekly gains to +2.5%, today's move aided in part by this morning's jobs report.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $104.96.
DJIA lagging, Chevron & JP Morgan underperform
05-Jul-24 13:30 ET
Dow -38.39 at 39269.61, Nasdaq +156.01 at 18344.31, S&P +22.56 at 5559.58
[BRIEFING.COM] The Dow Jones Industrial Average (-0.10%) is lagging, down about 38 points.
A look inside the DJIA shows that Chevron (CVX 154.07, -2.64, -1.68%), Dow (DOW 52.02, -0.86, -1.63%), and JP Morgan (JPM 204.64, -2.90, -1.40%) are underperforming.
Meanwhile, Intel (INTC 31.88, +0.65, +2.08%) is today's top performer.
The DJIA is on pace to gain about +0.39% this week.
Elsewhere, at the top of the hour, Baker Hughes (BKR 33.98, -0.49, -1.42%) announced a weekly U.S. rotary rig count of 585, +4 w/w and -95 yr/yr.
Instructure jumps on reports of takeover interest; boasts solid fundamentals (INST)
Instructure (INST +5%) leaps to five-month highs today on a Bloomberg report that KKR (KKR) and Francisco Partners were interested in acquiring the educational software company, taking it private again after a short stint as a publicly traded firm. After being acquired by private equity group Thoma Bravo in late 2019, INST was taken public in 2021, opening at $20/share. Thoma Bravo still controls around 80% of INST shares.
INST's core platform, Canvas, is used across all levels of education, including universities, in numerous markets globally. When taking it public, Thoma Bravo was looking to capitalize on a hot IPO market and the explosion in online learning sparked by the pandemic. However, the pandemic-induced tailwinds never really accelerated. Meanwhile, competition in the educational software market only intensified as companies looked to pounce on the e-learning spike. As a result, Thoma Bravo was shopping INST around as early as May.
With the stock not panning out precisely as Thoma Bravo may have anticipated, the possibility of a deal being reached to take INST private is becoming all the more likely.
- While shares have underperformed major indices since first becoming available to trade, INST's quarterly numbers have been respectable, registering double-digit sales growth in all but one quarter while delivering consistent profitability. In March, INST outlined its medium-term growth targets, projecting a +5-10% growth rate for its core products on an ARR basis and a +10-15% rate for its growth products, culminating in a +9-11% organic growth rate overall.
- Given the multitude of competitors in the market, INST's medium-term goals were commendable. Tech titans like Alphabet's (GOOG) Google Classroom to firmly-established names like Blackboard operate in the same market, each looking for a slice of a pie that is essentially fixed as the number of learning institutions stays relatively flat yr/yr.
- INST's total addressable market was recently bolstered by the acquisition of Parchment, which opened the door to an estimated $2.0 bln in possible revenue. Parchment's platform enables schools to securely issue transcripts, diplomas, etc., digitally, a critical feature in an increasingly digital world.
- As a software company, INST's margins are strong. As of last quarter, INST boasted adjusted operating margins of 40.8%, a 420 bp improvement yr/yr. Additionally, the company's recurring gross margins are above 80%. Management also commented that AI could bring further internal improvements.
- Speaking of AI, INST noted in June that it is being thoughtful about how it introduces AI into the classroom. The company is still running tests to determine if customers would be willing to pay for AI. With the technology still in the experimentation phase, INST is not aggressively pursuing it just yet, at least not externally.
With INST possibly returning to being a privately held organization, its upside is likely capped. However, the company commands several competitive advantages and compelling fundamentals, which could allow it to command a high price tag. As such, INST is worth a look.
Macy's rings up solid gains on an increased takeover offer; doubts remain over striking a deal (M)
Macy's (M +12%) rings up meaningful gains today after Arkhouse Management and Brigade Capital Management upped their bid to take the department store chain private. The WSJ reported on July 3, well after the closing bell, that the investor group increased their offer to $24.80 per share from $24.00 per share, a roughly $300 mln increase. The offer values Macy's at just under $7.0 bln, a nearly 40% premium to its previous closing price.
- With the stock still trading significantly below Arkhouse and Brigade's updated purchase price, investors remain skeptical about Macy's accepting the deal. This doubt is not without good reason. In March, the same investor group increased their offer from $21.00/share to no avail. Macy's chose to execute its restructuring plan instead, looking to monetize up to $750 mln of assets through 2026 with annual run-rate savings hitting $235 mln.
- CEO Tony Spring stepped in this past February to steer Macy's through a tumultuous period as discretionary spending wanes in light of sticky inflation while e-commerce competitors remain a considerable threat. Under relatively new leadership, Macy's may choose the turnaround route, especially given Mr. Spring's past as head of Bloomingdale's while overseeing Bluemercury, Macy's luxury banners. Both brands consistently outperformed over the past several quarters, possibly providing Mr. Spring the confidence to bring similar success to Macy's.
- However, one of Macy's peers is looking to fortify its competitive position today. The parent company of Saks Fifth Avenue agreed to acquire Neiman Marcus Group for $2.65 bln to establish a more fortified luxury retail banner. Meanwhile, takeover offers have been extended to another Macy's competitor, as Nordstrom (JWN) has seen several offers to go private. These developments may spur Macy's to act now, especially following an increase in a previous takeover offer.
- Furthermore, competitive and economic pressures generate plenty of headwinds for Macy's. The low end of the company's FY25 comp guidance of negative 1.0% to positive 1.5% assumes no improvement in end demand and constant competitive challenges. In contrast, the high-end anticipates internal improvements to drive increased store traffic. The outlook was not exactly confidence-inspiring; another weak quarter could be all that is needed for enough shareholder pressure to nudge Macy's toward a deal to go private.
The market remains skeptical over Macy's accepting a takeover deal even as Arkhouse and Brigade hike their offer to represent a sizeable premium over Macy's current stock price. If Macy's continues to reject the takeover deal, opting to bet on its turnaround plan, investors could grow impatient if no signs the plan will work unfold over the next quarter or two. By then, the prices offered by any takeover group could drop.
H&R Block has quietly been trading to new all-time highs; smartly expanding into adjacent areas(HRB)
H&R Block (HRB) has quietly been trading to new all-time highs this week. We have been keeping an eye on HRB to see if it would break above or below its multi-month trading range. From mid-November to early May, it traded in a pretty narrow $45-50 range. However, its strong Q3 (Mar) earnings report on May 9 has pushed the stock to break above that trading range, which is typically a good sign for further potential gains.
- HRB reminds us a bit of Intuit (INTU). Both are mostly known for the tax preparation offerings but have smartly leverages their brand equity and branched into adjacent areas. With Intuit, it is best known for its Turbo Tax software and its QuickBooks accounting platform, but in recent years it has branched into Credit Karma (credit services, personal loans) and Mailchimp (email and online marketing). Of note, INTU recently shut down its Mint offering and said users should migrate to Credit Karma.
- Similarly, H&R Block is best known for its tax prep services, although more on the assisted side whereas Turbo Tax is DIY. However, investors may not realize it also offers financial products, and small business systems. Through Block Advisors and Wave, the company helps small business owners with bookkeeping, payroll, advisory, and payment processing services. It also operates a mobile banking app, Spruce. H&R Block also has a growing DIY tax prep offering.
- On May 9, HRB posted a huge EPS beat with more modest revenue upside. And based on how it ended tax season and its Q3 performance, HRB now expects to finish the year near the high end of its outlook. HRB said there were many things to be pleased about in the quarter, from its strong DIY performance, virtual tax growth, and positive trends in small business. HRB also cited important progress for both Spruce and Wave.
- In particular, its paid DIY growth significantly outpaced the DIY category. Something that stood out to us was HRB saying that paid volumes thru April 30 grew 6% and many of these filers came from TurboTax. And at the same time, customer satisfaction metrics, including ease of use and price per service, improved. In addition, HRB focused on curated experiences to help self-employed workers feel more confident in their tax outcomes, which resulted in notable increases among those filers.
- Another thing about H&R Block is that it has a been a long time member of our Yield Leaders rankings, which means management has been good about buying back shares. In our latest report, HRB posted a huge buyback yield of 10.1% plus it pays a 2.3% dividend yield, for a total Shareholders Yield of 12.4%. In Q1-Q2, HRB repurchased $350 mln, or another 5.5% of shares outstanding. However, it did not buy back shares in Q3.
Overall, it is a slow news day, so we wanted to flag H&R Block. We like that it recently broke above a multi-month trading range. Also, its comment about many of its DIY filers coming over from Turbo Tax was piqued our interest. And the company has been great about buying back shares in recent years. We also think its strategy of moving into adjacent areas and leveraging the trusted H&R Block name makes a lot of sense.
Constellation Brands aligns the stars for another earnings beat as beer business shines again (STZ)
For alcoholic beverage maker and distributor Constellation Brands (STZ), the saying "the more things change, the more they stay the same" seems to be very fitting after the company reported mixed Q1 results. As has been the case for many quarters, STZ's beer business was a pillar of strength, while the wine and spirits business continued to lag after undergoing a major overhaul over the past few years.
- Younger consumers in particular have been gravitating towards premium imported beers and STZ's product portfolio fits right into that sweet spot. Most notably, Mexican lager Modelo Especial has been a star for STZ, catapulting to the top of the list in dollar sales among all brands in the U.S. Led by Modelo and Pacifico, which saw impressive depletion growth of 11% and 21%, respectively, in Q1, net sales increased by 8% for the total beer business.
- Volume growth, combined with pricing and cost savings initiatives, drove operating margin higher by 260 bps yr/yr to 40.6%. This, in turn, helped push EPS higher by 23% to $3.57, beating expectations for the sixth consecutive quarter.
- While the beer business seems to be mostly insulated from sluggish consumer spending trends, the same can't be said of the wine and spirits business. STZ stated that the U.S. wholesale market across most price points in the wine category continued to face unfavorable market conditions in Q1. As such, net sales for wine and spirits declined by 7% and operating margin decreased by 370 bps to 15.3%, leading to a 25% drop in operating income to $59.7 mln for the segment.
- Although the struggles for wine & spirits currently appear to be mostly macro-related, the lack of progress in the turnaround initiative has become a source of frustration for investors. Recall that in early 2021, STZ finalized a deal to sell its lower-priced wine brands to E.&J. Gallo Winery for $810 mln in an effort to prioritize its higher end brands. At this point, it's safe to say that the deal hasn't had the positive impact on margins and earnings that STZ hoped for.
- In today's earnings press release, STZ disclosed that new commercial and operational initiatives are underway to address the market headwinds in the wine and spirits business. Whether those efforts help kickstart this long-standing turnaround plan remains to be seen. The good news for STZ, though, is that its beer business is by far the larger of the two, accounting for about 85% of total Q1 revenue.
Lastly, despite exceeding Q1 EPS estimates, STZ chose to merely reaffirm its FY25 EPS guidance of $13.50-$13.80. In fact, the company reaffirmed all of its FY25 guidance, including enterprise net sales growth of 6-7%, beer net sales growth of 7-9%, and a net sales decline of 0.5% to growth of 0.5% for wine and spirits. STZ's decision to keep its EPS outlook unchanged may be a source of disappointment, but, on the other hand, the reaffirm of its net sales guidance for wine and spirits may be providing some relief after another rough performance in Q1.
Paramount Global jumps on reports of a possible deal between Skydance and National Amusements (PARA)
In the lengthy saga over the future of Paramount Global (PARA +8%), there may finally be some certainty on the horizon following a WSJ article reporting that Skydance Media, owned by the cofounder of Oracle's (ORCL) son, is looking to shell out $1.75 bln for National Amusements to merge Skydance into Paramount. The deal is multi-faceted, but National Amusements is critical as it owns around three-quarters of PARA's voting shares.
The news comes as a bit of a surprise given that last month, reports broke that National Amusements failed to reach an agreement with Skydance over its $23/share offer. At the same time, the non-executive Chairperson of PARA, Shari Redstone, was reportedly unlikely willing to merge PARA into another company.
There have been plenty of suiters willing to strike a deal with PARA, including Apollo Global Management (APO), which offered $11.0 bln for the company's film and TV studio, and Sony (SONY), which was still lingering in the backdrop to ink a deal with National Amusements. Also, yesterday, The New York Times reported that Barry Diller was mulling a bid to take control of PARA. Today's report does not take all other possible buyers off the table, especially given how flimsy these reports have proved to be in the past. However, it is more likely that a deal could finally be reached, particularly given PARA's deteriorating financial position.
- PARA has been increasing its efforts to bring heightened awareness to its streaming platform Paramount+, bundling it with other subscription services such as Walmart+ (WMT). However, with the streaming market flooded with options, it has been challenging to stand out while keeping the attention on profitability. PARA's DTC revenue, which includes streaming, was the silver lining to a tepid Q1 report, registering a 24% bump in revs yr/yr. However, the losses continued to mount, albeit at a slowing rate, with adjusted operating income before depreciation and amortization of $(286) mln in Q1.
- While a merger would not immediately lift Paramount+ into the green, it could precede the divestiture of PARA's linear assets (traditional cable and network TV stations), allowing it to focus solely on bolstering its streaming service.
- PARA currently has no single CEO; it established an Office of the CEO, consisting of three executives, following former CEO Bob Bakish's abrupt departure in late April. The strategy of the newly formed Office of the CEO centers on PARA's streaming service and balance sheet. Since then, it has become increasingly likely that PARA will need to find a buyer. Its debt load has swelled while sales have stagnated. A possible Skydance deal could bring some debt relief through significant cash injection. Its prior deal that broke down included $1.5 bln to fortify PARA's balance sheet.
The main takeaway is that the story about PARA's near-term future may have found an ending as it becomes more likely that Skydance and National Amusements will seal a deal. However, PARA still faces many obstacles even if a merger agreement can be reached.
The Big Picture
Last Updated: 05-Jul-24 12:51 ET | Archive
High expectations for second quarter earnings results
The second quarter has drawn to a close, but it's not over yet for the stock market. In the coming weeks, there will be regular reminders of the second quarter when corporate America reports its earnings results for the April-June period.
Expectations are high ahead of the reports.
Some Shine on Income Statements
We can say expectations are high knowing that the S&P 500 and Nasdaq Composite are trading at record levels. You don't get to those heights if expectations are low.
According to FactSet, the blended second quarter earnings growth rate (combined actual results with estimates for companies that have yet to report) is 8.7%. That is down slightly from the 9.0% growth rate expected at the end of the first quarter; however, it marks the highest growth rate since the first quarter of 2022.
Revenue growth is projected to be 4.4%, which will be the 15th consecutive quarter of revenue growth for the S&P 500.
With the pace of earnings growth expected to be roughly twice the pace of revenue growth, it is clear that analysts are expecting to see expense-savings efforts shine through on income statements.
The top line may just be a stronger focus this reporting period than the bottom line. The reason being is that investors will be scrutinizing the state of pricing power and whether it is waning due to weaker demand. If so, it will start to raise questions about the underlying strength of the economy and the achievability of earnings prospects in coming quarters.
Companies losing pricing power on weakening demand will presumably have to resort to cost cuts to deliver stronger earnings growth and that could very well entail job cuts.
Analysts are projecting 8.1% earnings growth for the third quarter and 17.3% earnings growth for the fourth quarter, according to FactSet, making it clear that earnings growth expectations for the back half of the year are high as well.
Size Matters
Turning back to the second quarter reporting period, expectations are highest for the mega-cap companies. That doesn't necessarily translate into the growth rates per se for each of them, so much as it pertains to their ability to deliver not only on what is expected of them in the June quarter, but also with their guidance.
The communications services sector, which houses Alphabet (GOOG) and Meta Platforms (META), is expected to deliver 18.7% earnings growth. The information technology sector, which is where Apple (AAPL), Microsoft (MSFT), and NVIDIA (NVDA) reside, is expected to deliver 15.7% earnings growth. And the consumer discretionary sector, home to Amazon.com (AMZN) and Tesla (TSLA), is expected to deliver 7.3% earnings growth.
The health care sector, which is where Eli Lilly (LLY) is in residence, is expected to deliver 16.8% growth.
Strikingly, both the utilities sector and the energy sector are expected to deliver 10.6% and 10.2% earnings growth, respectively, which is ahead of the consumer discretionary sector. Their combined market weight of 5.85%, however, doesn't come close to the 10.1% weighting of the consumer discretionary sector; moreover, the $2.72 trillion combined market value of those two sectors, which include 53 companies, is 5.6% less than the market value of Amazon.com and Tesla -- just two companies -- combined.
Size matters in a market-cap weighted index.
The stocks mentioned in this space account for 37.5% of the market value of the S&P 500. They will move the market -- and they have moved the market, which is why their results and guidance will be integral in driving investor sentiment.
What It All Means
The banks will get things going on the reporting front. JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), and BNY Mellon (BK) will all post their results before the open on July 12.
True to form, one shouldn't expect any specific EPS guidance from them. What will register more is their qualitative assessment of loan demand and loan quality and the provisions they are taking (or not taking) for loan losses.
After their reports, the spigot will open in the back half of July to include results from all other sectors. The second quarter reporting period will then start winding down and will be largely complete by the middle of August.
That is when the stock market will say good-bye to the second quarter, but it will be saying hello to the earnings estimate trend throughout the reporting period.
Currently, the forward 12-month EPS estimate stands at $260.28, according to FactSet, versus $249.96 at the end of the first quarter. At its current price, the market-cap weighted S&P 500 trades at 21.3x forward 12-month estimates, which is a 19% premium to its 10-year average (17.9x).
The corresponding PEG rate, or price-to-earnings growth rate, is 1.28, which is actually lower than the 1.41 PEG rate for the equal-weighted S&P 500, which trades at 15.9x forward twelve-month earnings. The lower PEG rate for the market-cap weighted S&P 500 has been planted by the stronger earnings growth prospects for the mega-cap companies.
It is a reminder of how important these companies are in driving earnings expectations, which drive the index. Those expectations are high and for good reason. They are not to be messed with or a pretty-looking price trend for the market-cap weighted S&P 500 would be upended.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: The next installment of The Big Picture will be published the week of July 15.)
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