| | | Market Snapshot
| Dow | 39753.75 | +32.39 | (0.08%) | | Nasdaq | 18283.41 | -364.04 | (-1.95%) | | SP 500 | 5584.54 | -49.37 | (-0.88%) | | 10-yr Note | +30/32 | 4.19 |
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| | NYSE | Adv 2328 | Dec 405 | Vol 977 mln | | Nasdaq | Adv 3216 | Dec 1052 | Vol 6.3 bln |
Industry Watch
| Strong: Real Estate, Utilities, Materials, Industrials, Health Care |
| | Weak: Information Technology, Communication Services, Consumer Staples |
Moving the Market
-- Reacting to cooler-than-expected CPI data
-- Treasury yields dropping, acting as support for equities
-- Recalibrating rate cut expectations
-- Losses in mega cap names weighing on indices
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Closing Summary
11-Jul-24 16:30 ET
Dow +32.39 at 39753.75, Nasdaq -364.04 at 18283.41, S&P -49.37 at 5584.54
[BRIEFING.COM] It was a solid day in the stock market following a pleasing CPI report for June, but the S&P 500 (-0.9%) and Nasdaq Composite (-2.0%) didn't reflect that. Total CPI deflated 0.1% month-over-month, slowing the pace of growth to 3.0% on a year-over-year basis from 3.3% in May. Core-CPI, which excludes food and energy, decelerated to 3.3% on a year-over-year basis from 3.4%.
The report sent market rates lower, reflecting optimism about the path of inflation and Fed policy. The 10-yr note yield, which is most reactive to inflation expectations, declined nine basis points to 4.19% and the 2-yr note, which is most responsive to changes in the fed fund rate, yield fell 12 basis points to 4.51%.
The fed funds futures market is pricing in a 92.7% probability of a rate cut at the June FOMC meeting, up from 73.4% yesterday.
Many stocks participated in a broad rally today, except mega caps and semiconductor stocks. Money was rotating away from these areas of the market due to profit taking activity after a big run of late. The Vanguard Mega Cap Growth ETF (MGK) logged a 2.3% decline and the PHLX Semiconductor Index (SOX) declined 3.5%.
This price action weighed on the S&P 500 and Nasdaq Composite while the Russell 2000 surged 3.6% and the S&P Mid Cap 400 logged a 2.5% gain. The equal-weighted S&P 500 registered a 1.2% gain.
Tesla (TSLA 241.03, -22.23, -8.4%) was an influential laggard from the mega cap space on news that it's delaying its robotaxi plans until October, according to Bloomberg. The stock had been trading nearly 3% higher at its best level of the day.
Meanwhile, rate-sensitive areas of the market benefitted from the drop in rates. The S&P 500 real estate sector was a standout in that respect, jumping 2.7%. Homebuilder stocks also surged in response to the movement in market rates. The SPDR S&P Homebuilder ETF (XHB) logged a 5.9% gain.
- Nasdaq Composite: +21.8% YTD
- S&P 500: +17.1% YTD
- Dow Jones Industrial Average: +5.5% YTD
- S&P Midcap 400: +7.7% YTD
- Russell 2000: +4.9% YTD
Reviewing today's economic data:
- Weekly Initial Claims 222K (Briefing.com consensus 234K); Prior was revised to 239K from 238K; Weekly Continuing Claims 1.852 mln; Prior was revised to 1.856 mln from 1.858 mln
- The key takeaway from the report is that initial claims continued backtracking from a high that was reached in June, suggesting that the labor market is holding up well despite restrictive policy from the Fed.
- June CPI -0.1% (Briefing.com consensus 0.1%); Prior 0.0%; June Core CPI 0.1% (Briefing.com consensus 0.2%); Prior 0.2%
- The key takeaway from the report is that the market heard exactly what it hoped for, as CPI deflated slightly in June, contributing to additional disinflation on a year-over-year basis. The 3.0% year-over-year growth rate matched the low from 2023, which will be seen as supportive of a case for a rate cut from the FOMC.
Market participants will receive the following economic data on Friday:
- 8:30 ET: June PPI (Briefing.com consensus 0.1%; prior -0.2%) and Core PPI (Briefing.com consensus 0.1%; prior 0.0%)
- 10:00 ET: Preliminary July University of Michigan Consumer Sentiment (Briefing.com consensus 67.5; prior 68.2)
Stocks hold steady in front of close; Treasuries settle with gains
11-Jul-24 15:30 ET
Dow +26.56 at 39747.92, Nasdaq -346.56 at 18300.89, S&P -47.56 at 5586.35
[BRIEFING.COM] The market is holding steady in front of the close. The S&P 500 (-0.8%) and Nasdaq Composite (-1.8%) trade near session lows.
Treasuries settled with solid gains. The 10-yr note yield declined nine basis points to 4.19% and the 2-yr note yield fell 12 basis points to 4.51%. This price action was in response to the cooler-than-expected CPI report. Today's $22 billion 30-yr bond reopening met weak demand.
Market participants will receive the following economic data on Friday:
- 8:30 ET: June PPI (Briefing.com consensus 0.1%; prior -0.2%) and Core PPI (Briefing.com consensus 0.1%; prior 0.0%)
- 10:00 ET: Preliminary July University of Michigan Consumer Sentiment (Briefing.com consensus 67.5; prior 68.2)
Value stocks lead, small and mid caps outperform
11-Jul-24 15:05 ET
Dow +29.89 at 39751.25, Nasdaq -315.56 at 18331.89, S&P -42.27 at 5591.64
[BRIEFING.COM] The major indices traded in narrow ranges over the last half hour.
Value stocks continue to lead while growth stocks fall under selling pressure. The Russell 3000 Growth Index shows a 1.7% decline and the Russell 3000 Value Index sports a 1.2% gain.
Small and mid cap stocks have also maintained their leadership position. The Russell 2000 sports a 3.4% gain and the S&P Mid Cap 400 shows a 2.4% gain.
Treasury's June deficit shrinks yr/yr
11-Jul-24 14:25 ET
Dow +50.64 at 39772.00, Nasdaq -363.49 at 18283.96, S&P -50.04 at 5583.87
[BRIEFING.COM] The major averages mostly shrugged off the release of the June Treasury Budget; mainly, the budget showed the government's deficit was much smaller than a year ago, but it comes after a sharp year-over-year increase in the May deficit. The
The Treasury Budget for June showed a deficit of $66.0 bln versus a deficit of $227.8 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the June deficit cannot be compared to the deficit of $347.1 bln for May.
Total receipts of $466.3 bln grew 11.5% compared to last year while total outlays of $532.2 bln fell about 17.6% compared to last year.
The total year-to-date budget deficit now stands at $1.27 trln vs $1.39 trln at this point a year ago.
Gold jumps as CPI data comes in cooler than expected
11-Jul-24 13:55 ET
Dow +33.69 at 39755.05, Nasdaq -387.74 at 18259.71, S&P -55.80 at 5578.11
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-2.08%) is near lows of the session in recent trading, down more than 385 points, ahead of the June treasury budget, which is due at the top of the hour.
Gold futures settled $41.40 higher (+1.7%) to $2,421.10/oz, firmly higher amid a drop in yields and the greenback in reaction to this morning's cooler-than expected CPI data.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $104.46.
Conagra's bright spots in Q4 dwarfed by prudent FY25 guidance; FY25 to be a transition year (CAG)
Conagra's (CAG -2%) Q4 (May) earnings beat and in-line revenue proved too stale today against the company's prudent FY25 guidance. The snack food giant behind many familiar brands like Slim Jim and Vlasic warned that the consumer will likely remain challenged during the upcoming year, adapting to a gradual transition toward a more normalized operating environment. Even though a normal environment sounds like favorable news for CAG, it expects turbulence as consumers adjust their reference prices, implying that the cumulative effects of inflation are here to stay, with prices unlikely to drop anytime soon. As a result, CAG forecasted adjusted EPS of $2.60-2.65 in FY25, alongside organic net sales growth of negative 1.5% to flat.
Management has been nudging consumers toward accepting its new price points and the updated value the products offer, but admitted it is a process that will take time. Even though disinflation has already cropped up, the past several years of inflation have affected virtually every aspect of daily life; incomes can take time to catch up, while the psychological effects do not disappear overnight.
Nevertheless, CAG is optimistic that it has taken the necessary steps to fortify its positioning in the grocery and snacking industry, as evident by the many bright spots from Q4.
- CAG squeaked out another bottom-line beat in Q4, registering adjusted EPS of $0.61. Revenue did contract for the third consecutive quarter, inching 2.3% lower yr/yr to $2.91 bln. The drivers were CAG's Grocery & Snacks and Foodservice segments, which registered net sales declines of 2.1% and 3.9%, respectively. In Grocery & Snacks, relatively high elasticity drove consumers toward reducing their basket sizes or trading down. Meanwhile, softness in restaurant traffic hurt CAG's Foodservice business, with volumes sliding by over 10% yr/yr.
- However, CAG did an impressive job expanding profitability in these two lagging segments, helping offset the bottom-line impacts of lower revenue and volumes. Furthermore, management noted that it gained unit share in snacking categories as it outperformed several of its competitors during the quarter, strengthening its foundation to reignite growth once economic conditions turn around.
- Meanwhile, the company's Refrigerated and Frozen segment enjoyed a modest volume bump of 0.9%, improving from last quarter. Although it did come on a 4.7% drop in prices. Both metrics resulted from the impacts of CAG's brand-building investments, which center around maximizing consumer engagement and recapturing share following a challenging period last year when trade-down intensified. Similarly, International sales increased nicely on a 4.1% jump in volumes, fueled by exceptional strength in CAG's Mexico and global exports businesses.
CAG is well aware of the stress inflation places on consumers. However, it is investing in its brands to support a return to positive volumes without significantly compromising its margins, projecting FY25 adjusted operating margins of 15.6-15.8%, similar to the 16.0% posted in FY24. While a transition year may not accompany meaningful financial gains, it is a step toward recovery, signaling that the worst of CAG's headwinds may be in the rear-view mirror.
Delta Air Lines' weak Q2 report creates turbulence for peers as rising capacity hits EPS (DAL)
Rising capacity in the airline industry has been a main concern among investors over the past couple of years and based on Delta Air Lines' (DAL) Q2 earnings miss and downside Q3 guidance, it's evident that an oversupply of seats is now putting a squeeze on the industry's margins and profits. As the first major airline to report Q2 earnings, DAL's disappointing results and outlook indicate that more turbulence is likely ahead for the space, especially since DAL's financial performance has generally outpaced its rivals.
- After three consecutive earnings beats, DAL fell just short of Q2 EPS estimates as lower ticket prices and higher operating costs weighed on its bottom line. Like its competitors, DAL has steadily ramped up capacity to meet the insatiable demand for travel, which remained strong in Q2 as revenue reached a June quarter record.
- Available Seat Miles (ASMs) grew by 8% yr/yr, led by a 19% jump in DAL's Latin America market, helping to drive revenue higher by a little more than 5% to $15.41 bln
- The problem, though, is that consumers -- particularly in the U.S. -- are dialing back on their travel plans, opting for less expensive trips, while industry-wide capacity is at sky-high levels. CEO Ed Bastian acknowledged that the company is seeing some price sensitivity taking hold in the lower fare categories.
- As such, Passenger Revenue per Available Seat Mile (PRASM) decreased by 3% in Q2.
- Given the steady rise in capacity across the industry, it doesn't come as a major surprise that DAL's PRASM is being pressured a bit. However, what might be catching investors a little more off-guard is the company's commentary and forecast regarding the demand situation. Specifically, CFO Dan Janki stated that "growth continues to normalize", while DAL's Q3 revenue guidance of $14.84-$15.13 bln also missed expectations.
- Demand certainly isn't falling off a cliff and there are still notable areas of strength, including in DAL's premium, corporate, and international businesses. Premium revenue grew by 10% yr/yr, corporate travel demand was up double-digits, and international passenger revenue increased 4%, despite lapping challenging yr/yr comparisons.
Additionally, DAL continues to pay down its debt, thanks to its strong free cash flow generation of $1.3 bln in Q2. By the end of Q2, the company's Adjusted debt to EBITDAR decreased to 2.8x from 3.0x at the end of 2023. The bottom line, though, is that DAL's and its peer's earnings are facing strengthening headwinds due to an unfavorable supply and demand dynamic as consumers begin to tighten their travel spending budgets.
WD-40 makes a nice move following earnings upside; trend improvements from 1H carried into Q3 (WDFC)
WD-40 (WDFC +4%) is trading higher after reporting EPS upside with its Q3 (May) report. Revenue rose 9.4% yr/yr to a record $155.1 mln, which also was better than expected. While most people know WDFC for its namesake WD-40 brand, it sells other Maintenance Products (GT85 and 3-IN-ONE) as well. WDFC also sells home cleaning products, but it's much smaller and WDFC has announced plans to sell its US and UK Homecare and Cleaning Products portfolio.
- WDFC remains encouraged that the improvement in trends it saw in the first half of fiscal year carried into Q3. Nearly all of its Q3 sales growth was driven by volume with currency and price impacts nearly cancelling each other out. Gross margin continues to improve and is moving closer to its long-term target of 55%. In Q3, gross margin improved substantially to 53.1% from 50.6% a year ago and from 52.4% in Q2.
- Its largest segment (49% of revs) is the Americas (US, Latin America, Canada), but it posted the slowest growth, up 6% yr/yr to $75.1 mln. Much of this growth came from strong sales of WD-40 Multi-Use Product in Latin America, which increased by 51% yr/yr. That was partially offset by lower sales of WD-40 Multi-Use Product in the US and Canada. Sales in Latin America were favorably impacted by a transition to a direct market model in Brazil.
- The company explained on the call that end user demand in the US remained relatively constant with sales down 2%. However, WDFC was lapping an extremely strong US performance in the year ago period when the US experienced exceptionally strong volume recovery. Also, part of the US softness came from strong declines in non-strategic household brands, which decreased by 15%.
- Sales in EIMEA (Europe, India, Middle East, Africa) were much stronger, up 13% yr/yr to $59.4 mln. Although without the FX tailwind, CC sales rose 10%. Growth was driven in large part by higher sales of WD-40 Multi-Use Product. AsiaPacific sales grew the most, up 14% yr/yr to $20.5 mln. In China, sales and maintenance products were up 29%, primarily due to successful brand building programs and the timing of customer orders.
- On two other key items, WDFC has been implementing a new ERP system, which is a significant investment. It went live in Q2 and is now in place over a substantial portion of its business, including the US, Latin America, and Asia regional distributor businesses. There were some minor disruptions in Q3 but most of the critical issues have subsided. WDFC also said it expects to sell its HCP portfolio during FY25. A sale will allow WDFC to focus on higher sales growth and gross margin segments.
Overall, investors were pleased with the Q2 results. We suspect sentiment was running low following a weak Q2 report in April. The trends that showed improvement in 1H carried into Q3. The gross margin metric jumps out at us as really impressive and helps explain the EPS upside. This stock has been trending lower for much of 2024, but this report was some much-needed good news.
PepsiCo turns lower after another quarter of volume compression in Q2 keeps sellers in control (PEP)
PepsiCo (PEP) flirts with 52-week lows today after experiencing another quarter of declining volumes across North America in Q2. Meanwhile, the beverage and snack giant effectively lowered its FY24 organic revenue growth outlook, projecting an approximately 4% bump yr/yr versus its prior forecast of at least 4%. The difference in wording is important as it incorporates the possibility that revs could fall short of the 4% target. PEP kept its other FY24 predictions unchanged.
PEP reiterating its FY24 EPS outlook of at least $8.15 is still commendable. The company has also been steadily recovering its supply chain, which should be back to 100% by Q4. Similarly, PEP expects its refilling of store shelves to finish by Q4 as well.
However, like last quarter, these minor silver linings are unable to overcome the overarching issue at hand, i.e., a softer consumer environment domestically and abroad.
- Challenging economic conditions may not have been apparent in PEP's headline Q2 numbers, delivering a double-digit EPS beat on top-line growth of 0.8% yr/yr and organic growth of 1.9%, to $22.5 bln. However, volumes tell a different story, contracting by 4% in Frito-Lay North America and 3% in Beverages North America. Prices across these segments edged 3% and 5% higher yr/yr, respectively.
- Frito-Lay's 4% volume drop was particularly troubling as it marked the worst quarter for PEP in years. One of the problem areas with Frito-Lay is that consumption trends have shifted, moving to away-from-home from in-home, causing portion sizes to change meaningfully, which can drastically impact volumes. Also, unlike beverages, which can be difficult to replicate and command meaningful brand loyalty, snacks compete against a wider variety of alternatives, making a higher price tag less palatable.
- PEP addressed pricing concerns, noting that some parts of the portfolio need value adjustments, which it is already making. As such, PEP felt optimistic that the category would begin to see improvements over the next two quarters.
- The volume compression in Beverages was disappointing and weakened from Q1. However, volumes have fared significantly worse in past quarters, taking some of the sting out of the drop in Q2.
- Internationally, PEP performed decently, boasting volume gains in Beverages in every region, while delivering a 5% bump in Convenient Foods in Europe, a reversal from the 5% drop last quarter. However, PEP's food line endured volume compression across Latin America and Asia Pacific. PEP was not too concerned, remarking that it does not foresee any issues in Latin America and that it is still witnessing solid performance in Asia even as the consumer remains cautious.
Even though PEP's blemishes from the quarter were not overly alarming, its performance is a frustrating continuation of past quarterly results. Prices are still bubbling across every category outside of Quaker Foods, which endured another sharp drop in volume regardless, placing further strain on the end consumer. It will be interesting to see how its peers perform over the coming weeks, including Coca-Cola (KO) and Keurig Dr Pepper (KDP). Last quarter, PEP's rivals posted considerably better beverage volume growth in the U.S., underpinning possible market share pressure.
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