| | | Market Snapshot
| Dow | 40665.02 | -533.06 | (-1.29%) | | Nasdaq | 17871.22 | -125.70 | (-0.70%) | | SP 500 | 5544.59 | -43.68 | (-0.78%) | | 10-yr Note | -2/32 | 4.19 |
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| | NYSE | Adv 616 | Dec 2139 | Vol 948 mln | | Nasdaq | Adv 950 | Dec 3324 | Vol 6.0 bln |
Industry Watch
| Strong: Energy |
| | Weak: Health Care, Information Technology, Consumer Discretionary |
Moving the Market
-- Increased selling in mega caps due to profit-taking interest
-- Mixed action in semiconductor stocks following yesterday's slide keeping broader market in check
-- Digesting this morning's earnings and economic news
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Closing Summary
18-Jul-24 16:30 ET
Dow -533.06 at 40665.02, Nasdaq -125.70 at 17871.22, S&P -43.68 at 5544.59
[BRIEFING.COM] The S&P 500 (-0.8%), Nasdaq Composite (-0.7%), Dow Jones Industrial Average (-1.3%), and Russell 2000 (-1.9%) all closed near their worst levels of the session with solid losses. Decliners led advancers by a 7-to-2 margin at both the NYSE and at the Nasdaq.
Mixed action in the mega cap and semiconductor spaces contributed to mixed action at the index level in early trading. Ultimately, many stocks finished lower on the day or pulled back from early highs, including mega cap and semiconductor names. The Vanguard Mega Cap Growth ETF (MGK) closed 0.9% lower and the PHLX Semiconductor Index (SOX), which had been up as much as 1.9%, closed just 0.5% higher than yesterday.
Apple (AAPL 224.18, -4.70, -2.1%), Microsoft (MSFT 440.37, -3.15, -0.7%), and Amazon.com (AMZN 183.75, -4.17, -2.2%) were among the influential losers due to ongoing profit-taking activity.
Domino's Pizza (DPZ 409.04, -64.23, -13.6%) was another notable laggard, registering the steepest decline among S&P 500 components after reporting earnings. This price action, along with the decline in AMZN, contributed to the underperformance of the S&P 500 consumer discretionary sector (-1.3%).
A solid earnings-related gain in D.R. Horton (DHI 173.42, +16.91, +10.1%) and other homebuilder stocks provided some offsetting support in the consumer discretionary sector.
The health care (-2.3%) and financial (-1.3%) sectors were also among the top laggards. Meanwhile, the energy sector (+0.3%) was alone in positive territory by the close.
The 10-yr note yield settled four basis points higher at 4.19% and the 2-yr note yield settled three basis points higher at 4.46%. The bond and equity markets were little changed by this morning's release of a weekly jobless claims report that showed a sizable increase in initial claims.
- Nasdaq Composite: +19.1% YTD
- S&P 500: +16.2% YTD
- Russell 2000: +8.5% YTD
- S&P Midcap 400: +9.2% YTD
- Dow Jones Industrial Average: +7.9% YTD
Reviewing today's economic data:
- Weekly Initial Claims 243K (Briefing.com consensus 225K); Prior was revised to 223K from 222K; Weekly Continuing Claims 1.867 mln; Prior was revised to 1.847 mln from 1.852 mln
- The key takeaway from the report is that it fits with the view that there is some softening in the labor market, which is a trend that will massage the market's belief that the Fed is likely to cut the target range for the fed funds rate before the end of the year.
- July Philadelphia Fed Index 13.9 (Briefing.com consensus 2.9); Prior 1.3
- June Leading Indicators -0.2% (Briefing.com consensus -0.3%); Prior was revised to -0.4% from -0.5%
There is no US economic data on tomorrow's calendar.
Stocks move sideways near lows
18-Jul-24 15:35 ET
Dow -549.59 at 40648.49, Nasdaq -175.56 at 17821.36, S&P -53.41 at 5534.86
[BRIEFING.COM] The major indices continue to trend sideways near session lows.
The 10-yr note yield settled four basis points higher at 4.19% and the 2-yr note yield settled three basis points higher at 4.46%.
Looking ahead, Dow components Travelers (TRV) and American Express (AXP) are among the names reporting earnings Friday morning.
There is no US economic data on tomorrow's calendar.
NFLX trades down in front of earnings
18-Jul-24 15:00 ET
Dow -461.94 at 40736.14, Nasdaq -157.84 at 17839.08, S&P -46.38 at 5541.89
[BRIEFING.COM] The major indices sit at or near session lows. The S&P 500 shows a 0.9% decline versus a 0.8% loss in the equal-weighted S&P 500.
Netflix (NFLX 643.20, -4.26, -0.7%) shows a modest decline in front of its earnings report this afternoon. This price action has contributed to the downside action in the S&P 500 communication services sector, down 0.3%. Alphabet (GOOG 179.10, -3.53, -1.9%) is another influential loser from the space while Meta Platforms (META 475.16, +13.11, +2.8%) provides some offsetting support.
The communication services sector shows the slimmest decline among the nine sectors trading lower. The utilities sector is trading flat while the energy sector maintains a 0.4% gain.
Freeport-McMoRan slips in S&P 500 ahead of earnings
18-Jul-24 14:30 ET
Dow -423.58 at 40774.50, Nasdaq -126.76 at 17870.16, S&P -38.32 at 5549.95
[BRIEFING.COM] The S&P 500 (-0.69%) is just narrowly today's shallowest declining average, down about 38 points.
Elsewhere, S&P 500 constituents Freeport-McMoRan (FCX 45.82, -2.68, -5.53%), IDEXX Labs (IDXX 471.58, -24.89, -5.01%), and Abbott Labs (ABT 99.91, -4.77, -4.56%) dot the bottom of the average. FCX is slated to report earnings next week, while ABT slips despite reporting a Q2 EPS beat and raising FY24 EPS guidance.
Meanwhile, Quanta Services (PWR 263.03, +18.09, +7.39%) is near the top of the standings after announcing the completion of its Cupertino Electric deal; the company also offered guidance implications for the acquisition.
Gold slides off earlier gains
18-Jul-24 14:00 ET
Dow -345.23 at 40852.85, Nasdaq -133.80 at 17863.12, S&P -34.24 at 5554.03
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-0.74%) is in second place.
Gold futures settled $3.50 lower (-0.1%) to $2,456.40/oz, slipping slightly off earlier gains.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $104.06.
D.R. Horton constructing big gains after upside Q3 results and $4 bln stock buyback program (DHI)
Homebuilder D.R. Horton (DHI) is soaring higher after delivering a top and bottom-line beat for Q3 as a lack of supply of available housing and favorable demographics once again buoyed demand for new home construction. The upside results were accompanied by a new $4.0 bln share repurchase program, which is adding some fuel to the fire today as the stock breaks out to all-time highs. DHI's strength is also carrying over to other homebuilder stocks, most notably including Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM).
- Home affordability has been a focal point for DHI and other homebuilders as high mortgage rates and constrained monthly budgets have put home ownership nearly out of reach for many people. To help ease the burden, DHI and its peers have ramped up incentives, including mortgage rate buydowns and reduced home prices.
- Since DHI mostly caters to the first-time homebuyer, with an average sales price of about $379,000 in Q3 (-1% yr/yr), it's more sensitive than most homebuilders to these affordability issues.
- Due to this increase in incentives, homebuilding margins have fallen under the spotlight across the industry. In Q3, DHI pleasantly surprised investors and analysts as gross profit margin on home sales improved by 80 bps qtr/qtr to 24%, beating expectations, as incentive-related costs were down from a year ago.
- However, during the earnings call, the company stated that incentives are still elevated and that it doesn't anticipate a significant change in the near-term. As such, DHI expects Q4 homebuilding gross margin to be similar to Q3, which we view as a positive considering the environment.
- A slightly more glaring blemish is DHI's downside Q4 revenue guidance of $10.0-$10.4 bln, but since the company's narrowed FY24 revenue outlook remains in line with estimates, the sting of the downside guidance was mitigated.
- Furthermore, the company believes it's in good position to continue taking market share with 42,600 homes in its inventory and as its average construction cycle times have returned to normal levels. Should the Federal Reserve begin cutting interest rates, DHI will be poised to generate stronger margins on those homes in its inventory as they sell.
Overall, it was another strong quarter for DHI and its new $4.0 bln share repurchase authorization is a clear reflection of its confidence regarding the health of the new home construction market and its growth prospects within it.
Taiwan Semiconductor Manufacturing's initial pop fades today amid geopolitical concerns (TSM)
Taiwan Semi (TSM -3%) records a solid beat-and-raise in Q2, prompting an initial buy-the-dip mindset today following the stock's sell-off yesterday on further export restriction concerns. The world's largest semiconductor foundry, supplying chips for many prominent tech giants, including NVIDIA (NVDA) and Apple (AAPL), climbed to all-time highs last week before encountering some turbulence. Still, even after yesterday's sell-the-news reaction, shares were up roughly +35% since Q1 results in mid-April, reflecting exuberance over AI and a recovery year ahead.
Against this backdrop, expectations remained relatively high. With concerns over export restrictions to China still lingering, the combination of these two dynamics led to investors quickly fading TSM's initial pop out of the gate, pulling back from highs of +2%. Also lurking in the shadows are fears over China/Taiwan relations. If tensions worsen between the two nations, TSM could get caught in the crosshairs.
- Like clockwork, TSM beat analyst earnings and sales estimates in Q2, delivering a 34.6% jump in its to-line yr/yr and 10.3% sequentially to $20.82 bln. Margins did slip by 90 bps yr/yr but stayed virtually unchanged from Q1. Sequentially, high-performance computing (HPC) shined, leaping by 28%, underpinning an insatiable desire for AI.
- AI remains the bedrock of TSM's excitement over the short and long run. Management anticipates its business over the next quarter to be supported by solid smartphone and AI-related demand. Even though TSM kept its FY24 forecast for the overall semiconductor market, excluding memory, unchanged at +10%, it did raise its FY24 revenue outlook to $22.4-23.2 bln from $19.6-20.4 bln. Again, this underpins the high forecasted demand from AI-related businesses. TSM added that in just the past three months, it has observed even greater AI demand from its customers.
- Given these remarks, it would not be surprising if NVDA delivers another outstanding quarter next month. While TSM's post-quarterly responses have not had much correlation with reaction to NVDA's earnings, its AI comments still serve as good news for the state of AI, as GPU makers would not likely continue ordering more chips if their end demand was not robust.
- Further evidence that AI demand has gone nowhere was TSM's FY24 capital budget forecast -- the higher the level, the higher the growth opportunities. TSM kept the high end of its FY24 outlook unchanged at $32 bln but did increase the low end from $28 bln to $30 bln. Most of the budget will be allocated to advanced process technologies, many of which HPC products are based on.
Perhaps unsurprisingly, the tailwinds produced by AI remained alive and well in Q2, and TSM sees this remaining the case this year. However, the gains associated with AI are being dwarfed by geopolitical concerns. The Biden Administration announced yesterday that it was considering more restrictive export controls, possibly halting semiconductor equipment suppliers from providing China access to American technology. Meanwhile, Taiwan may not be guaranteed intervention by the U.S. amid an invasion by China. Until these alarm bells quiet down, TSM could continue enduring selling pressure.
United Airlines gaining altitude as company sees overcapacity headwinds abating in Q3 (UAL)
United Airlines (UAL) executed well and set itself apart from its competitors in Q2, generating better-than-expected earnings, while Delta Airlines (DAL) fell just short of EPS expectations and American Airlines (AAL) cut its Q2 EPS outlook back in late May. CEO Scott Kirby credited the company's diverse revenue mix and its cost cutting efforts as key factors behind its solid Q2 performance. And while Q3 is shaping up to be a difficult quarter, as reflected by UAL's downside EPS guidance of $2.75-$3.25, Mr. Kirby sees clearer skies ahead, predicting that the industry-wide overcapacity issues will be corrected in mid-August.
- Following a similar flight path as its peers, UAL ramped up capacity in Q2, especially in its Pacific market. More specifically, available seat miles (ASMs) soared higher by 37.2% in the Pacific, followed by a 15.4% increase in Latin America. In the U.S., ASMs were up by a healthy 5.3% as UAL looked to keep pace with low-cost carriers which have steadily added seats in order to capitalize on the robust travel demand.
- This influx of available seats has naturally put downward pressure on pricing. Making matters worse, leisure travelers have become increasingly price sensitive, opting for shorter, less expensive (and less profitable) flights. This, in turn, is putting pressure on UAL's passenger revenue per available seat mile (PRASM), which declined by 2.9% in Q2.
- UAL's sagging unit revenue performance is the primary cause for its soft Q3 EPS guidance, but the company is planning to reduce its own domestic capacity by about 3% in Q4 compared to its original plan. Alongside other airlines canceling their loss-making capacity, UAL's efforts will help to restore balance in the industry, creating an environment that's more favorable for margins and profits.
- On that note, UAL reaffirmed its FY24 EPS guidance of $9.00-$11.00, indicating that it does anticipate this turbulence to subside over the next month or so. In fact, the company believes that it's best-positioned to benefit once the supply/demand inflection point is reached in mid-August. UAL is predicting that it will achieve leading unit performance relative to its largest peers in the second half of Q3.
In the meantime, the company will continue to keep a tight lid on costs -- CASM was down 4.8% in Q2 -- while capitalizing on its revenue mix, including premium revenue, which increased by 8.5% yr/y. Overall, UAL's Q2 results were solid, exceeding participants' muted expectations, and the reaffirm of its FY24 EPS guidance provided reassurance that the overcapacity headwinds will abate soon.
Domino's lower despite large EPS beat; reduction in intl new store outlook weighs (DPZ)
Domino's Pizza (DPZ -12%) is trading sharply lower despite reporting a sizeable Q2 EPS beat this morning. Revenue rose 7.1% yr/yr to $1.10 bln, which was in-line with analyst expectations. Its US comps were quite good too. However, the company also lowered its long term guidance for annual global net store growth.
- US comps had been disappointing in recent quarters, but the trend has been improving quite a bit and that continued in Q2. In Q2, DPZ reported healthy US same store comps of +4.8%, that is down slightly from +5.6% in Q1 but still quite good. That follows +2.8% in Q4, -0.6% in Q3 and +0.1% in Q2. We think Q2's international comp (excl FX) of +2.1% was decent. It was also above Q1's +0.9%.
- US comps were driven by positive order counts in its delivery business, positive order counts in its carryout business, and positive order counts across all income cohorts. Carryout comps were +7.9% in Q2 while delivery comps were +2.7%, driven primarily by transaction growth. Comp tailwinds were partially offset by a higher carryout mix, which carries a lower ticket than delivery.
- DPZ also benefited from a 1.5% price increase, including high single digits in California. Its sales mix from Uber grew to 1.9% for Q2. The incrementality of Uber sales continues to be in line with expectations. A tailwind recently has been its Emergency pizza promotion. It was a meaningful driver to comps in both Q4 and in Q1. However, this promotion has ended. On the positive side, DPZ recently went live with marketing on its new UberEats partnership, which seems to have helped comps.
- DPZ also sounds pretty excited about its New York-style pizza, which launched in Q2. It is intended to stay on the menu permanently. Its crust is thinner and more foldable than Domino's traditional crust. The goal is to attract customers whose preferences are a bit different than Domino's pizza other offerings.
- So, why is the stock lower? While DPZ continues to expect 175+ net stores annually in the US for 2024-28, the company lowered its international new store outlook. DPZ expects it will fall 175-275 stores below its 2024 goal of 925+ net stores in international primarily as a result of challenges in both openings and closures being faced by Domino's Pizza Enterprises (DPE), one of its master franchisees. The company is temporarily suspending its guidance of 1,100+ global net stores.
From an operations standpoint, we view the Q2 results as quite solid. DPZ posted big EPS upside and its US comps were quite good considering the end of a key promotion. It was good to see comp growth from both carryout and delivery. It also sounds like the UberEats partnership is off to a good start. However, it seems investors are spooked by this reduced international store outlook. This will be an area to watch in the quarters ahead to see if DPZ can fix this issue.
Cintas delivers another uniform quarter in Q4, reflecting healthy underlying dynamics (CTAS)
Another uniform quarter for Cintas (CTAS +5%) keeps its shares trending higher, moving to all-time highs, an over +25% gain thus far in 2024. CTAS, the largest supplier of work uniforms in the U.S., delivered Q4 (May) numbers similar to Q3 (Feb), topping earnings estimates by a double-digit margin on in-line revenue growth. The company also projected FY25 adjusted EPS and revs consistent with analyst forecasts. With business trending as usual despite modestly shaky economic conditions, investors remain confident in CTAS's short and long-term prospects.
- CTAS may not be an exciting organization, supplying work uniforms, facility services (cleaning supplies), and safety services (first aid kits). However, its results tend to offer a window into how businesses of varying sizes view near-term prospects. When CTAS performs well, it can often be an encouraging sign of the underlying economy. Therefore, it is important to keep an eye on its quarterly numbers.
- During Q4, CTAS's core Uniform Rental and Facility Services segment delivered a 7.8% improvement in revenue yr/yr to $1.91 bln. Meanwhile, all other divisions tacked on a 9.5% bump in sales. The broad-based strength supported CTAS's 8.2% revenue growth yr/yr to $2.47 bln, its 13th straight quarter of yr/yr growth.
- Verticals were strong across the board, as healthcare, hospitality, education, and state and local governments all exhibited solid demand characteristics. New business was also robust, a recurring theme for CTAS. Likewise, retention rates remained favorable.
- CTAS's consistent revenue growth continued to be accompanied by expanding margins, a good sign of demand as the company has not needed to lower prices to spur volume growth. It also reflects management's productivity enhancements, such as route optimization. Gross margins increased by 150 bps yr/yr to 49.2% in Q4, while operating margins edged 160 bps higher to 22.2%. As a result, CTAS kept its string of earnings beats active, growing its bottom line by 17.2% yr/yr to $3.99, nicely above analyst projections.
- Looking ahead, while CTAS's FY25 outlook merely met analyst expectations, targeting adjusted EPS of $16.25-16.75 and revs of $10.16-10.31 bln, the company has a recent history of initially guiding conservatively only to raise it as the year progresses. In fact, CTAS's initial FY24 outlook was bearish, making its FY25 guidance much more appealing by comparison.
CTAS capped off a banner year on a high note. A favorable combination of robust volumes and ongoing cost-improvement initiatives in Q4 led to another healthy earnings beat on stable revenue growth. We have been long-time fans of CTAS, which continues to post excellent numbers even as some concerns begin to crop up, such as rising unemployment figures, which can lead to possible headwinds down the road. While cracks in the labor market present risks, as does CTAS's frothy forward P/E ratio of 45x, the company's dominant position in its industry, significant efficiency improvement opportunities, and further market expansion possibilities as employers look to outsource various functions to better focus on their core business, can support shares drifting higher.
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