Market Snapshot
| Dow | 40357.89 | -57.55 | (-0.14%) | | Nasdaq | 17997.35 | -10.22 | (-0.06%) | | SP 500 | 5555.74 | -8.67 | (-0.16%) | | 10-yr Note | +23/32 | 4.24 |
|
| | NYSE | Adv 1420 | Dec 2325 | Vol 837 mln | | Nasdaq | Adv 2326 | Dec 1891 | Vol 5.0 bln |
Industry Watch
| Strong: Materials, Financials, Consumer Discretionary |
| | Weak: Energy, Utilities, Consumer Staples, Communication Services, Industrials |
Moving the Market
-- Mixed responses to earnings news
-- Not a lot of conviction after yesterday's solid rally
-- Drop in market rates providing a measure of support to the equity market
|
Closing Summary
23-Jul-24 16:30 ET
Dow -57.55 at 40357.89, Nasdaq -10.22 at 17997.35, S&P -8.67 at 5555.74
[BRIEFING.COM] The equity market had a mixed showing today. The S&P 500 (-0.2%), Nasdaq Composite (-0.1%), and Dow Jones Industrial Average (-0.1%) closed with losses after trading slightly higher or slightly lower through the entire session.
Meanwhile, the Russell 2000 continued its recent outperformance, jumping 1.1% today. The small cap index is 9.6% higher this month and the S&P 500 shows a 1.7% gain in July.
Mixed responses to earnings news contributed to the mixed feeling in the market. UPS (UPS 127.68, -17.50, -12.1%) was among the losing standouts after missing earnings estimates. NXP Semiconductors (NXPI 262.30, -21.51, -7.6%), and Nucor (NUE 161.55, -1.79, -1.1%) were also among the notable losers following their quarterly results.
Spotify (SPOT 330.79, +35.34, +12.0%), Lockheed Martin (LMT 501.29, +26.70, +5.6%), and Sherwin-Williams (SWH 344.50, +22.15, +6.9%) were winning standouts following their reports.
The mixed disposition in the market also stemmed from some hesitation in front of the bulk of earnings season and following yesterday's solid rally.
Only three of the S&P 500 sectors registered gains -- materials (+0.4%), financials (+0.1%), and consumer discretionary (+0.02%) -- while the energy (-1.6%), utilities (-0.7%), and consumer staples (-0.3%) registered the largest declines.
The 10-yr note yield declined two basis points to 4.24% and the 2-yr note yield settled four basis points lower at 4.48%.
- Nasdaq Composite:+19.9% YTD
- S&P 500: +16.5% YTD
- Russell 2000: +10.7% YTD
- S&P Midcap 400: +10.0% YTD
- Dow Jones Industrial Average: +7.1% YTD
Reviewing today's economic data:
- June Existing Home Sales 3.89 mln (Briefing.com consensus 4.00 mln); Prior 4.11 mln
- The key takeaway from the report is that sales activity slowed to levels last seen at the end of 2023, suggesting that elevated mortgage rates and low inventory are offsetting a seasonal activity boost that would be normally seen in the summer.
Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Index (prior 3.9%)
- 9:45 ET: flash July S&P Global U.S. Manufacturing PMI (prior 51.6) and flash July S&P Global U.S. Services PMI (prior 55.3)
- 10:00 ET: June New Home Sales (Briefing.com consensus 640,000; prior 619,000)
- 10:30 ET: Weekly crude oil inventories (prior -4.87 mln)
Stocks hold steady in front of close
23-Jul-24 15:35 ET
Dow +41.92 at 40457.36, Nasdaq +31.77 at 18039.34, S&P +4.02 at 5568.43
[BRIEFING.COM] The market continues to move sideways ahead of the close.
Alphabet (GOOG) and Tesla (TSLA) headline the earnings reports after the close. Chubb (CB), Capital One (COF), Visa (V), Texas Instruments (TXN), Seagate Tech (STX), Mattel (MAT), EQT Corp (EQT), Enphase Energy (ENPH), and others also report earnings after today's close.
Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Index (prior 3.9%)
- 9:45 ET: flash July S&P Global U.S. Manufacturing PMI (prior 51.6) and flash July S&P Global U.S. Services PMI (prior 55.3)
- 10:00 ET: June New Home Sales (Briefing.com consensus 640,000; prior 619,000)
- 10:30 ET: Weekly crude oil inventories (prior -4.87 mln)
GOOG, TSLA trade mixed in front of earnings
23-Jul-24 15:05 ET
Dow +36.26 at 40451.70, Nasdaq +23.86 at 18031.43, S&P +2.74 at 5567.15
[BRIEFING.COM] The major indices moved in a sideways flow over the last half hour.
Alphabet (GOOG 184.48, +1.13, +0.6%) and Tesla (TSLA 248.18, -3.29, -1.3%) trade in mixed fashion in front of their earnings results after the close.
Separately, the 10-yr note yield declined two basis points to 4.24% and the 2-yr note yield settled four basis points lower at 4.48%.
Pentair, MSCI outperforming in S&P 500 after earnings
23-Jul-24 14:30 ET
Dow +39.51 at 40454.95, Nasdaq +9.78 at 18017.35, S&P +1.83 at 5566.24
[BRIEFING.COM] Market gyrations continued in the last half hour, the S&P 500 (+0.03%) now narrowly above flat lines.
Elsewhere, S&P 500 constituents Pentair (PNR 86.84, +6.85, +8.56%), MSCI (MSCI 547.82, +41.80, +8.26%), and Brown & Brown (BRO 98.03, +4.87, +5.23%) pepper the top of the standings all following earnings.
Meanwhile, Washington-based commercial trucking manufacturer PACCAR (PCAR 97.07, -11.99, -10.99%) is near the bottom of the average following this morning's earnings miss, in-line revs.
Gold snaps recent losing streak
23-Jul-24 14:00 ET
Dow +24.12 at 40439.56, Nasdaq +27.24 at 18034.81, S&P +4.98 at 5569.39
[BRIEFING.COM] With about two hours to go on Tuesday afternoon the tech-heavy Nasdaq Composite (+0.15%) is atop the major averages.
Gold futures settled $12.60 higher (+0.5%) to $2,407.30/oz, snapping a four-session losing streak, jockeying for position ahead of GDP and PCE data later in the week which could give further validation on investors' thinking for the Fed's rate path.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.46.
UPS delivers a rare EPS miss as customers trade down to lower margin services (UPS)
UPS (UPS -13%) did not deliver as hoped. The delivery giant missed badly on EPS, its first miss since 1Q20. Revenue dipped 1.1% yr/yr to $21.82 bln, which was modestly below analyst expectations. While its FY24 revenue guidance of $93 bln is generally in-line with prior guidance of $92.0-94.5 bln, it does not tell the important part of the story. The bigger problem is that UPS reduced its FY24 operating margin outlook pretty significantly to 9.4% from 10.0-10.6%.
- Let's start with some good news. Q2 marked an important turning point for the business because US average daily volume (ADV) increased 0.7% yr/yr. This marked a return to positive volume growth for the first time since 4Q21. And sequentially, ADV grew 390 bps. Growth was led by B2C with volume up 4.8% yr/yr and it made up 58.5% of total volume. This growth was driven in large part by several new e-commerce customers that entered the UPS network. B2B ADV fell 4.6%.
- While it was good to see volume growth, there was a catch -- customers traded down to lower cost services. Specifically, UPS saw customers shift from air to ground and from ground to SurePost. Within ground, SurePost ADV grew 25% yr/yr, driven by new shippers product choices, product trade downs and easier comparisons. This trade down hurt margins and helps explain the large EPS miss. Also impacting margins yr/yr was high labor costs from its new Teamsters contract.
- In terms of its outlook, volume characteristics are expected to have a weaker mix with lower margin services making up a larger part of total sales. That is why UPS lowered its FY24 operating margin guidance. UPS expects US ADV in 2H to grow by mid-single-digits. However, product mix is expected to continue to pressure revenue per piece. Despite all of this, UPS expects to exit the year with a US operating margin of 10%.
- Quickly, in addition to earnings, UPS announced it will acquire Estafeta, a Mexican express delivery company. UPS noted that global supply chains are shifting and Mexico's role in global trade is growing. Also, Mexican SMB and manufacturing sectors are looking for reliable access to the US market. As the shift to nearshoring continues, UPS believes its combined business will give customers in Mexico unprecedented access to global markets.
Overall, this report from UPS was a letdown for investors. The large EPS miss was pretty shocking, given its rarity at UPS but also because FedEx (FDX) traded sharply higher in late June after reporting a nice EPS beat for Q4 (May). However, it does explain our bewilderment at the time for why UPS did not join in FDX's move last month. Clearly, investors were nervous about UPS's Q2 report and those concerns were borne out. It seems customers are trading down and that is hurting UPS's margins.
Spotify heads upstream to multi-year highs after delivering another profitable quarter (SPOT)
Even though monthly active users (MAUs) came up a tad lighter than expected in Q2, investors are singing Spotify's (SPOT +11%) praise today, pushing shares to three-year highs. Many other highlights outshined the MAU miss, including a third consecutive quarter of profitability, healthy top-line growth, and solid subscriber net adds. Also, while MAUs missed the mark in Q2, they still expanded sequentially, edging 1.8% higher to 626 mln.
SPOT has been on a tear lately, surging by over +70% YTD when incorporating today's move. Investors have consistently applauded the audio streaming platform for its swift transition to profitability, despite accompanying price hikes, which have not materially harmed MAU or premium subscriber growth. Impressively, even as SPOT implements further price hikes across several key markets, there has been less churn compared to the first round of hikes last year, which it noted was already low. This is no small feat and highlights SPOT's competitive edge in the ocean of endless music, podcast, and audiobook streaming services.
- SPOT's "year of monetization" continues to go swimmingly. The company reported positive EPS of €1.33 on revs of €3.81 bln, a 19.8% jump yr/yr. Subscriber net adds topped SPOT's guidance by 1 mln, reaching 7 mln in the quarter. Meanwhile, total premium subs grew by 12% yr/yr to 246 mln, ahead of its 245 mln forecast and supported by growth across all regions.
- So why did MAUs fall short? The miss can be attributed to how SPOT handles different markets. Developed markets, where users are more financially capable of absorbing a monthly fee, anchor its paid subscription business. Conversely, its ad-supported business is focused on developing markets, where SPOT targets converting users into paid subs but on a much longer time horizon.
- Each quarter, this dichotomy generates a few wrinkles. Engagement is different between developed and developing markets. In developing regions, conversion to paid is often slower than it is in developed countries, making it challenging to achieve the same level of ROI effectiveness from SPOT's marketing initiatives.
- However, SPOT is implementing two initiatives to tackle the problem of converting free users to paid users. For one, the company is stepping up its efforts to improve the impact of its marketing. Management is confident there are several levers it can pull over the coming quarters to make this strategy effective. Secondly, SPOT is prioritizing enhancements in its free product pipeline, which it believes will boost engagement.
Despite the disappointing MAU miss, SPOT's history suggests that the conversion rate of free users is more about when than if. Its actions to speed up this development may not produce conversions as rapidly as the company may expect. Investors, however, are willing to overlook the risks associated with any potential snags in SPOT's game plan, especially when it continues to generate profitable quarters.
General Motors heads lower despite Q2 upside; trucks/SUVs doing well but China is a weak spot (GM)
General Motors (GM -6%) is trading lower despite the automotive giant reporting upside Q2 results this morning. GM has now posted back-to-back $0.35+ quarters. Perhaps even more important, GM raised its FY24 adjusted EPS to $9.50-10.50 from $9.00-10.00. GM also boosted FY24 adjusted EBIT guidance to $13-15 bln from $12.5-14.5 bln. GM also announced a $6 bln share buyback authorization.
- Adjusted EBIT is the most closely followed metric. It jumped 37% yr/yr and 15% sequentially to $4.44 bln in Q2, with a 9.3% adjusted EBIT margin, up sharply from 7.2% in the year ago period. Adjusted EBIT was driven by higher volume, consistent pricing, the non-recurrence of the LG agreements and decreases in EV inventory allowance. All partially offset by lower mix and China equity income.
- In 1H24, GM posted adjusted EBIT of $8.31 bln (+18% yr/yr). However, doing the math, that points to a lower 2H adjusted EBIT in 2H vs 1H given the $14 bln guidance (mid-point). GM is assuming a bigger pricing headwind in 2H and roughly $1 bln of costs are 2H-weighted, including $400 mln higher marketing spend to support more launches in the back half of the year. The remainder is related to higher commodity prices, particularly copper and aluminum, and the timing of other EV costs.
- Trucks/SUVs continue to propel GM's overall results. GM noted that its refreshed midsize SUVs are some of the fastest growing vehicles in the segment, supporting stable pricing and generating stronger margins than preceding models. Chevrolet Silverado and GMC Sierra volumes in the US were up a combined 5% yr/yr. In addition, sales of its redesigned Chevrolet Colorado and GMC Canyon midsize pickups were up 31%.
- Another strong area was EVs, which surprised us a bit given all the sky-is-falling reporting around EV demand. Total US EV deliveries rose 40% yr/yr to 22K. EV volumes are expected to build sequentially every quarter in 2024 to achieve GM's full year target of 200,000-250,000. GM is also scaling production of the Chevrolet Equinox EV, which it sees as a game changer in terms of price and range. Then over the next several months, GMC will launch the Sierra EV and the Cadillac LYRIQ will be joined by the OPTIQ, Escalade IQ and CELESTIQ. GM maintains its goal of positive variable profits in EVs by Q4.
- A clear trouble spot was China, which continues to suffer from significant excess capacity. Many startups and local competitors continue to prioritize production over profitability. GM has been reducing inventories, aligning production to demand and reducing fixed costs. While these steps have been significant, they have not been enough. GM had expected to return to profitability in China in Q2. However, it reported a loss and expects the rest of the year will remain challenging.
The stock initially popped when results were announced on the strong upside for EPS and revenue. Its core business of gasoline vehicles, especially trucks are SUVs, are propelling overall results with solid pricing. We were also surprised about the generally positive commentary on EVs given the weak industry demand. However, GM is really struggling in China as it's facing stiffer competition from local automotive brands. We also think the impact of higher costs on 2H adjusted EBIT is weighing on shares today.
Coca-Cola remains refreshing in Q2; brand loyalty proves key difference versus PepsiCo (KO)
Following another quarter of global volume growth, Coca-Cola (KO) quenched precisely what investors were thirsty for in Q2. The beverage behemoth recorded top- and bottom-line upside in the quarter, while bumping its FY24 adjusted EPS and organic revenue growth outlook modestly higher. Perhaps most impressive and a clear testament to exceptional brand power, KO delivered positive +2% volume growth in Q2, once again exceeding PepsiCo's (PEP) global beverage volumes, which were flat. KO has topped PEP's global volume growth for six quarters running.
- Headline numbers were what many have come to expect from KO, delivering a moderate bottom-line beat on mild revenue growth of 3.3% yr/yr to $12.4 bln. When backing out currency fluctuations, i.e., a strong U.S. dollar, which clipped 5 pts off revenue growth, and M&A impacts, organic revs grew by 15.0%.
- Inflationary pricing remained a contributor to KO's organic revenue growth in the quarter. Outside of the Asia Pacific, price/mix jumped significantly, accelerating in some markets, including North America, where the metric was up by 4 pts from last quarter to 11%. Meanwhile, in Latin America and EMEA, the pace at which price/mix grew remained eye-watering, leaping 19% and 24%, respectively.
- On a side note, KO's price/mix can be somewhat misleading as an uptick in price comprises only around half of the total increase.
- However, KO's brand portfolio superseded the inflationary climate. In Europe, volumes remained flat yr/yr, while in North America, they slipped by 1%. While both figures reflected how consumers are reducing their basket sizes and shopping trip frequency to better combat higher prices, they were impressive given the speed at which costs rose in Q2. Additionally, the 1% drop in North America exceeded PEP's 3% decrease.
- Meanwhile, in Latin America, where inflation has been more historically common, volumes ticked 5% higher. Finally, in Asia Pacific, volumes expanded by 3%, supported by price compression.
- As volumes held up, adjusted operating margins were able to continue expanding, increasing by 120 bps yr/yr to 32.8%. KO's Global Ventures segment was a highlight here. This unit comprises several businesses, including fees earned from KO's Monster (MNST) partnership, and has minimal overhead. Meanwhile, aside from Asia Pacific, all geographies supported KO's margin growth.
- KO is confident it can continue to leverage its brand power to deliver sound numbers in FY24 despite the challenging macroeconomic backdrop. The company raised its FY24 financial goals, targeting adjusted EPS of $2.82-2.85 from $2.80-2.82 and organic revenue growth of +9-10%, up 1 pt from its prior forecast.
In an environment that has constantly weighed on the end-consumer's purchasing power, KO's Q2 results were once again refreshing, especially following PEP's Q2 report earlier this month. While KO's non-carbonated beverage portfolio, including juices, sports drinks, and brands like Fairlife, has performed decently, it was the company's trademark Coca-Cola brand, including Zero Sugar, that enjoyed the most pronounced volume gains in Q2. This strength makes KO a force to be reckoned with, and it can keep its shares trending higher despite a wobbly global economy.
Terex's $2.0 bln purchase of Dover's Environmental Solutions Group met with a standing ovation (TEX)
Terex (TEX +9%), an aerial work platform and materials processing machine manufacturer, is surging today after agreeing to purchase Dover's (DOV -1%) Environmental Solutions Group, or ESG, for $2.0 bln in cash. On the flip side, DOV is not faring as strongly today, as investors express modest disappointment in the deal. Although shares of DOV just reached all-time highs last week, profit-taking is not overly surprising.
At the price TEX agreed to and including expected synergies of approximately $25 mln by 2026, the company paid around 8.4x FY24 EBITDA for ESG, a reasonable valuation as it is relatively in line with TEX's consolidated multiple. The transaction is expected to close during the back half of this year.
Even though TEX shares are up significantly today, meaningful upside potential remains, especially after the addition of ESG.
- As of last quarter, the Environmental Solutions Group was on track to generate pro forma LTM revenues of $1.4 bln, considerably strengthening TEX's overall business, which produced sales of roughly $5.2 bln in FY23. ESG also generates this revenue profitability; TEX anticipates ESG's EBTIDA margins, including run-rate synergies, to add 130 bps of margin accretion.
- ESG is part of DOV's Engineered Products segment, which provides a vast range of products and services to numerous customers globally. However, ESG primarily serves North America, boasting a leadership position in refuse collection vehicles and waste compaction equipment. This market is precisely what TEX has been looking to fortify, commenting last quarter that it was focused on expanding into new geographies and products. The addition of ESG would push TEX's North American revenue exposure to 65% and broaden its TAM to $40 bln.
- TEX was also bullish on waste recycling, forecasting increasing demand throughout FY24, making it critical to act now to bolster its presence in this industry. Waste recycling is also relatively non-cyclical, as the need persists no matter the economic climate.
- With so many similarities between TEX's existing environmental business and ESG, integrating the purchase should not bring too many integration-related pains. This is why TEX expects significant financial advantages so quickly, targeting its adjusted EPS to be double-digit percentage accretive in 2025 and grow meaningfully thereafter.
In 2024, the story of TEX has been filled with ups and downs. Over the past two quarterly reports, investors quickly locked in their profits, only for the selling to stabilize and ultimately reverse course. TEX reports Q2 results next week, on July 30, which could encounter a similar reaction. With backlogs continuing to moderate and the economic environment remaining subdued, TEX's near-term results could remain somewhat sluggish. However, last quarter, management reiterated that customer demand continues to be healthy across most of its businesses, which led to its raised FY24 outlook. By only strengthening its market position with ESG, even if results lag over the next couple of quarters, TEX is positioning itself nicely for long-term success.
|
