Market Snapshot
| Dow | 42374.36 | -140.59 | (-0.33%) | | Nasdaq | 18415.48 | +138.83 | (0.76%) | | SP 500 | 5809.86 | +12.44 | (0.21%) | | 10-yr Note | +3/32 | 4.20 |
|
| | NYSE | Adv 1485 | Dec 1240 | Vol 862 mln | | Nasdaq | Adv 2157 | Dec 2045 | Vol 5.8 bln |
Industry Watch
| Strong: Consumer Discretionary, Communication Services, Real Estate, Information Technology |
| | Weak: Materials, Industrials, Utilities, Health Care, Consumer Staples |
Moving the Market
-- Tesla (TSLA) up sharply after impressing with Q3 earnings and 2025 vehicle growth estimate
-- Losses in IBM (IBM), Honeywell (HON), and Boeing (BA) leading DJIA to trade lower
-- Buy-the-dip activity following recent declines
-- Treasury yields steady after sharp rise
| Closing Summary
24-Oct-24 16:20 ET
Dow -140.59 at 42374.36, Nasdaq +138.83 at 18415.48, S&P +12.44 at 5809.86
[BRIEFING.COM] The stock market closed mostly higher after a soft start to the week. Some buy-the-dip action contributed to the positive bias, which was boosted by surging shares of Tesla (TSLA 260.46, +46.83, +21.9%) after impressive Q3 earnings and a 2025 vehicle growth estimate.
The upside bias was also related to a drop in market rates. The 2-yr yield settled two basis points lower at 4.07% and the 10-yr yield settled four basis points lower at 4.20%.
The S&P 500 settled 0.2% higher and the Nasdaq Composite closed up 0.8% compared to yesterday. The S&P 500 is still 0.9% lower since Friday and the Nasdaq Composite is 0.4% lower for the week.
The Dow Jones Industrial Average (-0.3%) underperformed major indices due to losses in IBM (IBM 218.39, -14.36, -6.2%), Honeywell (HON 209.10, -11.24, -5.1%), and Boeing (BA 155.20, -1.86, -1.2%). IBM and Honeywell reported earnings results and Boeing trades down on news that workers voted 64% against accepting the latest contract proposal put forth by their employer.
Other influential names like Whirlpool (WHR 110.37, +11.09, +11.2%), Mattel (MAT 18.57, +0.79, +4.4%), Lam Research (LRCX 76.57, +3.71, +5.1%), and ServiceNow (NOW 956.58, +48.90, +5.4%) settled higher in response to earnings news, providing added support to the broader market.
Union Pacific (UNP 230.75, -10.60, -4.4%), United Rentals (URI 824.99, -9.19, -1.1%), and Harley Davidson (HOG 31.67, -2.46, -7.2%) were among the names that traded down after reporting earnings results.
The S&P 500 communication services sector was a top performer, jumping 3.2% thanks to Tesla and Amazon.com (AMZN 186.38, +1.67, +0.9%). The materials sector logged the largest decline, down 1.4% from yesterday.
- Nasdaq Composite: +22.7% YTD
- S&P 500: +21.8% YTD
- Dow Jones Industrial Average: +12.4% YTD
- S&P Midcap 400: +12.5% YTD
- Russell 2000: +9.5% YTD
Reviewing today's economic data:
- Weekly Initial Claims 227K (Briefing.com consensus 246K); Prior was revised to 242K from 241K, Weekly Continuing Claims 1.897 mln; Prior was revised to 1.869 mln from 1.867 mln
- The key takeaway from the report is that, while it might still contain some noise from the effects of the hurricanes, the initial claims data from both a seasonally adjusted and unadjusted basis connote a labor market that is still operating on solid ground that is a long way from recession-like territory.
- October S&P Global US Manufacturing PMI - Prelim 47.8; Prior 47.3
- October S&P Global US Services PMI - Prelim 55.3; Prior 55.2
- September New Home Sales 738K (Briefing.com consensus 713K); Prior was revised to 709K from 716K
- The key takeaway from the report is that new home sales, which are tabulated when contracts are signed, likely enjoyed a tailwind from the drop in mortgage rates seen in September ahead of the FOMC decision, but with rates higher now than they were before the September 18 rate cut, it is reasonable to think October new home sales won't look as good.
Looking ahead, Friday's economic lineup includes:
- 8:30 ET: September Durable Orders (Briefing.com consensus -0.9%; prior 0.0%) and Durable Orders ex-transport (Briefing.com consensus -0.1%; prior 0.5%)
- 10:00 ET: Final October University of Michigan Consumer Sentiment (Briefing.com consensus 68.9; prior 68.9)
Treasuries settle with gains, boosting equities
24-Oct-24 15:35 ET
Dow -121.33 at 42393.62, Nasdaq +150.56 at 18427.21, S&P +16.90 at 5814.32
[BRIEFING.COM] The S&P 500 and Nasdaq Composite are higher, up 0.3% and 0.8%, respectively, ahead of the close.
The 2-yr yield settled two basis points lower at 4.07% and the 10-yr yield settled four basis points lower at 4.20%.
Looking ahead, Friday's economic lineup includes:
- 8:30 ET: September Durable Orders (Briefing.com consensus -0.9%; prior 0.0%) and Durable Orders ex-transport (Briefing.com consensus -0.1%; prior 0.5%)
- 10:00 ET: Final October University of Michigan Consumer Sentiment (Briefing.com consensus 68.9; prior 68.9)
S&P 500 driven by earnings movers
24-Oct-24 14:30 ET
Dow -144.32 at 42370.63, Nasdaq +131.46 at 18408.11, S&P +12.61 at 5810.03
[BRIEFING.COM] The S&P 500 (+0.22%) is in second place on Thursday afternoon, see-sawing back toward session highs over the last half hour.
Elsewhere, S&P 500 constituents Molina Healthcare (MOH 331.89, +56.89, +20.69%), CBRE Group (CBRE 134.61, +11.49, +9.33%), and Pool (POOL 377.07, +26.39, +7.53%) are among today's top gain getters following earnings.
Meanwhile, Colorado-based gold miner Newmont Corporation (NEM 49.45, -8.29, -14.36%) is top laggard after last night's Q3 miss.
Gold returns to winning ways
24-Oct-24 14:00 ET
Dow -162.10 at 42352.85, Nasdaq +112.71 at 18389.36, S&P +7.79 at 5805.21
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+0.62%) remains firmly ahead of its major counterparts.
Gold futures settled $19.50 higher (+0.7%) to $2,748.90/oz, fueled in part by ongoing geopolitical tensions.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $104.02.
IBM, Honeywell drag DJIA on Thursday
24-Oct-24 13:30 ET
Dow -153.97 at 42360.98, Nasdaq +106.06 at 18382.71, S&P +9.51 at 5806.93
[BRIEFING.COM] The Dow Jones Industrial Average (-0.36%) is down about 154 points, little changed over the last half hour.
A look inside the DJIA shows that IBM (IBM 217.19, -15.59, -6.69%), Honeywell (HON 210.42, -9.92, -4.50%), and Verizon (VZ 41.77, -1.09, -2.54%) are underperforming.
Meanwhile, Goldman Sachs (GS 522.70, +5.50, +1.06%) is atop the standings.
The DJIA is now -1.17% lower week-to-date.
Southwest Air descending despite upside Q3 results and proxy fight resolution (LUV)
Echoing a similar message as Delta Air Lines (DAL) and United Airlines (UAL), which reported Q3 earnings on October 10 and October 15, respectively, Southwest Airlines (LUV) credited industry-wide capacity moderation and improving travel demand for its better-than-expected Q3 results. The upside quarterly results are only half the story for LUV, though. After four contentious months in which activist investment firm Elliott Investment Management engaged in a proxy fight with LUV and called for the dismissal of CEO Bob Jordan and Chairman Gary Kelly, both sides came to a formal agreement.
As part of the settlement, Mr. Jordan will retain his CEO position, but Mr. Gary will depart from the Board of Directors. Additionally, Elliott's influence will increase considerably as six of its recommendations for the Board of Directors were approved, including David Cush, the former CEO of Virgin America, and Pierre Breber, the former CEO of Chevron (CVX).
The agreement removes an overhang and uncertainty, and it also should help to accelerate LUV's turnaround efforts. However, shares of LUV are still flying sharply lower despite the positive news.
- We believe the weakness is partly attributable to the fact that the stock had already rallied by 30% since early August. In the wake of UAL's strong results last week, investors were anticipating a solid report from LUV. The company's guidance, though, may also been causing an issue.
- While LUV's Q4 RASM guidance of +3.5-5.5% looks good, reflecting healthy holiday-season demand, the company's cost guidance is disappointing. Specifically, LUV anticipates Q4 CASM-X to increase in the range of 11-13%, driven by ongoing cost pressures, especially related to new labor contracts. Furthermore, an expected 4% reduction in capacity will also pressure CASM-X.
- In Q3, CASM-X came in at +11.6%. For the sake of comparison, UAL reported that CASM-ex increased by 6.5% in Q3, while DAL reported a 5.7% increase in non-fuel CASM. One of Elliott's gripes against LUV has been that the airline wasn't operating efficiently, so we anticipate that further actions to control costs will be on the horizon.
- Removing unprofitable flights and reducing capacity is another lever LUV is pulling to improve profitability. On that note, ASMs increased by 2.4% in Q3, but LUV is planning for a 4% cut in capacity in Q4, which should support higher ticket prices.
- Rounding out the busy news morning for LUV, the company also announced a $250 mln accelerated share repurchase program under its $2.5 bln share repurchase authorization. Buying back stock should help to offset the impact on EPS from the higher costs.
Overall, LUV delivered a solid earnings report, but its performance is still lagging that of UAL's and DAL's. There's plenty of room for improvement, especially on the cost side, but with Elliott now on board, we suspect that operational changes will be coming sooner-than-later, potentially providing a boost to LUV's profits.
UPS delivered good result despite recent FedEx miss; first top line growth in 2 yrs (UPS)
UPS (UPS +5%) delivered for investors today as the package delivery giant rebounded from a big miss in Q2 to report nice EPS upside in Q3. Following a huge miss from FedEx (FDX) last month, many investors had concerns coming into this quarter. They were pleasantly surprised. However, it was not all clear sailing as UPS lowered its FY24 revenue outlook to $91.1 bln.
- Revenue rose 5.4% yr/yr to $22.2 bln, a bit better than expected. Importantly, this marked UPS's first yr/yr revenue growth since 3Q22 with all three business segments delivering revenue growth. In its US Domestic segment, its performance was driven by strong volume growth, the highest growth rate in more than three years, and excellent cost management, which resulted in a yr/yr decrease in cost per piece of 4.1%. US average daily volume, or ADV, increased 6.5% yr/yr.
- In terms of product mix in Q3, Ground ADV increased 8.9%, while total air ADV was down 6.3%. UPS continues to see customers shifting down from air to ground and some ground volume is shifting down to SurePost. Within ground, SurePost volume levels rose slightly vs Q2. While SurePost volume comes at a lower revenue per piece, UPS said its algorithm improvements allowed it to redirect more SurePost packages into its own network, driving delivery density.
- On its last earnings call, UPS said that Q2 would not only be the bottom, but a turning point for its performance. UPS said it would return to revenue and profit growth in Q3 and UPS did just that. Nevertheless, UPS conceded that it faced a macro environment in Q3 that was slightly worse than expected. In the US, online sales slowed and manufacturing activity was lower than anticipated. This slowdown in manufacturing was also true outside of the US.
- Looking ahead to the all-important holiday season in Q4, UPS noted that this year's holiday season has only 17 shipping days between Black Friday and Christmas Eve. There has not been such a compressed peak since 2019. To prepare, UPS has been collaborating with customers on daily volume expectations and the timing of their promotions. While UPS customers are still expecting a good holiday selling season, recently, shippers have tempered their volume expectations.
Given all the doom and gloom from UPS's Q2 EPS miss and the big miss we saw from FedEx last month, investors are quite excited and likely surprised to see such a good quarter from UPS today. What really stood out were the comments about strong volume growth in the US Domestic segment, the highest growth rate in more than three years. With that said, UPS seemed a bit cautious on Q4 as some shippers have tempered their volume expectations in Q4 given the compressed peak season this year.
Lam Research ticks higher as unrelenting AI-related demand supports decent SepQ results (LRCX)
Lam Research (LRCX +2%) takes a small step higher today after registering decent top and bottom-line upside in Q1 (Sep). The wafer fab equipment (WFE) supplier also projected Q2 (Dec) numbers consistent with analyst forecasts, a common occurrence for the company, having done so for six straight periods. The performance overall was sufficient in easing some fears prompted by ASML's (ASML) dismal Q3 report last week, projecting downbeat figures following a slower-than-expected recovery across all markets outside of AI. Still, unease likely remains, evidenced by LRCX trading around 12% below levels before ASML's Q3 report and over 30% below all-time highs reached in July.
- AI is likely not generating concerns. The technology remained a silver lining for ASML and a positive standout for LRCX, showcased by its advanced packaging business, which meets the need for high bandwidth memory (HBM), reaching $1.0 bln in sales in the quarter. Management mentioned that the unrelenting demand for AI has gone beyond what it initially expected. LRCX does not foresee advanced packaging slowing down anytime soon given conversations with customers.
- The accelerating momentum for AI was an underlying factor in LRCX's second straight double-digit revenue growth in the quarter, posting a 19.7% jump yr/yr to $4.17 bln, exceeding the midpoint of its $3.75-4.35 bln guidance. Margins also exceeded LRCX's expectations, pushing adjusted EPS 29% higher yr/yr to $0.86.
- Keeping shares somewhat in check today was LRCX's unchanged WFE spending forecast for 2024 at around the mid-$90 bln range. AI remains buoyant, countering domestic China WFE spending sliding in the back half of the year compared to the first half. China's share of LRCX's overall revs is also normalizing to the 30% range for Q2 (Dec). Given this context, LRCX projected a relatively wide guidance range for Q2, expecting adjusted EPS of $0.77-0.97 and revs of $4.0-4.6 bln.
- While LRCX noted that it is too early to outline its 2025 WFE spending guidance, it predicts growth yr/yr. NAND and DRAM are expected to recover, propped up by advanced packaging demand and ongoing technology conversions to more advanced nodes, among other factors. More importantly, LRCX is confident in outperforming overall WFE growth next year due to the company's critical role in chip manufacturing.
Supported by constant AI-related investments from customers, LRCX's Q1 report was decent. The timing surrounding a recovery remains uncertain, however, keeping overall sentiment somewhat cautious. ASML's alarming guidance last week is proving challenging to shrug off as the market may need further signs of recovery from LRCX's peers before fears begin to subside. However, it could take until next quarter, when LRCX should issue its 2025 WFE spending outlook before investor confidence is fully restored.
Tesla puts a charge into its stock by delivering much improved Q3 results (TSLA)
Tesla's (TSLA) margins and earnings had been driving in the wrong direction over the past several quarters, but the EV maker executed a surprise U-turn in 3Q24, beating EPS estimates for the first time since 2Q23. The competitive landscape remains daunting in both the U.S. and China, and TSLA continued with its price-cutting ways as ASPs fell across nearly all models (S,3,X,Y), yet the steady decline in automotive gross margin finally came to an end in Q3. Providing another charge to the stock was Elon Musk's prediction of 20-30% vehicle volume growth in FY25, which would represent a substantial upswing from the company's expectation for "slight growth in vehicle deliveries in 2024."
- One of the key drivers that sparked the EPS beat was the 6% yr/yr decline in cost of goods sold. In fact, TSLA's cost per vehicle sank to its lowest level ever at $35,100 due to lower raw material and freight costs and improved manufacturing efficiencies for Cybertruck, which achieved positive gross margin for the first time. Accordingly, TSLA's overall automotive gross margin swung higher by about 230 bps yr/yr to 17.0%
- In addition to the improved automotive gross margin, TSLA's cost-cutting efforts also played a part in the better-than-expected earnings performance. After jumping by 39% last quarter, operating expenses fell by 6% in Q3 to $2.28 bln, mainly reflecting the impact of TSLA's 10% reduction in its global workforce that was announced this past April.
- The story on the demand side, though, isn't quite as positive. While revenue growth improved to nearly 8% from the pedestrian 2%-mark seen last quarter, this was mostly driven by the 59% surge in revenue for the Energy Storage business and a 33% increase in revenue from the sale of regulatory credits to $739 mln. Meanwhile, automotive revenue inched higher by just 2% to $20.0 bln.
- However, Elon Musk's optimistic outlook for vehicle growth next year is easing these growth concerns. Of course, it's always wise to take his predictions with a grain of salt, but if TSLA comes anywhere near the high end of his 20-30% vehicle volume growth forecast, that would be a major win for the company and its shareholders. To reach that level of growth, the company certainly would need to be ramping up production of new, affordable models, which is still expected to begin in 1H25.
- Looking further ahead, Musk stated that Cybercab should reach volume production in 2026, while setting a very ambitious goal of eventually making 2 million units annually. For some context, TSLA is expected to produce around 1.8-1.9 million total vehicles this year, for all models.
The main takeaway is that two of the most pressing concerns surrounding TSLA -- eroding margins/profits and slowing growth -- were eased, at least temporarily, with this earnings report. If TSLA can continue to generate earnings growth (EPS was up 9% in Q3), that will make its lofty spending plans around Cybercab and AI a much easier sell to shareholders. Although one quarter doesn't make a trend, the turnaround in TSLA's financials is a welcomed development for shareholders who have seen the stock drop by 14% on a year-to-date basis before today's sharp gains.
IBM sees some earnings-related profit taking following big move; Consulting seeing headwinds (IBM)
IBM (IBM -6%) is trading lower after reporting Q3 results last night. It reported nice EPS upside, but revenue rose just 1.5% yr/yr (+2% CC) to $14.97 bln, which was a bit light. However, IBM reaffirmed FY24 free cash flow guidance at "above $12 bln." It also said it expects Q4 CC revenue (not comparable to consensus) to be consistent with Q3.
- The Software segment was the star of the show with revenue up +9.7% (+9.6% CC) to $6.5 bln with a reacceleration in Red Hat +14% and continued strength in transaction processing. Software is now nearly 45% of total revs, up from the high 20's in 2018. IBM says this is a testament to innovation and repositioning its portfolio. Its recurring revenue base, which is about 80% of annual Software revenue, continues to deliver strong growth. ARR for hybrid platform and solutions now stands at $14.9 bln, up 11% yr/yr. Also, this quarter marks the 5-year anniversary of the Red Hat acquisition. Red Hat has doubled in size since the deal was announced.
- Turning to its Consulting segment, revenue was down -0.5% yr/yr (-0.2% CC) to $5.2 bln, which was at the lower end of internal expectations. Technology spending remains strong. However, a pause in discretionary spending is impacting IBM's Consulting unit. IBM cited an uncertain macro environment (geopolitical issues, US election, changing interest rates, inflation). At the same time, clients are reprioritizing their IT budgets to prepare for generative AI.
- While demand for large digital transformations remains solid, IBM's overall signings declined for the second consecutive quarter. Despite the weak current demand environment for Consulting, IBM says it's well-positioned to capture growth from generative AI. It continues to build a solid generative AI book of business with about $1 bln of new bookings in Q3.
- Its final segment is Infrastructure, which saw sales decline -7.0% (-6.7% CC) to $3.0 bln, reflecting product cycle dynamics. Hybrid infrastructure was down 9%, and within that, IBM Z revenue declined 19% in what is now the 10th quarter of z16 availability. The silver lining is that the z16 program continues to exceed prior cycles, delivering revenue growth in 8 of the last 10 quarters. Distributed Infrastructure revenue was down 3%, with product cycle dynamics impacting its Power business.
- IBM says it has made solid progress in transitioning its portfolio to a higher growth, higher margin business and that it is well positioned heading into 2025. Software revenue growth has accelerated throughout the year, and this should continue in Q4 as IBM expects low double-digit growth for Software, led by Red Hat growth in the mid-teens. IBM expects Q4 Consulting revenue performance to be similar to Q3.
The stock is trading lower despite the EPS upside, decent guidance and robust Software segment results. Infrastructure was weak, but that was expected given that we are now into the tenth quarter since IBM's z16 launch. We think IBM's comments about macro pressures and seeing a pause in discretionary spending from its Consulting clients are mostly responsible for today's pullback.
Also, the stock has been a beast (+40% since early June), trading at new all-time highs earlier this month as investors have been focusing more on IBM's AI exposure. As such, sentiment was likely pretty high heading into this report, so it does not take much to convince them to book some profits.
|
