Market Snapshot
| Dow | 42342.24 | +15.37 | (0.04%) | | Nasdaq | 19411.26 | -19.92 | (-0.10%) | | SP 500 | 5866.78 | -5.08 | (-0.09%) | | 10-yr Note | -4/32 | 4.57 |
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| | NYSE | Adv 943 | Dec 1820 | Vol 1.2 bln | | Nasdaq | Adv 1807 | Dec 2485 | Vol 8.1 bln |
Industry Watch
| Strong: Utilities, Information Technology, Financials, Consumer Discretionary, Communication Services |
| | Weak: Real Estate, Energy, Materials, Health Care |
Moving the Market
-- Early rebound activity faded as yields increased
-- Mega cap names gave back early gains, coinciding with S&P 500, Nasdaq turning lower
-- 10-yr yield settling above 4.50% weighing down equity market
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Closing Summary
19-Dec-24 16:30 ET
Dow +15.37 at 42342.24, Nasdaq -19.92 at 19411.26, S&P -5.08 at 5866.78
[BRIEFING.COM] The stock market started the session in rebound-mode after the major indices registered sharp declines yesterday in response to the FOMC's decision and acknowledgement that committee members expect rates to stay higher for longer. Market breadth was positive and gains in the mega cap space provided an added boost to the broader market. Things deteriorated as the session progressed, though.
Ultimately, the S&P 500 and Nasdaq Composite each settled 0.1% lower than yesterday. The deterioration was related to rising rates and rollover action in mega cap names. The 10-yr yield jumped another eight basis points today to 4.57% following a batch of economic data (initial jobless claims, third estimate for Q3 GDP, existing home sales, and leading indicators) that was better than expected.
Microsoft (MSFT 437.03, -0.36, -0.1%), Alphabet (GOOG 189.70, -0.45, -0.2%), and Meta Platforms (META 595.57, -1.62, -0.3%) were among the mega cap names that fell from initial gains as the market declined. MSFT shares were up as much as 1.3% at session highs, GOOG was up as much as 2.3%, and META was up as much as 2.4%.
Disappointing earnings results and/or guidance from Micron (MU 87.09, -16.81, -16.2%) and Lennar Corp. (LEN 138.40, -7.53, -5.2%) contributed to the negative vibe in today's session. This price action also contributed to the underperformance of stocks in their respective industries. The SPDR S&P Homebuilder ETF (XHB) traded 2.2% lower and the PHLX Semiconductor Index (SOX) showed a 1.6% decline.
Some individual stocks were able to go against the grain, settling higher. FedEx (FDX 275.88, +2.72, +1.0%), NIKE (NKE 77.10, +0.20, +0.3%), and Carnival Corp. (CCL 25.18, +0.36, +1.5%) were standouts in that respect in front of their earnings reports.
Separately, the Bank of England voted 6-to-3 to leave its benchmark rate unchanged at 4.75% and the Bank of Japan voted 8-to-1 to leave its benchmark rate unchanged at 0.25%.
- Nasdaq Composite: +29.1% YTD
- S&P 500: +23.0% YTD
- Dow Jones Industrial Average: +12.3% YTD
- S&P Midcap 400: +11.7% YTD
- Russell 2000: +9.6% YTD
Reviewing today's economic data:
- Weekly Initial Claims 220K (Briefing.com consensus 237K); Prior 242K, Weekly Continuing Claims 1.874 mln; Prior was revised to 1879 mln from 1.886 mln
- The key takeaway from the report is the low level of initial jobless claims, which connotes a reluctance on the part of employers to layoff staff.
- Q3 GDP - Third Estimate 3.1% (Briefing.com consensus 2.8%); Prior 2.8%, Q3 GDP Deflator - Third Estimate 1.9% (Briefing.com consensus 1.9%); Prior 1.9%
- The key takeaway from the report is that it is dated (we're less than two weeks away from the end of the fourth quarter); however, the report speaks to the enduring -- and surprising -- strength of the U.S. economy despite the Fed raising rates 12 times between March 2022 and July 2023.
- December Philadelphia Fed Index -16.4 (Briefing.com consensus 3.0); Prior -5.5
- November Existing Home Sales 4.15 mln (Briefing.com consensus 4.10 mln); Prior 3.96 mln
- The key takeaway from the report is that it shows how lower mortgage rates can move the needle on existing home sales given the pent-up demand; however, with mortgage rates having risen noticeably again, expectations for continuing strength in existing home sales will be tempered by affordability concerns.
- November Leading Indicators 0.3% (Briefing.com consensus -0.1%); Prior -0.4%
Friday's economic lineup features:
- 8:30 ET: November Personal Income (Briefing.com consensus 0.4%: prior 0.6%), Personal Spending (Briefing.com consensus 0.5%; prior 0.4%), PCE Prices (Briefing.com consensus 0.2%; prior 0.2%), and Core PCE Prices (Briefing.com consensus 0.2%; prior 0.3%)
- 10:00 ET: Final December University of Michigan Consumer Sentiment (Briefing.com consensus 74.2; prior 74.0)
Stocks maintain gains ahead of the close; Yields settle mixed
19-Dec-24 15:25 ET
Dow +186.18 at 42513.05, Nasdaq +49.15 at 19480.33, S&P +22.95 at 5894.81
[BRIEFING.COM] The stock market has moved mostly sideways at the index level in recent trading.
The Treasury market closed somewhat mixed. The 2-yr yield dropped three basis points to 4.32% and the 10-yr yield jumped another eight basis points to 4.57%.
Looking ahead, Friday's calendar features the Fed's preferred gauge on inflation (core-PCE Price Index), which could have an outsized impact on markets following this week's FOMC announcement and acknowledgement that the committee expects less rate cuts than prior estimates.
FDX, NKE, CCL trade up ahead of earnings
19-Dec-24 15:05 ET
Dow +131.36 at 42458.23, Nasdaq +49.15 at 19480.33, S&P +14.16 at 5886.02
[BRIEFING.COM] The three major indices have stuck to fairly narrow trading ranges through the session so far.
Some of the names that report earnings this afternoon and ahead of tomorrow's open trade higher. FedEx (FDX 275.09, +1.93, +0.7%), NIKE (NKE 77.13, +0.22, +0.3%), and Carnival Corp (CCL 25.06, +0.25, +1.0%) are standouts in that respect.
The 10-yr yield remains near its intraday high.
S&P 500 gains, led by GE Vernova, Palantir, and FactSet; Lamb Weston drops on weak earnings
19-Dec-24 14:30 ET
Dow +238.69 at 42565.56, Nasdaq +97.19 at 19528.37, S&P +27.91 at 5899.77
[BRIEFING.COM] The S&P 500 (+0.48%) is narrowly lower form levels half an hour ago, still up about 28 points on the day.
Elsewhere, S&P 500 constituents GE Vernova (GEV 335.67, +18.55, +5.85%), Palantir Technologies (PLTR 75.03, +3.52, +4.92%), and FactSet (FDS 493.55, +20.50, +4.33%) pepper the top of the standings. PLTR is higher today after UBS started coverage on the stock at Neutral, $80 tgt citing strong fundamentals but lofty valuation, while FDS jumps after topping Q1 expectations and reaffirming FY25 guidance, highlighting strong growth and cost discipline.
Meanwhile, Lamb Weston (LW 60.16, -18.06, -23.09%) is today's top laggard as Q2 missed expectations, FY25 outlook slashed amid rising costs and soft demand; the company also announced a repurchase, dividend increase, and appointment of Michael Smith as CEO.
Gold drops as strong U.S. data boosts dollar and fuels Fed caution
19-Dec-24 14:00 ET
Dow +276.00 at 42602.87, Nasdaq +110.68 at 19541.86, S&P +33.44 at 5905.30
[BRIEFING.COM] The tech-heavy Nasdaq Composite is tied with the S&P 500 at gains of +0.57% apiece.
Gold futures settled $45.20 lower (-1.7%) to $2,608.10/oz, dipping as strong U.S. data fuels Fed caution.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $108.38.
Cintas pulling back on earnings; had been in steady uptrend, but has stumbled (CTAS))
Cintas (CTAS -9%) is trading lower after reporting Q2 (Nov) earnings results this morning. The company has not missed on EPS in any quarter for the past five years and that was the case again in Q2. Revenues rose 7.8% yr/yr to a record $2.56 bln, which was in-line.
- However, Cintas clipped the high end of its FY25 organic revenue growth guidance a bit lower to +7.0-7.7% vs +7.0-8.1% prior guidance. We think this is the main source for the weakness today. However, Cintas still expects its first $10+ bln revenue year in FY25. Importantly, the company also raised full year EPS guidance for the second quarter in a row. The guidance increase was more than the Q2 beat, which implies upside EPS guidance for Q3-Q4.
- We like to keep an eye on Cintas because it is a window into how businesses see their near term prospects. Cintas is more than just the largest supplier of work uniforms in the US, it also gets more than half of its revenue from facility services (cleaning supplies, mops, first aid cabinets, fire extinguishers, alarms etc.) Cintas said it continued to experience strong demand in Q2 from businesses of all types and sizes.
- The company explained that virtually every business has a need Cintas is ready to meet. Whether it's a front door that needs a mat, a bathroom to service, exit lighting, fire extinguishers and sprinkler systems, first aid and safety needs etc. Cintas is also continually deepening its value proposition particularly within its four focused verticals: health care, hospitality, education and state and local government, which continued to perform well in Q2.
- Its Uniform Rental and Facility Services is the much larger segment of the two. Segment revenue rose 7.6% yr/yr to $1.99 bln. Other revenue, of which its First Aid segment accounts for a big part, rose 8.5% yr/yr to $571.4 mln.
- On the call, Cintas said that obtaining price increases has been more challenging than it was in Q1 (Aug) and earlier in calendar 2024. Price increases are coming down as inflation has come down. However, it still is able to obtain price increases. Nevertheless, Cintas said that new business is quite strong. Its retention rates are still at very attractive levels. Catalog spending is down a little bit but, overall, the business is functioning at a high level and the macro data seems pretty stable.
For much of the past year, this stock has been in an enviable uptrend without a lot of volatility. However, the stock has started to get tripped up in December. Shares of Cintas have been hit by two events this week. First, the Fed slowing its rate cut plans is not great for Cintas. Interest rates impact its customers plans to hire people and make investments. Second, this earnings report was decent, but not great. The main issue is that Cintas shaved a bit off the high end of its guidance for FY25 organic sales growth. That seems to have spooked investors a bit. Also, the comments about price increases being a bit harder to come by is having an impact as well.
CarMax's upbeat Q3 results drives its shares to 52-week highs before pulling back slightly (KMX)
CarMax (KMX +4%) got off to a hot start this morning, driving to 52-week highs following a double-digit earnings beat on a return to positive yr/yr revenue growth in Q3 (Nov) following nine consecutive quarters of sales declines. Shares are still higher on the day but have since pulled back from intraday highs, underscoring a few concerns still hanging over the stock, primarily surrounding interest rates and how they will affect borrowers.
- KMX's bottom-line performance was impressive, posting its widest earnings beat since 1Q24 (May). The company has focused on margin preservation over volume growth during the current wobbly economic climate. As such, retail gross profit per used unit remained stable, inching over 1% higher yr/yr to $2,306, while wholesale margins improved by over 5% to $1,015 per unit.
- Average selling prices continued to contract in Q3, sliding by roughly 4% and 6% for used and wholesale vehicles, respectively. The price drop spurred decent volume growth, with used units boasting a 5% jump while wholesale edged 6% higher compared to last year. Meanwhile, used unit comps ticked +4.3% higher, consistent with last quarter. As a result, KMX finally returned to positive yr/yr revenue growth at 1.2% to $6.22 bln, crushing analyst expectations, which called for another yr/yr decline.
- An uptick in the provision for loan losses last quarter raised a few alarms. Encouragingly, in Q3, the trend did not persist. KMX stabilized the provision for loan losses, ending the quarter at $73 mln compared to last year's provision of $68 mln, far better than how KMX exited Q2 (Aug) at $113 mln versus $90 mln in the year-ago period. KMX noted that the provision this quarter was at a much more normalized level.
- KMX did not outline formal guidance but expressed satisfaction with its current sales momentum. In fact, last quarter, KMX said that comp growth would likely run slightly lighter in Q3 compared to Q2. Sales trends shaping up more favorably than expected bodes well for KMX heading into 2025.
Overall, KMX performed well in Q3, keeping margins stable while returning to positive revenue growth. Delinquency rates will likely remain a concern over the near term, especially given that the Fed may not cut interest rates as aggressively as previously thought. Most of the headwinds lie in financing during 2022 and 2023 when inflation was peaking at the same time interest rates were climbing. However, KMX continues to explore ways to help its customers through adjustments, such as offering payment extensions. At the same time, the company continues to test its new credit scoring models to better assess risk across the full spectrum of borrowers.
Micron tumbles on downbeat Q2 (Feb) guidance; AI demand robust while consumer segments struggle (MU)
A significantly weaker-than-expected Q2 (Feb) outlook, sparked by softening demand across consumer-oriented markets, is triggering a considerable sell-off in Micron (MU -17%) today. The memory chip manufacturer projected adjusted EPS and revenue alarmingly below consensus, targeting $1.33-1.53 and $7.70-8.10 bln, respectively, both representing sharp slowdowns in growth compared to Q1 (Nov).
MU still enjoyed unwavering demand for AI, a similar theme that took center stage among some of the company's peers recently, including Marvell (MRVL) and Broadcom (AVGO). Unfortunately for MU, unlike its peers, whose AI-related gains offset lingering weaknesses from consumer-facing end markets, it could not dodge the adverse impacts of sluggish PC, smartphone, and automotive demand.
- MU warned last quarter that customer inventory reductions in its consumer segments combined with seasonality would adversely affect Q2 (Feb) bit shipments. As such, MU's performance in Q1 was unaffected, leading to adjusted EPS of $1.79 on revs of $8.71 bln, an 84.3% jump yr/yr. DRAM and NAND revenue each surged by over 80%, supported by healthy demand in data center and high bandwidth memory (HBM) -- used extensively in AI workloads.
- AI remained the star in Q1 as training model sizes continued to increase. MU upgraded its view of server unit percentage growth for CY24 to the low teens and sees momentum continuing in 2025. HBM revs more than doubled sequentially in Q1, supporting MU's increased TAM estimates for 2025 to now exceed $30 bln, up from its $25 bln prediction last quarter.
- Casting a dark cloud on the AI highlights was lackluster PC, mobile, and automotive demand. The PC refresh cycle is unfolding gradually; MU expects volume growth to be flattish in CY24, below its prior outlook. Management is still bullish on AI PC adoption over time, which will require more DRAM content, given the resources AI consumes.
- In mobile, smartphone volumes are tracking in line with MU's expectations, aided by AI adoption, which also drives DRAM content growth. However, bit shipments will be weighted toward the back half of FY25 (Aug), consistent with release schedules from major smartphone manufacturers.
- Automotive production is slowing, and consumers are shifting their tastes toward value-trim vehicles from premium models and EVs. This creates speedbumps for MU as it reduces memory and storage content growth, resulting in inventory adjustments at automotive OEMs. MU is still optimistic that advanced driver assistance systems, infotainment, and AI adoption across the automotive industry will propel long-term content growth. However, MU does not see a recovery until later in 2025.
A silver lining from MU's troubling Q2 guidance is that it might be a short-lived setback as the company expects a return to growth within its consumer-facing segments during the second half of FY25. At the same time, there are no slowdowns present within the AI space, which is now comprising over half of the company's total revenue. Nevertheless, MU's downbeat outlook is spooking investors today as there are no guarantees that demand will pick up across the PC, smartphone, and automotive industries, especially with the Federal Reserve signaling fewer-than-expected interest rate cuts next year while the cumulative effects of inflation linger in the background.
Darden Restaurants looks delicious to investors following strong comps and Uber rollout (DRI)
Darden Restaurants (DRI +13%) is making a strong move following its Q2 (Nov) earnings report this morning. This operator of several restaurant chains (Olive Garden, LongHorn Steakhouse, Ruth's Chris, Chuy's) reported only a modest beat on EPS with slight revenue upside. DRI reaffirmed FY25 EPS at $9.40-9.60, but it raised FY25 revenue guidance to $12.1 bln from $11.8-11.9 bln, primarily adding in the impact of the Chuy's acquisition. The comps seem to be propelling the stock.
- Turning to comps, DRI posted Q2 consolidated comps of +2.4% (OG +2.0%, LS +7.5%, Fine Dining -5.8%), a notable improvement from Q1's -1.1% comp (OG -2.9%, LS +3.7%, Fine Dining -6.0%). As a housekeeping matter, consolidated comps do not include Chuy's, which was just acquired in October. Chuy's will be added to comps after a 16-month period (4QFY26). Another recent acquisition, Ruth's Chris, is finally starting to show in comps but only for November in Q2.
- Importantly, the late Thanksgiving this year meant that the holiday was part of Q3 and not Q2. That caused a sales benefit for the Casual Dining brands in Q2, and a headwind for its Fine Dining brands. However, even when adjusting for the benefit of the Thanksgiving holiday shift at its four largest brands, comps were still positive. Excluding the noise from weather and the shift of Thanksgiving, underlying basic traffic trends improved in Q2 relative to the prior two quarters across all brands.
- It was good to see Olive Garden return to positive comps after three consecutive negative comps. Olive Garden has been working on several initiatives to appeal to core guests as well as value seekers. Its Never Ending Pasta Bowl starting at $13.99 was a hit with customers. Also, OG debuted an updated menu that launched two weeks ago, featuring two fan favorites, Steak Gorgonzola and Stuffed Chicken Marsala.
- Also, recall that last quarter DRI announced a partnership with Uber (UBER) last quarter for tis OG brand. In October, Olive Garden launched its Uber Direct pilot in approximately 100 restaurants. The pilot has gone very well despite not actively promoting the service just yet. It's on track to begin rolling it out to the rest of the system after the holidays, with potential completion by the end of Q3 (Feb). That is earlier than the May 2025 target disclosed on its last call, so that is a good sign.
Overall, this was a very solid quarter for Darden. The headline numbers showed slight upside, however, following EPS misses in two of the past three quarters, we will take it. Also, what really stood out was the comp metric, a marked improvement from recent quarters. Olive Garden and especially Longhorn were impressive. The Never Ending Pasta offering appeals to value consumers. Also, the Uber partnership is off to a good start and we like that Darden moved up the national rollout date.
Finally, given the pullback in the share price in recent weeks, we think there was a good bit of negativity priced in, which also helps explain today's outsized move. We think this report bodes well for other casual dining restaurants set to report when earnings season kicks off next month, including BJRI, BLMN, CAKE, EAT, TXRH.
HEICO descends on a Q4 revenue miss; excited about potential U.S. budget cuts (HEI)
HEICO (HEI -8%), an aerospace component and electronics supplier, is descending quickly today after its revenue fell short of analyst estimates in Q4 (Oct). Additionally, HEI reported a slimmer bottom-line beat compared to the previous quarter, potentially adding to today's downbeat sentiment. Similar to the set-up heading into Q3 (Jul), the stock ascended by around +6% over the previous three months, reaching highs of +13% late last month. The upward trend steadily pushed expectations higher, making HEI's top-line miss more disappointing.
However, despite the weaker-than-expected revenue performance in Q4, delivering just 8.2% yr/yr growth to $1.01 bln, a drastic slowdown from +37.3% posted in Q3, HEI delivered several highlights.
- A favorable combination of broad-based demand and acquisition-related impacts pushed sales in HEI's Flight Support Group (FSG) segment 15% higher yr/yr in Q4 to a record $691.8 mln. When backing out M&A, organic sales growth was still a healthy 12%. The FSG segment revolves around manufacturing components for sale at lower prices than OEMs. While a steady uptick in commercial flights remains important to FSG, the U.S. government is a critical customer, with defense and space crucial to HEI's long-term strategy.
- The government is also vital to HEI's Electronic Technologies Group (ETG) segment. Unfortunately for HEI, due to the nature of government contracts, revenue can fluctuate considerably from quarter to quarter. This dynamic clipped Q4 growth, with ETG recording a 1.8% drop in sales yr/yr to $336.2 mln. Furthermore, inventory destocking continues to unfold at some of HEI's customers, capping growth, especially across the non-aerospace and defense markets.
- Regarding HEI's Wencor Group acquisition, which operates as a standalone operation, the company noted that performance continued to exceed expectations in the quarter. HEI added that its decision to operate Wencor as a standalone company contributed to energetic sales, earnings and margins in Q4. Management mentioned that given Wencor's early success, it anticipates further revenue synergies.
- Looking ahead, HEI conveyed a glass-half-full attitude, expressing confidence in returning to growth in its ETG segment during the first half of FY25. Likewise, in FSG, HEI anticipates positive growth, supported by robust demand for most of its products. Additionally, given its business model regarding pricing below OEMs, HEI stands to benefit from potential budget cuts from the incoming administration. Management touched on the DOGE (Department of Government Efficiency) division, noting that it is low-hanging fruit.
HEI's Q4 sales miss and its slimmest earnings beat since 3Q23 were disappointing. However, like last quarter, HEI is bullish about its prospects, anticipating a rebound in ETG and additional growth in FSG in FY25. Furthermore, HEI believes DOGE will be outstanding for the company given the budget deficit and the amount of money the U.S. government must cut, presenting HEI with a significant opportunity. As such, HEI is worth keeping on the radar.
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