Market Snapshot
| Dow | 42587.50 | +4.18 | (0.01%) | | Nasdaq | 18271.86 | +83.26 | (0.46%) | | SP 500 | 5776.65 | +9.08 | (0.16%) | | 10-yr Note | +3/32 | 4.31 |
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| | NYSE | Adv 1177 | Dec 1521 | Vol 1.1 bln | | Nasdaq | Adv 1674 | Dec 2650 | Vol 6.4 bln |
Industry Watch
| Strong: Communication Services, Consumer Discretionary, Financials, Materials |
| | Weak: Utilities, Consumer Staples, Real Estate |
Moving the Market
-- Not a lot of conviction amid ongoing uncertainty around trade policy
-- Still some buying interest under the surface due to market being oversold on short-term basis
-- Gains in some mega caps helping broader market
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Closing Summary
25-Mar-25 16:30 ET
Dow +4.18 at 42587.50, Nasdaq +83.26 at 18271.86, S&P +9.08 at 5776.65
[BRIEFING.COM] The major equity indices closed higher for a third consecutive session. This price action pushed the S&P 500 further above its 200-day moving average (5,754). The moves were modest, however, and mostly driven by gains in the mega cap space.
There was an overall negative bias under the index surface as participants continue to weigh worries about US trade policy and economic growth. The latter was piqued by this morning's economic releases.
The Consumer Confidence Index showed a fourth consecutive decline, and the Expectations Index fell to its lowest level (65.2) in 12 years, with worries about future employment prospects and inflation pacing that downturn. Separately, new home sales increased a modest 1.8% month-over-month in February, yet higher-priced homes made up a smaller percentage of sales than the prior month.
In housing market-related news, KB Home's (KBH 58.57, -3.22, -5.2%) disappointing earnings and guidance contributed to the downside bias today. Shares hit a 52-week low after the homebuilder reported below-consensus Q1 earnings and lowered its FY25 housing revenue outlook, piling onto concerns of an intensifying housing market slowdown. This comes less than one week after competitor Lennar (LEN 117.74, +0.18, +0.2%) issued soft 2Q25 EPS and deliveries guidance.
Treasuries settled higher in another manifestation of growth concerns. The 10-yr yield dropped two basis points to 4.31%, and the 2-yr yield dropped three basis points to 4.00%. On a related note, today's $69 billion 2-yr note sale met strong demand.
- Dow Jones Industrial Average: +0.1% YTD
- S&P 500: -1.8% YTD
- S&P Midcap 400: -3.6% YTD
- Nasdaq Composite: -5.4% YTD
- Russell 2000: -6.0% YTD
Reviewing today's economic data:
- January FHFA Housing Price Index 0.2%; Prior was revised to 0.5% from 0.4%
- January S&P Case-Shiller Home Price Index 4.7% (Briefing.com consensus 4.6%); Prior 4.5%
- March Consumer Confidence 92.9 (Briefing.com consensus 94.2); Prior was revised to 100.1 from 98.3
- The key takeaway from the report is that the drop in confidence was guided primarily by the decline in consumers' outlook, which was driven by worries about inflation and future employment prospects, the latter of which hit a 12-year low. This can be a combination for a pullback in discretionary spending.
- February New Home Sales 676K (Briefing.com consensus 680K); Prior was revised to 664K from 675K
- The key takeaway from the report is that new home sales in February were aided by the drop in mortgage rates, yet affordability constraints remained a headwind as sales of higher-priced homes accounted for a smaller percentage of new home sales in February than the prior month.
Wednesday's economic lineup features:
- 7:00 ET: Weekly MBA Mortgage Index (prior -6.2%)
- 8:30 ET: February Durable Orders (Briefing.com consensus -1.2%; prior 3.1%) and Durable Orders ex-transport (Briefing.com consensus 0.1%; prior 0.0%)
- 10:30 ET: Weekly crude oil inventories (prior +1.75 mln)
Econ data fuels some selling under the surface
25-Mar-25 15:30 ET
Dow -77.84 at 42505.48, Nasdaq +43.56 at 18232.16, S&P -2.15 at 5765.42
[BRIEFING.COM] The Dow Jones Industrial Average (-0.2%) and S&P 500 (-0.1%) are lower heading into the close while the Nasdaq Composite (+0.2%) remains above its prior close, propelled by gains in some mega caps.
Today's economic data contributed to some selling interest under the index surface after the Consumer Confidence Index showed a fourth consecutive decline, and the Expectations Index fell to its lowest level (65.2) in 12 years, with worries about future employment prospects and inflation pacing that downturn. Separately, new home sales increased a modest 1.8% month-over-month in February, yet higher-priced homes made up a smaller percentage of sales than the prior month.
Wednesday's economic lineup features:
- 7:00 ET: Weekly MBA Mortgage Index (prior -6.2%)
- 8:30 ET: February Durable Orders (Briefing.com consensus -1.2%; prior 3.1%) and Durable Orders ex-transport (Briefing.com consensus 0.1%; prior 0.0%)
- 10:30 ET: Weekly crude oil inventories (prior +1.75 mln)
GME, DLTR trade down ahead of earnings
25-Mar-25 15:05 ET
Dow -86.86 at 42496.46, Nasdaq +43.13 at 18231.73, S&P -2.17 at 5765.40
[BRIEFING.COM] The major indices trade near their worst levels of the session, sporting slim gains or losses, with about one hour left in the session.
GameStop (GME 25.30, -0.30, -1.2%), Dollar Tree (DLTR 67.46, -2.31, -3.3%), Chewy (CHWY 33.88, -0.13, -0.4%), and Cintas (CTAS 192.38, -2.19, -1.1%) trade down ahead of their earnings reports. GME reports this afternoon while the other names report tomorrow morning.
Elsewhere, the 10-yr yield is at 4.31%.
S&P 500 wavers as Int'l Paper, CrowdStrike, Freeport-McMoRan lead; UPS slumps
25-Mar-25 14:30 ET
Dow -62.82 at 42520.50, Nasdaq +47.08 at 18235.68, S&P +0.03 at 5767.60
[BRIEFING.COM] The S&P 500 (flat) is in the middle of figuring out a trading level this afternoon, having changed places between gains and losses a few times this last half hour.
Briefly, S&P 500 constituents Int'l Paper (IP 55.97, +3.14, +5.94%), CrowdStrike (CRWD 385.71, +13.07, +3.51%), and Freeport-McMoRan (FCX 42.96, +1.35, +3.24%) pepper the top of the standings. IP is higher after upside guidance from this morning's Investor Day slides, CRWD caught an upgrade out of BTIG Research this morning, while FCX jumps on gains in copper futures.
Meanwhile, UPS (UPS 110.17, -5.63, -4.86%) is one of today's worst performers, breaking through support near the 112.25 level.
Nasdaq holds gains as gold rises on trade concerns; dollar slips
25-Mar-25 14:00 ET
Dow -44.88 at 42538.44, Nasdaq +34.50 at 18223.10, S&P -1.20 at 5766.37
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (+0.19%) holds up fairly well, the lone major average now in positive territory.
Gold futures settled $10.30 higher (+0.3%) at $3,025.90/oz, as concern regarding U.S. trade policies continues to fuel safe-haven demand for the yellow metal.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $104.10.
UniFirst sells off; marks lows on the year after Cintas (CTAS) ends acquisition discussions (UNF)
While Cintas (CTAS) endures modest losses today, UniFirst (UNF -14%) is selling off to its worst levels of the year after CTAS terminated discussions with UNF surrounding its January proposal to acquire the firm for $275.00 a share, a 46% premium to UNF's 90-day average price. Shortly after CTAS, a prominent business equipment supplier, announced its proposal to purchase UNF, a similar uniform rental firm, UNF rejected the unsolicited offer.
However, many investors were confident that a deal would ultimately be made, keeping shares of UNF over 30% higher from its closing price immediately before the proposal. Nevertheless, as time passed and few details emerged, doubt started to creep in, causing UNF to steadily slide lower in the following weeks, only to sink toward levels from before the January proposal today after CTAS terminated the M&A discussions.
- Why are investors fleeing UNF today? The potential deal with CTAS offered considerable appreciation; $275 represented an 8% premium from UNF's record closing highs reached in 2021 and a 63% premium to levels closed prior to the January proposal.
- It also seems more likely that the two parties will not be reconvening for any future discussions. While CTAS has offered to acquire UNF in the past, proposing a $255/share buyout in 2022, the current deal was met with fierce rejection from the start. In November 2024, CTAS first delivered its updated proposal to UNF's Board, increasing its initial $255 offer to $275 despite UNF refusing to meet. UNF's cold reception led to CTAS publicly publishing its intent to acquire the firm, hoping enough pressure could be placed on UNF to finally accept the terms.
- Nevertheless, even after these actions, UNF's Board unanimously rejected the offer almost immediately. Frankly, it is surprising that investors kept shares trading at elevated levels despite UNF's clear unwillingness to budge from going it alone.
Where does UNF go from here? Financials are in good shape; UNF has no long-term debt, which provides it with ample flexibility to tackle its operational goals. Speaking of which, UNF commented in January that it was encouraged by the pipeline of large account opportunities it was working on. However, some incremental weaknesses have cropped up compared to this time last year. During Q1 (Nov), net wearer levels for UNF's existing customers contracted yr/yr. Still, UNF showcased the progress it has been making regarding margins, driving decent improvements in operating income and adjusted EBITDA during Q2 despite posting a sluggish +1.9% bump in consolidated revenue yr/yr.
Overall, the proposed deal between CTAS and UNF falling through is unfortunate news for both companies, albeit to a lesser extent for CTAS. UNF is confident in extracting more value as an independent company than being absorbed by CTAS. However, in the current climate, which remains subject to economic and competitive pressures, it could take time before UNF reaches levels near CTAS's proposed price.
KB Home misses Q1 expectations, cuts outlook as spring sales slow amid affordability issues (KBH)
Less than one week after competitor Lennar (LEN) issued soft 2Q25 EPS and deliveries guidance, KB Home (KBH) reported downside 1Q25 results and lowered its FY25 housing revenue outlook, providing further evidence of an intensifying housing market slowdown. Similar to LEN, KBH experienced lower than expected demand as the spring season began to unfold with high mortgage rates and rising macroeconomic uncertainties mainly to blame. Once again, KBH relied heavily on incentives such as rate buy downs in order to stimulate demand, putting pressure on margins and EPS, which decreased by 15% yr/yr to $1.49.
- Homes delivered decreased by 9% to 2,770, missing analysts' estimates, reflecting the muted spring demand and delayed community openings due to the wildfires in Southern California. Mortgage rates have hovered in the high-6% range causing affordability issues, but another headwind has emerged. Buyers are taking longer to make decisions now, resulting in lower absorption rates early in the quarter. The good news is that net orders began rebounding after a mid-February pricing adjustment, but KBH's reduced FY25 housing revenue forecast of $6.60-$7.00 bln (from $7.00-$7.50 bln) is clouding over that development.
- Housing gross profit margin has become a closely watched metric in the homebuilder industry as companies ratchet up costly incentives to support demand. Last quarter, KBH reported a surprise 20-bps bump in adjusted housing gross profit margin to 20.9%, bolstered by lower building costs and pricing discipline. Although direct costs were lower again in Q1, and average selling price (ASP) was up 4% yr/yr to $500,700, adjusted housing gross profit margin slipped lower this time, contracting by 130 bps yr/yr to 20.2%. A combination of homebuyer concessions, higher land costs, and reduced operating leverage weighed on margins.
- KBH has done well to protect ASPs, but the affordability issues and slipping consumer confidence levels are now taking too big of a toll. Therefore, the company is anticipating ASPs to fall to $480,000-$495,000 in FY25 due to selective price adjustments, down from its prior guidance of $488,000-$498,000. Likewise, KBH anticipates FY25 housing gross profit margin in the range of 19.2-20.0%, down from its prior outlook of 20.0-21.0%.
- From a longer-term perspective, the same positive dynamics that have been in place for many years still remain, including favorable demographics, the chronic undersupply of available homes in the U.S., and the accumulated wealth built up from home price appreciation. Once mortgage rates do decline, KBH should see a potent upswing in the market.
KBH's Q1 results revealed weaker-than-expected demand during the start of the spring selling season as consumer confidence declined and buyers hesitated to make purchases due to high mortgage rates. To stimulate sales, the company once again implemented price reductions and increased incentives, which helped drive late-quarter order improvements, but also pressured margins and reduced profitability.
McCormick heads slightly lower on EPS miss, but seems slightly more positive on QSR and China (MKC)
McCormick (MKC -1%) is trading lower after kicking off FY25 on a down note. This supplier of spices, seasoning mixes, and condiments reported its first EPS miss after eight consecutive quarters with in-line or upside results. Revenue for Q1 (Feb) rose 0.2% yr/yr to $1.61 bln, which was generally in-line but followed four consecutive upside quarters, so this was a slight letdown. Probably the best part was MKC reaffirming FY25 guidance despite lackluster Q1 results.
- MKC operates two segments: Consumer (57% of FY24 revs; 69% of operating income) and Flavor Solutions (43%; 31%), which caters to food manufacturers and food service customers. Its Consumer segment tends to sport better margins than its FS segment. Total organic sales growth in Q1 was +2% driven by volume and product mix.
- Consumer segment sales were flat yr/yr (+1% organic) at $919 mln. Organic sales reflected a 3% increase in volume/mix, offset by a 2% decrease in pricing. Importantly, MKC made some price gap management investments last year, so it was lapping a tougher comparison. MKC also made some targeted incremental promotions in the Americas. China consumer sales improved slightly, which is more optimistic than what MKC said on the Q4 call.
- FS segment sales increased by 1% (organic +3%) to $686 mln. Organic sales saw a 2% increase in volume and product mix and a 1% increase in pricing. MKC said its FS results reflect a strong performance with faster-growing Flavor customers and improved QSR growth, which was partially offset by soft CPG (consumer packaged goods) customer volumes.
- In terms of the macro environment, MKC said there is increasing consumer uncertainty and concern over returning to more inflation. This has impacted consumer sentiment, particularly in the last month. As such, consumers, especially lower-income consumers, are more cautious and are exhibiting more value-seeking behavior and tightening their budgets. Many are worried about the future, job security, and rising costs. MKC is seeing this not just in the US, but across its key markets.
- MKC addressed tariffs on the call. MKC plans to offset costs related to US import tariffs on China with cost savings and some very targeted price adjustments. MKC's focus remains on safeguarding the health and competitiveness of its brands. In terms of guidance, MKC continues to expect FY25 sales growth of +0-2% (+1-3% CC). Its outlook assumes a gradual recovery, and it expects China consumer sales to improve slightly yr/yr.
Overall, the Q1 results were a bit of a letdown as they continue to reflect a cautious consumer. While it is good for MKC that consumers are eating at home more, they are still value-conscious. Two comments on the call stood out to us: improved QSR growth and China sales are improving slightly. MKC was quite bearish on both counts in Q4, so that was good to see. Also, we view MKC's decision to reaffirm despite the Q1 EPS miss and lackluster sales growth as a positive sign. We think that is why the stock is holding up well.
Tesla ticks lower as European sales plunge and rivals leap ahead; shares may be bottoming (TSLA)
European sales plunge and rivals leap ahead, creating selling pressure on Tesla (TSLA) today. According to FT.com, the U.S.-based EV maker posted a 40% yr/yr drop in sales across Europe in February, giving up 1 pt of overall market share to 1.8%. At the same time, China-based EV maker BYD (BYDDF) reported year-end results today, ending 2024 with revenue surpassing that of TSLA's for the first time since 2018.
While by no means uplifting, the unfavorable headlines are not surprising. For instance, earlier this month, Bloomberg mentioned that TSLA's sales in Germany nosedived by 76% yr/yr in February. A week after that development, Bloomberg reported that shipments sunk by 49% over that same period in China. Combining these reports with a souring macroeconomic backdrop amid tariff uncertainty underpinned a 53% stock wipeout from December 17 highs to March 10 lows.
There is certainly no shortage of headwinds facing TSLA, from tariffs and weakening consumer sentiment to an eroding brand image and intensifying competition. However, there are silver linings surrounding TSLA that are worth discussing.
- TSLA said it would release its self-driving feature in China yesterday after completing regulatory approval, launching a free trial of its FSD service in the region sometime between now and April 16. TSLA is aiming for a full rollout of FSD this year. The development sparked a rally yesterday as intense competition in China has had plenty to do with technological superiority.
- EV rivals BYD, NIO (NIO), XPeng (XPEV), and Li Auto (LI) are launching Level 2 autonomous driving systems (vehicles can steer, accelerate, and decelerate), with reports finding that an estimated 15 mln new cars sold in the region will have at least Level 2 autonomous capability. Consumers may have been gravitating toward other OEMs in China out of fear that TSLA will not have self-driving anytime soon.
- CEO Elon Musk recently held an "all-hands" meeting to make the long-term vision of the company clear. Part of this includes building on the success of the Model Y, which has been the best-selling SUV globally for two straight years. The Model Y is incredibly popular in China when stacked against the competition. The updated Model Y started local deliveries at the end of February, which could explain why sales slumped during the month as consumers awaited the newer model. As such, deliveries in March could quickly reaccelerate.
- Reports have noted that during the second week of March, China's new vehicle registrations rose to the highest in Q1, underpinned largely by Model Y shipments.
- The stock's substantial decline has given it a more palatable valuation, going from a forward P/E of 145x to around 91x. Similarly, TSLA's forward sales multiple stands at around 7.5x, which is more attractive than the 13.0x valuation from December.
TSLA still has a lot of work to do to reengage buyers and spark a more aggressive rally. Economic hurdles will not be easy to clear, nor will overcoming the recent deterioration in brand image. However, with the stock already slashed in half, plenty of these concerns may already be priced in, limiting the downside.
Avnet confident in mitigating tariff impacts; possible signs of stabilization outside Asia (AVT)
Avnet (AVT) has crossed both of our Value and Yield Leader Rankings in recent weeks, showcasing its attractive 14x forward earnings valuation and decent 2.8% dividend yield. Avnet is a global electronic component distributor, working with manufacturers in all major electronic component segments. Essentially, if they use a chip, Avnet can supply that business, serving organizations of all sizes, from startups to enterprises and electronic manufacturing services (EMS) providers. Like EMS providers, AVT's margins are slim; in Q2 (Dec), the company posted adjusted operating margins of just 2.8%, down 100 bps yr/yr. However, AVT operates on volume, supporting its steady ~$5.6 bln in revenue over the past four quarters.
There are headwinds present in the semiconductor space as tariff-related uncertainty spurs concerns over how organizations will offset potentially higher costs and lower customer spending. Earlier this month, AVT touched on the subject, noting that during the first round of tariffs in 2017, it handled the higher costs, successfully passing them along to the customer with no impact from a P&L perspective. While this time around the picture has changed, AVT's confidence in managing the matter has not. The company stated that its relationship with suppliers will help mitigate impacts, allowing it to source some products from certain countries without tariffs. Ultimately, AVT believes that its systems in place will lead to virtually no impact on its bottom line.
- Over the past several quarters, AVT has been dealing with a clear downturn. Inventories have piled up as demand softens across most sectors outside of AI. The EMEA region, AVT's most lucrative market from a margin standpoint, has seen outsized weakness compared to the Americas and Asia. However, aerospace and defense end markets displayed moderate sequential growth in Q2. Given the EU's current defense push, these markets may see accelerated growth over the coming months, potentially supporting stabilization in the region and propping up AVT's margins.
- Similarly, aerospace and defense end markets enjoyed sequential growth in the Americas in Q2. Revenue still fell by double-digits yr/yr in the region, largely due to customer hesitation regarding upcoming tariffs. However, only around 8% of AVT's business in the Americas is coming out of China. Also, AVT's customers may need a little time to move their supply chains and gear up for tariff impacts.
- Asia was a highlight in Q2, being the only region to post yr/yr sales growth. However, Asia commands the lowest margins, which weighed on AVT's consolidated margins in the quarter. Still, Q2 marked the second straight quarter of yr/yr growth in Asia, an encouraging sign that the region's economies are holding up relatively well. AVT noted that this tends to be a bullish sign for what is to come in the balance of all its other regions.
Tariffs remain a near-term concern as they cloud businesses' plans. This is leading to an issue surrounding the timing related to demand stabilization in EMEA and the Americas. However, given that Asia has started to show signs of growth, a recovery in the West could occur sooner rather than later. Also, despite tariff concerns, shares of AVT have held up relatively well, slipping by just 11% from January highs. As such, we like AVT at current levels for buy-and-hold investors. As always, a 15-20% stop loss limit should be used.
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