Market Snapshot
briefing.com
| Dow | 33963.11 | -19.09 | (-0.06%) | | Nasdaq | 12973.31 | +35.23 | (0.27%) | | SP 500 | 4283.74 | +9.63 | (0.23%) | | 10-yr Note |
|
|
|
| | NYSE | Adv 1794 | Dec 1253 | Vol 678 mln | | Nasdaq | Adv 2338 | Dec 2050 | Vol 4.5 bln |
Industry Watch
| Strong: Energy, Utilities, Information Technology, Materials |
| | Weak: Health Care, Real Estate, Consumer Discretionary, Communication Services |
Moving the Market
-- Feeling the market is due for longer consolidation period
-- Mixed earnings reports and economic data ahead of the open
-- Rising price of oil
|
Closing Summary
18-Aug-22 16:25 ET
Dow +18.72 at 34000.92, Nasdaq +27.22 at 12965.30, S&P +9.70 at 4283.81
[BRIEFING.COM] There was some up and down price action today in a narrow trading range, leading to a mixed market that followed form with mixed earnings results and mixed economic data. Fresh buying interest in the final hour of trading sent the major indices to new session highs before losing steam and dipping into the close. There was a lack of conviction on either side of the tape and volume was on the lighter side today.
Mixed action saw the mega caps trading roughly in line with the broader market while small and mid cap stocks outperformed. The Vanguard Mega Cap Growth ETF (MGK) closed up 0.1% versus a 0.3% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 0.2% gain in the S&P 500. The Russell 2000 (+0.7%) and S&P Mid Cap 400 (+0.8%) closed ahead of the major indices.
Market breadth showed the lack of conviction for either side of the tape. Advancers led decliners by a 7-to-5 margin at the NYSE and an 11-to-10 margin at the Nasdaq.
Semiconductor related names had a strong showing thanks to Wolfspeed's (WOLF 112.94, +27.29, +31.9%) favorable quarterly results and guidance. The PHLX Semiconductor Index closed up 2.2%. The strength here helped propel the information technology sector (+0.5%) to second place on the day.
Cisco's (CSCO 49.37, +2.71, +5.8%) earnings-driven gains also boosted the information technology sector.
Bath & Body Works (BBWI 40.26, +0.07, +0.2%) and Tapestry (TPR 37.57, +0.46, +1.2%) offered some support to the consumer discretionary sector (-0.04%) after reporting quarterly results but Tesla's (TSLA 908.61, -3.38, -0.4%) modest loss weighed on sector performance. Kohl's (KSS 31.33, -2.62, -7.7%), though not a sector component, also weighed on performance as retail peers traded down in solidarity.
Rising oil prices sent the energy sector (+2.5%) to the top of the leaderboard. Notably, it was the only sector to move more than 1.0% in either direction. WTI crude oil futures rose 2.4% to $90.07/bbl.
Separately, several Fed officials made comments today, including Minneapolis Fed President Kashkari (2023 FOMC voter) saying he does not know if the Fed can bring inflation down without triggering a recession. Saint Louis Fed President Bullard (2022 FOMC voter) said he is leaning towards a 75 basis point rate hike in September and is not sure the worst of inflation has passed, according to The Wall Street Journal. Kansas City Fed President George (2022 FOMC voter) said there is still a significant difference between supply and demand in the economy, adding she is encouraged by the July inflation report, but it's not a time for a "victory lap."
Treasury yields settled lower in a choppy session. The 2-yr note yield fell five basis points to 3.22% while the 10-yr note yield fell one basis point to 2.88%.
Deere (DE) and Foot Locker (FL) report earnings ahead of Friday's open.
There is no U.S. economic data of note out tomorrow.
Reviewing today's economic data:
- Weekly initial jobless claims totaled 250,000 (Briefing.com consensus 266,000) after last week's revised total of 252,000 (from 262,000). Continuing claims totaled 1.437 million after last week's revised total of 1.430 million (from 1.428 million).
- The key takeaway from the report is twofold: first, the initial claims level is still a long way from recession levels; and secondly, this report covers the week in which the survey for the August employment report was conducted. The low level of initial jobless claims supports expectations for continued strength in nonfarm payrolls, which of course should support continued tightening moves by the Federal Reserve.
- The Philadelphia Fed Index improved to 6.2 in August (Briefing.com consensus -4.0) from -12.3 in July. The new orders index, though, remained stuck in negative territory at -5.1, which qualified as an improvement from the -24.8 reading seen in July.
- The key takeaway from the report was the recognition that firms expect overall declines six months from now, evidenced by a -10.6 reading in the future index versus -18.6 in July.
- Existing home sales decreased 5.9% month-over-month in July to a seasonally adjusted annual rate of 4.81 million (Briefing.com consensus 4.85 million) versus a downwardly revised 5.11 million (from 5.12 million) in June. That is the sixth straight month that existing home sales have fallen. Total sales in July were down 20.2% from a year ago.
- The key takeaway from the report is that higher mortgage rates are taking a bite out of existing home sales, having compounded affordability pressures that persist with still-high (although moderating) prices.
- Weekly EIA Natural Gas Inventories showed a build of 18 bcf versus a build of 44 bcf last week.
Dow Jones Industrial Average: -6.4% YTD
S&P 400: -7.8% YTD
S&P 500: -10.1% YTD
Russell 2000: -10.9% YTD
Nasdaq Composite: -17.1% YTD
Market higher into close
18-Aug-22 15:30 ET
Dow +33.61 at 34015.81, Nasdaq +51.73 at 12989.81, S&P +14.75 at 4288.86
[BRIEFING.COM] The Dow Jones Industrial reached a new session high, pushing into positive territory.
After the close, Applied Materials (AMAT) and Ross Stores (ROST) are set to report earnings. Deere (DE) and Foot Locker (FL) report earnings ahead of Friday's open.
Treasury yields settled lower in a choppy session. The 2-yr note yield fell five basis points to 3.22% while the 10-yr note yield fell one basis point to 2.88%.
Also, WTI crude oil futures rose 2.4% to $90.07/bbl. Natural gas futures rose 0.3% to $9.19/mmbtu. Unleaded gasoline futures fell 4.9% to $2.79/gal.
There is no U.S. economic data of note out tomorrow.
Market moves sideways
18-Aug-22 15:00 ET
Dow -19.09 at 33963.11, Nasdaq +35.23 at 12973.31, S&P +9.63 at 4283.74
[BRIEFING.COM] The major indices are trending somewhat higher but haven't broken out of today's narrow trading range.
Several Fed officials made comments recently, including Minneapolis Fed President Kashkari (2023 FOMC voter) saying he does not know if the Fed can bring inflation down without triggering a recession. Saint Louis Fed President Bullard (FOMC voter) said he is leaning towards 75 basis point rate hike in September and is not sure the worst of inflation has passed, according to WSJ. Kansas City Fed President George (FOMC voter) said there is still a significant difference between supply and demand in the economy, adding she is encouraged by the July inflation report, but its not a time for a "victory lap".
Separately, the CBOE VIX Index is down 0.8% or 0.16 to 19.75.
Generac, Juniper Networks outperform in S&P 500
18-Aug-22 14:30 ET
Dow -43.97 at 33938.23, Nasdaq +30.78 at 12968.86, S&P +6.76 at 4280.87
[BRIEFING.COM] The benchmark S&P 500 (+0.16%) is in second place to this point on Thursday afternoon.
S&P 500 constituents APA Corp. (APA 35.92, +2.29, +6.81%), Generac (GNRC 268.80, +13.18, +5.16%), and Juniper Networks (JNPR 30.00, +1.18, +4.09%) pepper the top of the standings. APA benefits from gains in commodities, and specifically oil, GNRC is higher today after reports from the NHC that recent forecasts for storms in the Atlantic Ocean and Caribbean Sea regions are fairly blank, while JNPR might be higher in sympathy to fellow networking peer Cisco's (CSCO 49.43, +2.77, +5.94%) advance.
Meanwhile, Chicago-based REIT Ventas (VTR 49.12, -1.39, -2.75%) is one of today's worst performers, underperforming alongside the broader sector.
Gold lower on Thursday
18-Aug-22 14:00 ET
Dow -90.97 at 33891.23, Nasdaq +26.81 at 12964.89, S&P +2.34 at 4276.45
[BRIEFING.COM] Among the major averages, the tech-heavy Nasdaq Composite (+0.21%) holds the session's best gains as we approach two hours remaining on Thursday.
Gold futures settled $5.50 lower (-0.3%) to $1,771.20/oz, pressured by strength in the greenback and gains in treasury yields.
Meanwhile, the U.S. Dollar Index is up about +0.9% to $107.54.
BJ's Wholesale rings up an impressive beat-and-raise report, sending shares to record highs (BJ)
BJ's Wholesale (BJ), which can be characterized as the Costco (COST) of the east coast, posted an impressive beat-and-raise Q2 report, revealing that warehouse club operators continue to thrive in this inflationary environment. That premise was solidified earlier this week when Walmart (WMT) reported upside Q2 earnings that featured a 9.5% comp increase for its Sam's Club business. As BJ's CEO Bob Eddy remarked in the earnings press release, "value is king" in these conditions, and BJ's ability to offer more savings compared to traditional supermarkets is driving market share gains and solid growth.
Similar to Sam's Club and COST, the company offers discounted gasoline prices to its members. Gas prices have fallen recently, but they remain elevated and were about 45% higher on an yr/yr basis during Q2. The opportunity to pay a little less at the pump is a major draw for consumers, so it's not surprising to see BJ's membership count grow by 6% to about 6.9 mln. With comparable gas gallons up by 18% in Q2, compared to a decline for the overall market, it's evident that BJ's members are taking advantage of the lower prices. As input costs eased midway through the quarter, the company also experienced a boost in profit per gallon.
The fuel business was certainly a standout in Q2; total comparable club sales jumped by a stellar 19.8%, compared to a 7.6% increase, excluding gasoline sales. However, the strength in BJ's business is broad-based.
- BJ and its peers have become favored stores for grocery shopping as food prices soar. In Q2, comps for BJ's grocery, perishables, and sundries category grew by a healthy 8%, indicating that it continues to take market share. For a point of comparison, Kroger's (KR) identical sales (excluding fuel) increased by 4.1% in Q1.
- Not nearly as much attention is given to e-Commerce sales compared to 2020 and 2021, but the digital channel is another area where BJ is shining. In Q2, digitally enabled sales jumped by 47% yr/yr with nearly half of BJ's members engaging with it digitally. Before the pandemic, less than a quarter of the company's members used its digital channels.
- This rising digital trend is encouraging because members that engage digitally also tend to have higher average basket values and shop with the company more frequently.
- Unsurprisingly, higher freight and raw material prices negatively impacted margins. Additionally, some of BJ's competitors became more promotional in an effort to liquidate inventory -- Target (TGT) immediately comes to mind -- forcing BJ to follow suit. Despite these headwinds, BJ's merchandise gross margin only slipped by 50 bps yr/yr.
- Consequently, BJ was still able to achieve record adjusted EBITDA of $274 mln (+24% yr/yr), with adjusted EPS crossing the $1/share mark for the first time in its history.
- Ballooning inventory levels have become a significant storyline in the retail sector. Home Depot (HD), PriceSmart (PSMT), WMT, and TGT, are just a few retailers that have reported a substantial increase in inventories. At first glance, it seems that BJ is in the same camp with merchandise inventory climbing by 33% yr/yr to $1.376 bln. During the earnings call, though, the company alleviated concerns around this issue.
- On May 2, BJ closed on the acquisition of its perishable distribution center, adding $90 mln to its inventory compared to last year.
- Furthermore, about 40% of the baseline increase (excluding the perishable distribution center) is related to cost inflation, and about 50% is attributable to new club growth and actions to improve in-stock levels.
The main takeaway is that BJ is operating in a sweet spot of the retail sector and its enhanced FY23 EPS guidance suggests that its momentum will continue into next year. Given the stickiness of its membership-based business, it's hard to disagree with the company's bullish outlook.
Cisco bounces back with solid quarter after top line miss in AprQ, supply constraints easing (CSCO)
Cisco Systems (CSCO +6%) bounced back nicely with upside results in Q4 (Jul) after a pretty big top line miss in Q3 (Apr). We also got out first look at FY23 guidance, which was in-line for EPS, but offered nice revenue upside. The Q1 (Oct) revenue guidance was also a good bit better than expected. Cisco is known for being pretty conservative on guidance, so all of this revenue guidance was encouraging to see.
- Just like last quarter, the problem is not demand. The shift to hybrid cloud, 5G, 400GB, IoT, hybrid work and an explosion of applications are driving demand for next-generation networking equipment and security.
- It's more about supply chain disruptions and component shortages. As such, Cisco's revenue has little to do with demand as it has a record backlog. Revenue is much more a function of Cisco's ability to ship product and it shipped more than expected in Q4 and the guidance implies it expects shipment levels to continue to increase in FY23.
- We got some good news on the supply constraint front on the call. After a challenging April due to COVID-related shutdowns in Shanghai, Cisco says that overall supply constraints began to ease slightly in the back half of Q4 and that is continuing into the start of Q1. Cisco concedes that component supply headwinds remain, but they have begun to show early signs of easing. Part of this is the market and part is from actions taken by Cisco. Specifically, Cisco has been adding new suppliers and redesigning hundreds of products to use alternative components with similar capability.
- Another item that stood out to us was Cisco saying that it has not seen a material change in demand related to enterprise spending despite higher interest rates and economic fears. We had concerns that enterprise spending may start to wane, but this was encouraging to hear.
- A final kicker, which we do not think should be overlooked, is Cisco noting that as it goes through FY23 and it can finally work through its large backlog, it will begin to ship out more and more orders that actually reflect the price increases that were put into place in FY22. This should act as a nice tailwind to margins throughout the year.
Overall, there was a lot to like from this report. Most notably was that supply constraints are beginning to ease and enterprise spending remains resilient. Demand remains robust and customers want to spend. It is still early, but we sort of see JulQ as an inflection point where we have gone from Cisco being quite negative on the component issue in Q3 and Q4 to now being noticeably more confident on its call. Supply issues remain, but at least it is starting to turn a corner. Since Cisco is such a dominant player, this report also bodes well for other networking equipment names (JNPR, EXTR, CIEN, LITE, ANET, NOK) and Cisco suppliers, most notably Broadcom (AVGO +4%), which is also trading higher today.
Kohl's cuts its FY23 outlook considerably after weak JulQ results, causing shares to slide (KSS)
Expectations may have been low leading into Kohl's (KSS -4%) Q2 (Jul) earnings report today, especially after major retailers like Walmart (WMT) and Target (TGT) posted declining apparel sales in the quarter. However, by registering its second-straight earnings miss in Q2 (Jul) and slashing its FY23 outlook considerably, as KSS dealt with a souring consumer sentiment brought on by inflation, shares are facing selling pressure today.
- The dampened consumer backdrop was evident in comparable sales falling 7.7%, missing analyst estimates. Sales also slid 8.1% yr/yr to $4.09 bln but exceeded analyst expectations, possibly due to an underestimation of inflationary forces.
- KSS noted that discretionary categories like apparel are being disproportionately impacted by heightened inflation levels, echoing the sentiment felt by WMT.
- Meanwhile, unlike off-price retailers like TJX (TJX), which saw positive apparel comps in JulQ, KSS typically caters to middle-income consumers who are beginning to trade down.
- The magnitude of inflationary pressures is illuminated by KSS's adjusted operating margins diving over 500 bps yr/yr to 3.5%, leading to a 55% decline in adjusted EPS yr/yr to $1.11, which came up just short of consensus.
- Still, KSS is confident in achieving its long-term operating margins of 7-8%.
- On the bright side, KSS's partnership with beauty retailer Sephora is flourishing. Within the 200 stores opened last year, KSS has maintained a high single-digit percent lift relative to the overall chain. Additionally, in the almost 400 stores opened this year, KSS is already seeing a mid-single-digit percent sales lift. KSS projects that Sephora sales will continue to accelerate.
- Sephora's solid performance was highlighted by parent company LVMH (LVMUY), which commented last month that Sephora was a driver behind its strong first-half sales growth. As a result, investors may have already expected fruitful results from KSS's Sephora partnership in Q2.
- Another positive was KSS's $500 mln accelerated share repurchase agreement (ASR), underscoring management's confidence in the company's future. Also, CFO Jill Timm commented that now is the time to buy low as the company builds back to a normal cash position into 2023.
- Nevertheless, by slashing its FY23 earnings guidance to $2.80-3.20 from $6.45-6.85 and sales to down 5-6% yr/yr from flat to up 1%, KSS's near-term outlook will be rocky.
Overall, as expected, Q2 was a challenge for KSS. However, the degree to which KSS struggled in the quarter was not fully anticipated, leading to today's unfavorable reaction. KSS was straightforward in its comments on Q2, noting that it has already adjusted its plans to improve its position, implementing actions to trim inventory, increase promotions, and reduce expenses to incorporate a softening demand picture. KSS also remains a takeover candidate, which could create a floor in the stock price. Still, we believe it is best to employ a wait-and-see attitude at the moment.
On a final note, discount apparel chains like Ross Stores (ROST), which reports JulQ earnings today after the bell, and Burlington Stores (BURL), which reports JulQ earnings on August 25, may be better positioned from fierce inflationary pressures. However, given KSS's JulQ results, we are concerned that rival Macy's (M), which reports JulQ earnings on August 23, may follow KSS's lead.
Wolfspeed races ahead of semiconductor pack as demand for silicon carbide surges in EV market (WOLF)
A slowdown may be occurring across the semiconductor industry, but Wolfspeed (WOLF) is racing ahead of the pack as demand for its silicon carbide materials remains robust. Despite facing similar supply chain disruptions as other semiconductor companies, WOLF delivered upside 4Q22 results and guided 1Q23 EPS and revenue above expectations. The company mitigated the impact from COVID-related shutdowns in China through improved productivity at its fabrication plant and its back-end operations. Still, WOLF estimates that it ended FY22 with more than $100 mln of unfulfilled demand for power devices and it expects that figure to increase due to capacity constraints.
The primary story emanating from WOLF's earnings report revolves around this strengthening demand and the key secular trends underlying that strength. Silicon carbide (SiC) is gaining ground on conventional silicon in certain power applications due to its higher voltage and higher frequency capabilities. In particular, SiC is a hot commodity in the electric vehicle (EV) and green energy markets, thanks to its ability to provide higher power density in smaller and lighter designs.
Several data points from WOLF's earnings report illustrate how potent the EV-related catalyst is.
- In Q4, the company achieved a record of $2.6 bln of design-ins, representing a 3x increase from its FY20 total. The surge in design-ins was derived from automotive OEMs, tier one suppliers in the automotive industry, and energy customers.
- At the end of last year, WOLF forecasted that it would generate $2.1 bln in revenue in 2026. Bolstered by the rapid acceleration of design-ins, the company now anticipates that 2026 revenue will be higher by 30-40% versus its initial outlook.
- To meet this expected wave of demand, WOLF opened the new Mohawk Valley fab in Marcy, New York this past April, which is the world's first fully automated 200-millimeter silicon carbide plant. However, even with this new fab now online, WOLF's capacity is still inadequate to meet demand.
- Therefore, the company is expanding the Mohawk Valley lab sooner than anticipated, requiring approximately $550 mln of capital expenditures in FY23.
- Additionally, CFO Neill Reynolds spoke about the need of potentially opening another materials plant outside of its main Durham, NC facility since demand will likely outpace capacity for many years.
- A by-product of WOLF's improving top-line growth rate (57% vs. 37% last quarter) is improved manufacturing efficiency and higher fab yields. Accordingly, non-GAAP gross margin expanded by 430 bps yr/yr to 36.5%. Looking ahead, the company believes that margins will improve further once it starts to realize benefits from its new 200-millimeter wafer lab.
WOLF's impressive quarterly report is reflective of its strong position in a SiC market that's experiencing a boom in EV and alternative energy settings. To put this boom into perspective, CEO Gregg Lowe stated that the opportunity for SiC has more than doubled to $35 bln in a single year. The only factor standing in its way is the ongoing supply chain issues, but even this issue is losing its sting as WOLF expands its capacity and achieves manufacturing efficiencies.
Analog Devices' broad-based strength in Q3 is overshadowed by management's cautious commentary (ADI)
Analog Devices (ADI -5%) powers down despite posting beats on its top and bottom lines in Q3 (Jul). The semiconductor manufacturer, specializing in analog, mixed-signal, and digital signal processing, posted broad-based growth despite a tricky macroeconomic environment, with meaningful strength in its Industrial and Automotive segments, mirroring recent results from Texas Instruments (TXN) and Qorvo (QRVO).
However, management's color on the state of the economy was not exactly cheerful, noting that economic conditions are starting to ding demand as orders slowed late in Q3 and cancellations increased slightly. For example, even though ADI's backlog increased to a new record in Q3, stretching well into mid-2023, its book-to-bill fell sequentially. The volatile and uncertain environment shows up in the company's Q4 (Oct) guidance, which was just in-line with consensus despite the outperformance in Q3.
- Adjusted EPS and revenue growth soared by 41.3% and 76.8% yr/yr, respectively, as operating margins expanded by 650 bps yr/yr to 50.1%, and each segment saw growth of at least 55%.
- Bucking the trend of softening consumer demand documented recently by peers NXP Semi (NXPI) and Advanced Micro (AMD), ADI's Consumer segment saw the biggest sales jump at 136% yr/yr. The massive growth in this segment can be chalked up to ADI's move toward the higher end of the market, which has been better shielded from demand pressures. More specifically, growing demand across portables and longer life cycle applications fueled growth in the quarter.
- Meanwhile, emulating robust figures from industry peers, Industrial and Automotive sales were exceptional, growing 55% and 127% in Q3. The more than doubling of revenue in Automotive sales was primarily due to a better mix of higher-content premium vehicles.
- ADI's final segment, Communications, grew 69% yr/yr, driven by wireless and wireline sales. Demand continued to accelerate for ADI's optical and power portfolios as telecoms and hyperscalers poured capital into meeting an ongoing need for data.
The main takeaway in Q3 is that ADI proved again to be a powerhouse, posting considerable growth across each of its segments, fueled by its excellent product and customer diversification. However, investors are not showing their excitement for ADI's consistency but instead zeroing in on management's commentary, which turned significantly more cautious in Q3 compared to Q2 (Apr). Still, ADI's portfolio stacks up nicely against current economic headwinds. The company also remains confident in achieving its annualized long-term revenue target of +7-10%.
|
