Market Snapshot
briefing.com
| Dow | 31161.43 | -158.97 | (-0.51%) | | Nasdaq | 11559.97 | -70.87 | (-0.61%) | | SP 500 | 3910.64 | -13.69 | (-0.35%) | | 10-yr Note |
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| | NYSE | Adv 975 | Dec 2105 | Vol 916 mln | | Nasdaq | Adv 1386 | Dec 2835 | Vol 4.5 bln |
Industry Watch
| Strong: Utilities, Health Care, Real Estate, Industrials |
| | Weak: Communication Services, Energy, Information Technology, Consumer Staples |
Moving the Market
-- Carryover negativity from recent sessions
-- S&P 500 testing, and finding support at, the 3,900 level
-- Rising Treasury yields tempering some buying interest
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Closing Summary
06-Sep-22 16:25 ET
Dow -173.14 at 31147.26, Nasdaq -85.96 at 11544.88, S&P -16.07 at 3908.26
[BRIEFING.COM] This holiday-shortened week started on a volatile note for the stock market. Major indices opened somewhat higher before quickly heading lower, logging session lows early on. The S&P 500 tested 3,900, where it found upside momentum, bringing the market back to positive territory before giving way to selling pressure once again. The three main indices moved sideways, with modest losses, into the close. The S&P 500 closed just a hair above the key technical level of 3,900.
Selling pressure was fueled by rising Treasury yields while buying interest was fueled by positive sentiment from the S&P 500 finding support at 3,900.
Treasury yields hit their highs around midmorning and settled just off those levels. The 2-yr note yield breached 3.50%, rising 11 basis points to 3.51% while the 10-yr note yield rose 13 basis points to 3.33%. This comes ahead of the ECB meeting on Thursday, which participants are closely watching to see if the central bank raises its key policy rate by 50 basis points or 75 basis points.
The US dollar rose sharply today along with market rates. The yen fell to a 24-yr low against the dollar while the euro dropped to a 20-yr low.
Selling today was modest but broad based. The Vanguard Mega Cap Growth ETF (MGK), Invesco S&P 500 Equal Weight ETF (RSP), and S&P 500 closed down 0.5%, 0.3%, and 0.4%, respectively.
Market breadth also reflected the broad nature of today's selling. Decliners led advancers by a greater than 2-to-1 margin at both the NYSE and the Nasdaq.
Most S&P 500 sectors closed in the red with communication services (-1.3%) and energy (-1.1%) falling to the bottom of the pack while real estate (+1.0%) and utilities (+0.2%) sat atop the leaderboard.
Semiconductor stocks sold off more sharply than the broader market. The PHLX Semiconductor Index closed down 1.1%.
Energy complex futures settled this volatile session in mixed fashion. WTI crude oil futures rose 0.07% to $86.97/bbl while natural gas futures fell 6.4% to $8.19/mmbtu. This comes after Russia indicated the shutdown of the Nord Stream 1 pipeline is going to be long lasting, according to The Wall Street Journal, and OPEC+ announced a 100K bpd cut in production.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Applications Index (prior -3.7%) at 7:00 a.m. ET, the July Trade Balance (Briefing.com -$70.2 billion; prior -$79.6 billion) at 8:30 a.m. ET, and the Fed's Beige Book at 2:00 p.m. ET.
Reviewing today's economic data:
- The ISM Non-Manufacturing Index for August increased to 56.9% (Briefing.com consensus 55.2%) from 56.7% in July. The dividing line between expansion and contraction is 50.0%. The August reading marks the 27th straight month of growth for the services sector.
- The key takeaway from the report is that business activity for the non-manufacturing sector accelerated slightly in August at the same time there was a deceleration in the pace of price increases. The acceleration in overall activity, however, fits the notion that the Federal Reserve will continue to raise its policy rate and will not be quick to pivot to a rate-cut cycle.
- The August ISM Non-Manufacturing Index increased 56.9% (Briefing.com consensus 55.2%) after the prior increase of 56.7%.
Dow Jones Industrial Average: -14.3% YTD
S&P 400: -16.3% YTD
S&P 500: -18.0% YTD
Russell 2000: -20.2% YTD
Nasdaq Composite: -26.2% YTD
Major indices stuck in narrow range
06-Sep-22 15:30 ET
Dow -137.69 at 31182.71, Nasdaq -70.56 at 11560.28, S&P -12.83 at 3911.50
[BRIEFING.COM] The major indices stick to a narrow trading range heading into the close.
Energy complex futures settled this volatile session in mixed fashion. WTI rose 0.07% to $86.97/bbl while natural gas futures fell 6.4% to $8.19/mmbtu.
Coupa Software (COUP) will report earnings after today's close.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Applications Index (prior -3.7%) at 7:00 a.m. ET, the July Trade Balance (Briefing.com -$70.2 billion; prior -$79.6 billion) at 8:30 a.m. ET, and the Fed's Beige Book at 2:00 p.m. ET.
Market continues lateral flow
06-Sep-22 14:55 ET
Dow -158.97 at 31161.43, Nasdaq -70.87 at 11559.97, S&P -13.69 at 3910.64
[BRIEFING.COM] The stock market is little changed in the last half hour, moving sideways off session lows.
One bright spot in the market today has been the Dow Jones Utility Average, up 0.1%. Its best performer, NextEra Energy (NEE 87.57, +2.46, +2.9%), received an upgraded today to Overweight from Equal-Weight at Morgan Stanley.
On a related note, the S&P 500 utilities sector (+0.4%) continues to outpace the market.
Separately, copper futures made sizable upside moves today, settling 1.3% higher at $3.46/lb.
Market climbs off recent lows
06-Sep-22 14:30 ET
Dow -125.30 at 31195.10, Nasdaq -59.60 at 11571.24, S&P -10.11 at 3914.22
[BRIEFING.COM] The stock market has been climbing off recent lows after the S&P 500 found support at the 3,900 level.
As the market lifted higher, industrials (+0.1%) and health care (+0.4%) joined real estate (+0.9%) and utilities (+0.6%) in positive territory.
Earlier, value stocks had a performance edge over growth stocks, but now trade roughly in-line. The Russell 3000 Value Index and Russell 3000 Growth Index both show modest losses, down 0.3% and 0.2%, respectively.
Separately, the CBOE Volatility Index is down from session highs, up 4.0% (or 1.02) to 26.49.
S&P 500 again finds support at 3,900 level
06-Sep-22 14:00 ET
Dow -159.69 at 31160.71, Nasdaq -96.40 at 11534.44, S&P -12.22 at 3912.11
[BRIEFING.COM] The major indices dipped towards session lows with the S&P 500 again testing the 3,900 level, where it found some support.
Treasury note yields move sideways near session highs with the 10-yr note yield up 14 basis points to 3.34%. The 2-yr note yield is up 11 basis points to 3.51%. This comes ahead of the ECB meeting on Thursday, which participants are closely watching to see whether the central bank raises its key policy rate by 50 basis points or 75 basis points.
Separately, the US Dollar Index is up 0.7% to 110.30.
ADT securing some sizable gains after State Farm and Google make big bet on company (ADT)
ADT (ADT), the provider of security and monitoring systems for homes and businesses, is surging higher after announcing that State Farm and Google (GOOG) have invested $1.50 bln in the company. The bulk of that new capital is coming from State Farm, which is purchasing 133.3 mln shares of ADT for $9/share, while also sinking $300 mln into a fund to support product development and marketing. For GOOG, its new $150 mln contribution that's earmarked for engineering and product design expands on its initial $150 mln investment. Unlike the partnership with State Farm, GOOG has an established track record with ADT through its Nest connected home products.
With this new arrangement, ADT will expand its partnership with GOOG. Rather than simply selling Nest hardware, ADT will harness the data from GOOG devices in order to predict and prevent major home incidents from happening. For instance, GOOG's home monitoring systems could identify water leaks and alert homeowners of the issue before the problem becomes severe.
That's a compelling value-add for potential ADT customers, but the most exciting aspect of today's developments revolves around State Farm.
- In essence, ADT has just gained nearly 20,000 new sales representatives at State Farm. Given that wage inflation has significantly dented ADT's profitability, the prospect of having thousands of sales agents pitching its products on another company's payroll is quite a feat.
- ADT is badly in need of a catalyst that can turn its financial performance around. Since going public in 2018, the company has consistently missed EPS expectations and has struggled to attain profitability. On that note, last quarter marked the first time that ADT generated positive adjusted net income.
- In addition to wage inflation, supply chain disruptions and installation delays on the commercial side of the business have created headwinds recently.
- Longer-standing challenges for ADT include customer attrition and the mountain of debt that's sitting on the balance sheet from Apollo Global Management's (APO) leveraged buyout in 2016.
- There is some good news on both accounts, though, as gross customer attrition fell to a record low of 12.7% over the past twelve months. ADT's debt-to-adjusted EBITDA ratio also dipped to 4.2x at the end of Q2, compared to 4.4x at year-end FY21.
- There's reason to believe that State Farm will be successful in bundling insurance policies with ADT's home monitoring systems. Not only will policyholders receive a discounted rate for adding an ADT system, but they'll also lower the risk of needing to file a claim for damages. The peace of mind that comes from possibly preventing a major loss, and/or a home intrusion, is a key selling point.
- From State Farm's perspective, it views this partnership as an opportunity to transition from a "repair and replace" approach, to a "predict and prevent" model. Accordingly, the company expects that claims payments will decrease over time.
This new partnership with State Farm, combined with additional investments from GOOG, has the potential to be a game-changing development for ADT. On paper, everything looks great, and it appears that this arrangement could spark a turnaround for the beleaguered company. However, ADT remains a "show me" story due to its dismal earnings history. Therefore, we wouldn't advise jumping in with both feet until the results can be measured over the next quarter or two.
CVS Health signals intention to expand its reach with acquisition of Signify Health (CVS)
CVS Health's (CVS) vision of becoming a more diversified, full-service healthcare company is unfolding today after the company emerged as the winning bidder for Signify Health (SGFY). In a deal valued at approximately $8.0 bln, CVS will pay $30.50/share for the provider of at-home healthcare services. When the Wall Street Journal reported that CVS was preparing to make a bid for SGFY about one month ago, it was far from a done deal that the two companies would agree on a transaction. In fact, some considered CVS to be the underdog as it reportedly competed against Amazon (AMZN) and UnitedHealth (UNH) in the SGFY sweepstakes.
Although an acquisition of SGFY would barely make a dent in AMZN's balance sheet, perhaps the company wasn't comfortable being overly aggressive in the M&A market given the macroeconomic uncertainties. On that note, Bloomberg reported last Friday that AMZN has shuttered plans of opening 42 warehouses in the U.S. due to sagging sales growth. After already bolstering its healthcare services with a $4 bln acquisition of 1Life Healthcare (ONEM) this past July, maybe AMZN didn't feel as compelled to make another healthcare deal while its core business is softening.
Whatever the case may be, CVS was the more motivated suitor, as reflected in its generous offer for SGFY. The $30.50/share price tag represents a 78% increase over SGFY's stock price from August 1, the day before the Wall Street Journal reported that SGFY is working with investment bankers to explore strategic alternatives. Concerns that CVS may have overpaid for SGFY are tempering investors' enthusiasm for the acquisition. Based on FY23 EPS estimates, CVS is paying roughly 60x forward earnings expectations.
Looking beyond the valuation, we believe the addition of SGFY is a good fit.
- SGFY, which uses a combination of analytics and at-home visits from physicians to provide healthcare, will expand CVS's capabilities and total addressable market. The acquisition will also complement the pharmacy business since physicians can direct patients to CVS's pharmacies to fulfill prescriptions.
- With a network of over 10,000 clinicians across the U.S., SGFY already has considerable reach. However, its reach, scale, and revenue generating potential should expand considerably with CVS's resources behind it.
- For some perspective, SGFY guided for FY22 revenue of $800-$810 mln for is Home & Community Services (HCS) segment, and revenue of $45-$48 mln from its Caravan Health acquisition.
- The mid-point of the HCS revenue guidance equates to an estimated yr/yr increase of 23%.
- CVS expects the acquisition to be meaningfully accretive to earnings, although, it didn't provide a specific timeframe for achieving that EPS accretion in the press release. The company added that the acquisition makes it increasingly confident it can achieve its long-term adjusted EPS goals it set forth at its Investor Day.
- Specifically, CVS is aiming for low double-digit EPS growth starting in 2024 and moving forward.
SGFY is trading a bit below the $30.50/share price, indicating there's some risk that the deal will fall through. Importantly, New Mountain Capital, which owns about 60% of SGFY's stock, has agreed to vote in favor of the transaction. Therefore, the main roadblock revolves around regulatory concerns and antitrust issues. It would be surprising, though, if this deal ran into regulatory issues given that CVS and SGFY operate in different spaces within the healthcare sector. Overall, we're in favor of CVS's acquisition of SGFY as it expands its capabilities and aligns the company with a growing at-home healthcare market.
Post's private labels help cushion it against potentially worsening inflationary pressures (POST)
Given Post's (POST) $300 mln share repurchase authorization today, which translates to around 5% of its current shares outstanding, we wanted to dive deeper into the consumer packaged goods company. Currently, the stock is up nearly 20% on the year, outpacing many of its peers even when incorporating their dividends. However, there is still plenty of room for Post to run.
- Post's primary business is its Consumer Brands (~31% of FY21 sales), comprised of its ready-to-eat and hot cereals. Post commanded roughly 19% of the U.S. ready-to-eat branded cereal market last year, making it the third largest seller.
- Perhaps more significant is Post's private label exposure. In Q3 (Jun), 7 pts of Consumer Brands' 23% sales growth yr/yr and half of its volume gains were attributed to private label cereal sales. Post noted that although an increase in average net pricing in the quarter helped drive Consumer Brands' growth, it is also seeing expanding volume across its value portfolio with gains in private label. Furthermore, the company commented that the positive developments in Consumer Brands are stable and building momentum.
- Many companies have discussed the exceptional growth in their private label offerings over the past few months as inflation squeezes consumer budgets.
- For instance, Kroger (KR), which will report Q2 (Jul) earnings on September 9, stated last quarter that it saw "tremendous" growth in its "Our Brands" products, where comparable sales outstripped all national brands.
- Likewise, Walmart (WMT) noted last month that within the food category, the private brand growth rate doubled sequentially in JulQ.
- Beyond private label exposure, Post also boasts a well-diversified portfolio, consisting of egg and potato products for the foodservice industry, convenient nutrition items, refrigerated foods for the retail sector, and consumer packaged goods for the U.K.
- Post's foodservice business is its second-largest (~26% of FY21 sales) and should continue to rebound from the pandemic. Post noted in Q3 that it expects to exceed its pre-pandemic profit level in Q4 (Sep).
- Also, although Post's U.K.-based sales will likely struggle due to inflation in the region outpacing that in the U.S. along with a strengthening U.S. dollar, this business is Post's smallest at just ~8% of FY21 sales, so its impact should be relatively minor.
Overall, Post is positioned to continue performing nicely, especially as inflation erodes consumers' spending power, as its private label business expands its reach to many income levels. Also, its recovering foodservice business builds in additional upside. Meanwhile, its refrigerated foods unit capitalizes on a stable trend of eating at home, while its nutrition division takes advantage of consumers engaging in more active lifestyles since the pandemic.
CoStar Group sees its star rise with addition to the S&P 500 (CSGP)
CoStar Group (CSGP +7%) is seeing its star quality go up as this provider of online real estate marketplaces will be added to the S&P 500 on September 19. This news is providing a nice boost in the share price today. It follows an impressive beat-and-raise earnings report in late July, which was a bit of a surprise with rates rising. As such, we thought this would be a good time to take a quick look at CoStar.
- We understand the hesitation of considering an online real estate name in this environment. Everyone is familiar with Zillow (ZG) and its struggles, but that is more on the residential side. Think of CoStar as the Zillow of commercial real estate, which includes multi-unit apartment buildings, office space, strip malls etc. CoStar and Loopnet are its primary sites. It also operates some platforms that helps renters find apartments, which folds in nicely with its multi-unit listings.
- CoStar reported a healthy beat in Q2 with its top three products (CoStar, Apartments.com, LoopNet) all achieving high double-digit sales increases. However, at the time, we remember being concerned about the guidance with the housing market cooling with rates rising. CoStar surprised us by guiding Q3 above consensus and raised full year guidance.
- So, why is CSGP doing so well in a cooling housing market? The main reason is that multi-family market conditions continue to be more favorable than housing generally. It makes sense. If rates are rising, that makes home ownership less affordable. But those people need to live somewhere, so that increases demand for rentals and for landlords buying apartment buildings.
- The numbers tell the story. Net new bookings in Q2 increased over 130% yr/yr in Apartments.com and over 40% for LoopNet. It also helps that CSGP's recent decision to build a dedicated LoopNet sales team is paying off. Also, new apartment construction deliveries are expected to reach record levels this year, and that means more listings. Another good thing is that the vast majority of its revenue (80% in Q2) is subscription-based, which generates consistent recurring revenue.
Between February and July, the stock had been stuck trading mostly sideways but has started to trend higher in recent weeks thanks to the strong Q2 report and now the addition into the S&P 500. Being added to the index is not only a nice milestone, but it also means all the index funds will need to purchase CSGP to match the S&P index. Overall, we think CoStar is a name to keep on the radar as it continues to perform well even as rates rise. |
