Market Snapshot
briefing.com
| Dow | 31034.37 | -102.75 | (-0.33%) | | Nasdaq | 11576.08 | -143.56 | (-1.22%) | | SP 500 | 3913.96 | -32.12 | (-0.81%) | | 10-yr Note |
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| | NYSE | Adv 867 | Dec 2209 | Vol 990 mln | | Nasdaq | Adv 1852 | Dec 2466 | Vol 4.7 bln |
Industry Watch
| Strong: Financials, Health Care |
| | Weak: Energy, Utilities, Information Technology |
Moving the Market
-- Lingering rate hike and inflation concerns
-- Mixed corporate news items getting mixed reactions
-- Relative weakness from mega caps
-- S&P 500 testing 3,900
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Closing Summary
15-Sep-22 16:30 ET
Dow -173.27 at 30963.85, Nasdaq -167.32 at 11552.32, S&P -44.66 at 3901.42
[BRIEFING.COM] The stock market tried to rebound today but ran into resistance from sellers when the S&P 500 broke below Tuesday's low (3,921). The major indices oscillated around a fairly narrow range throughout the afternoon until the S&P 500 fell below the 3,900 level. It found last minute support from buyers, closing just a hair over 3,900. The Nasdaq Composite lagged the other indices as mega cap stocks weighed on index performance.
There was a slate of mixed economic data and corporate news ahead of open that was met with mixed reactions from market participants before weakness in mega cap stocks took over as the main driver of price action today.
The Vanguard Mega Cap Growth ETF (MGK) closed down 1.7%; the Invesco S&P 500 Equal Weight ETF (RSP) closed down 0.8%; the S&P 500 closed down 1.1%.
Many stocks were under pressure today as nine of the 11 S&P 500 sectors closed in the red. Only health care (+0.6%) and financials (+0.3%) could squeeze out a gain while energy (-2.5%), utilities (-2.5%), and information technology (-2.4%) brought up the rear.
Health care sat atop the leaderboard thanks to Humana (HUM 497.24, +38.39, +8.4%), which traded up after raising its FY22 EPS guidance.
Conversely, information technology was weighed down by Adobe (ADBE 309.13, -62.39, -16.8%) after participants reacted negatively to the company's $20 billion cash-and-stock acquisition of Figma.
Energy stocks sold off as energy complex prices fell. WTI crude oil futures settled down 3.9% to $85.11/bbl and natural gas futures fell 8.6% to $8.31/mmbtu. These moves are being attributed to the news that a national railroad workers strike has been averted.
Treasury yields rose noticeably today. The 2-yr note yield rose 11 basis points to 3.87% and the 10-yr note yield rose five basis points to 3.46%.
Looking ahead to Friday, market participants will receive the University of Michigan Consumer Sentiment preliminary September reading (Briefing.com consensus 60.0; prior 58.2) at 10:00 a.m. ET and July Net Long-Term TIC Flows (prior $121.8 billion) at 4:00 p.m. ET.
Reviewing today's economic data:
- Aug Retail Sales 0.3% vs Briefing.com consensus of 0.0%; prior was -0.4% revised from 0.0%
- The key takeaway from the report is that the low level of initial claims -- a leading indicator -- is indicative of a tight labor market that will keep the pressure on the Fed to follow through with another aggressive rate hike.
- Aug Retail Sales ex-auto -0.3% vs Briefing.com consensus of 0.0%; prior was 0.0% revised from 0.4%
- 09/10 Initial Claims 213K vs Briefing.com consensus of 233K; prior was 218K revised from 222K
- The key takeaway from the report is that the low level of initial claims -- a leading indicator -- is indicative of a tight labor market that will keep the pressure on the Fed to follow through with another aggressive rate hike.
- 09/03 Continuing Claims 1403K; prior was 1401K revised from 1473K
- Sep Empire State Manufacturing -1.5 vs Briefing.com consensus of -13.5; prior was -31.3
- Sep Philadelphia Fed Index -9.9 vs Briefing.com consensus of 3.0; prior was 6.2
- Aug Import Prices -1.0; prior was -1.5% revised from -1.4%
- Aug Import Prices ex-oil -0.2%; prior was -0.5%
- Aug Export Prices -0.016; prior was -0.037 revised from -0.033
- Aug Export Prices ex-ag. -0.018; prior was -0.038 revised from -0.033
- Aug Industrial Production -0.002 vs Briefing.com consensus of 0; prior was 0.005 revised from 0.006
- The key takeaway from the report is that there was little growth in manufacturing output, and that little growth wasn't enough to offset a 2.3% decline in the index for utilities.
- Aug Capacity Utilization 0.8 vs Briefing.com consensus of 0.803; prior was 0.802 revised from 0.803
Dow Jones Industrial Average: -14.8% YTD
S&P 400: -15.1% YTD
S&P 500: -18.2% YTD
Russell 2000: -18.7% YTD
Nasdaq Composite: -26.2% YTD
S&P 500 falls below 3,900
15-Sep-22 15:25 ET
Dow -225.36 at 30911.76, Nasdaq -206.54 at 11513.10, S&P -54.78 at 3891.30
[BRIEFING.COM] The S&P 500 broke below the 3,900 level recently.
Energy complex futures all fell today. WTI crude oil futures settled down 3.9% to $85.11/bbl and natural gas futures fell 8.6% to $8.31/mmbtu. The moves are being attributed to the news that a national railroad workers strike has been averted.
Looking ahead to Friday, market participants will receive the University of Michigan Consumer Sentiment preliminary September reading (Briefing.com consensus 60.0; prior 58.2) at 10:00 a.m. ET and July Net Long-Term TIC Flows (prior $121.8 billion) at 4:00 p.m. ET.
Consumer discretionary outperforms
15-Sep-22 15:00 ET
Dow -102.75 at 31034.37, Nasdaq -143.56 at 11576.08, S&P -32.12 at 3913.96
[BRIEFING.COM] The stock market is little changed in the last half hour.
The consumer discretionary sector (-0.4%) has been able to outpace the broader market today thanks in large part to gains in Wynn Resorts (WYNN 65.24, +4.55, +7.5%) after it was upgraded Outperform from Neutral at Credit Suisse. The upside move in Tesla (TSLA 305.74, +3.20, +1.1%) is offering additional support after the company received an upgrade to Hold from Underperform at Needham.
Retail components are relatively strong as well. The SPDR Retailer ETF (XRT) is up 0.4%.
Wynn Resorts, Netflix higher on sell side upgrades
15-Sep-22 14:30 ET
Dow -10.78 at 31126.34, Nasdaq -112.95 at 11606.69, S&P -26.13 at 3919.95
[BRIEFING.COM] The benchmark S&P 500 (-0.66%) is still in second place to this point on Thursday afternoon.
S&P 500 constituents Wynn Resorts (WYNN 65.54, +4.85, +7.99%), Netflix (NFLX 239.92, +15.80, +7.05%), Warner Bros. Discovery (WBD 13.25, +0.54, +4.25%) dot the top of today's trading. WYNN perks up today after a Credit Suisse upgrade, NFLX caught an Evercore ISI upgrade.
Meanwhile, Albemarle (ALB 290.64, -16.01, -5.22%) dips with the stock trading ex-dividend today.
Gold slips to lowest levels in two years
15-Sep-22 14:00 ET
Dow +38.28 at 31175.40, Nasdaq -85.06 at 11634.58, S&P -18.11 at 3927.97
[BRIEFING.COM] With about two hours remaining on Thursday the tech-heavy Nasdaq Composite (-0.73%) sits at the bottom of the standings.
Gold futures settled $31.80 lower (-1.9%) to $1,677.30/oz, falling below the $1,700 psych level, to its lowest finish in more than two years. Yields across the curve are modestly higher to this point today while the dollar is modestly lower.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $109.59.
Danaher's plan to spin-off EAS segment purifies company's path to higher growth (DHR)
The idea of streamlining operations to drive improved efficiency and to sharpen a company's focus on its top growth opportunities continues to gain popularity among corporate executives. Yesterday, life sciences and diagnostics company Danaher (DHR) announced plans to spin-off its Environmental & Applied Solutions (EAS) segment into a separate publicly traded company. The maneuver comes from the same playbook that Johnson & Johnson (JNJ), General Electric (GE), 3M (MMM), and Kellogg (K) have leaned on as each of those companies are in line to spin-off business segments in the coming year.
Investors have generally applauded this approach in the recent past, and the reaction to DHR's plans is no different. Given that DHR's Life Sciences and Diagnostics segments serve similar end markets (labs, hospitals, pharmaceutical companies, research institutions, etc.) that are considerably different from the EAS segment (utilities, industrial companies), splitting EAS off does make sense. Relatedly, capitalizing on the growth drivers that underlie EAS, including rising demand for clean drinking water, requires substantial resources that could take away from other parts of DHR's business. By spinning off EAS, the company can fully home in on the growth opportunities for Life Sciences and Diagnostics.
While DHR is a large company with a market cap north of $207 bln, it isn't necessarily a well-known name. However, DHR's profile was lifted when the pandemic hit because Cepheid, a business it acquired in 2016, received Emergency Use Authorization from the FDA for its Xpress SARS-CoV-2 molecular diagnostic test. That event put DHR on the map and created a major growth catalyst, as illustrated by its revenue growth of 58% in 1Q21 and 36% in 2Q21. Growth has since moderated (+7% in 2Q22) as demand for COVID-19 testing and vaccines decelerates, but DHR has other growth drivers in the mix. In fact, core revenue in the non-COVID business for Life Sciences (which helped with vaccine development) was up by more than 20% in Q2.
- By spinning-off EAS, the company can focus on generating growth at customers that previously paused programs during the pandemic. On that note, DHR stated during the Q2 earnings call that its Life Sciences backlog is very healthy as its customer continue transitioning away from COVID-19 vaccines. Accordingly, DHR said it still anticipates achieving high-single to low-double-digit core growth in its bioprocessing business for FY22, despite COVID-19 vaccine revenue dropping to an estimated $1.0 bln in 2022, compared to $2.0 bln in 2021.
- Similarly, the Diagnostics segment generated respiratory testing revenue of $750 mln in Q2, well above DHR's expectation of $400 mln, even as testing for COVID-19 slowed. Market share gains for its 4-in-1 combination test, and higher incidences of other respiratory infections, such as RSV and flu, helped drive a 9.5% core revenue increase in the Diagnostics segment.
- For EAS, the company is forecasting mid-single-digit core revenue growth over the long term, with 55% recurring revenue. With the segment contributing about $5 bln in revenue, dis-synergies could total about $0.15 per DHR share on an annual basis.
Overall, a spin-off of EAS looks like a win-win scenario. DHR's razor/razor blade business model, that features recurring revenue of 75% of the total business, should benefit as more resources are freed up to fuel growth in areas like genomic medicines, biologics, and vaccines. Meanwhile, EAS will be able to build its business through organic means and through acquisitions, which the company anticipates will play a significant role in its future.
Humana springs to life on raised FY22 guidance and an upbeat FY25 EPS forecast (HUM)
Humana (HUM +8%), one of the largest U.S. health insurers, is springing to life today after lifting its FY22 earnings guidance to $25.00 during its Investor Day presentation, a 25-cent improvement from its prior forecast and $1.00 higher than its initial outlook in early February. HUM mentioned that due to a lack of COVID-19 headwinds materializing, it is releasing a $0.50 explicit headwind embedded in its prior FY22 projection. Other benefits, such as lower-than-expected medical cost trends in HUM's Medicare and Medicaid businesses, also contribute to its FY22 guidance.
HUM's color regarding COVID-19 is notable, given its late July remarks. The company stated that it was seeing an uptick in cases in recent weeks, although hospitalization rates remained lower than during previous surges. The same was true for Dow Jones component UnitedHealth (UNH), which shared similar comments earlier that month. Although the situation looked much brighter than earlier in the year, especially regarding the Omicron variant, it still threatened HUM's FY22 earnings goal.
Another notable highlight from Investor Day was HUM detailing its expectations of 14% compounded annualized earnings growth going forward, resulting in adjusted EPS of $37.00 in FY25.
HUM expects to achieve its longer-term forecast through three primary levers. This includes an overall expansion in enterprise earnings, capital deployment in the form of ~$1 bln of annual share buybacks or other accretive M&A, and continual improvements in operational efficiencies enabled by $1.0 bln in value creation initiatives first discussed in February. Recall there were four key focus areas centered around its commitment to driving $1 bln of additional value, including a review of current investments, workforce optimization, third-party spending reduction, and adding more automation and digital capabilities.
We also think the strongly favorable reaction today is being fueled by investors breathing a sigh of relief after health insurance giant Centene's (CNC) comment yesterday. During its presentation at a global healthcare conference yesterday, CNC stated that its recent loss of a couple of significant requests for proposals (RFPs) in California would be a meaningful unanticipated headwind to its FY25 projections.
It is worth noting that despite COVID-related headwinds dwindling, deferred utilization and pent-up demand remain a concern. Last quarter, HUM commented that surgical volumes ticking up 600 bps YTD from the prior year likely reflects pent-up demand. The company believes this could still moderate in the back half of the year. However, if it persists into FY23, HUM notes that it will mitigate the uptick in utilization through higher risk adjustment.
Overall, HUM's FY25 earnings target is attainable, especially with COVID-19 headwinds dissipating. However, deferred care remains a risk that could get in the way of HUM reaching $37.00 in adjusted earnings in FY25. Nevertheless, a normalization of the economy post-pandemic should provide a steady tailwind for HUM as it works to achieve its new long-term earnings goal.
Arconic getting rolled after cutting Q3 guidance, but headwinds seem mostly company-specific (ARNC)
Aluminum manufacturer Arconic (ARNC) became the latest basic materials company to lower its outlook, guiding for FY22 revenue of $9.2-$9.5 bln, compared to its prior forecast of $9.6-$10.0 bln. ARNC also lowered its full-year adjusted EBITDA guidance to $715-$765 mln from $820-$870 mln, and its free cash flow outlook to $200 mln from $300 mln. The company's downward revision comes on the heels of yesterday's weak Q3 EPS guidance from steel producer Nucor (NUE), and Eastman Chemical's (EMN) reduced EPS projection the day before that.
The trio of downbeat updates painted a bleak picture for the materials sector, and for the broader economy, due to the highly cyclical nature of metals and chemicals production. However, the doom and gloom may have been a bit premature, because earlier this morning, Steel Dynamics (STLD) and U.S. Steel (X) issued solid Q3 guidance, with STLD highlighting strength in the non-residential construction market. STLD added that its steel fabrication operations are expected to be "meaningfully higher" than its record Q2 results.
Importantly, the more positive news from STLD and X put the spotlight on the company-specific issues that ARNC and EMN are contending with. In other words, we can't paint this set of guidance updates within the materials sector with a broad brush, simply concluding that a faltering economy is solely to blame. On that note, we'd expect Alcoa (AA) and Kaiser Aluminum (KALU) to also trade sharply lower in sympathy with ARNC, if the issue was completely macro-related. Currently, both of those stocks are trading with modest losses.
- It's true that demand has softened in certain markets, especially in Europe, where about 6-8% of ARNC's revenue is generated. In ARNC's press release, the company stated that hyper-inflationary energy costs are hurting demand and are also applying production cost pressures.
- ARNC also wouldn't lower its aluminum price forecasts if demand was strengthening. The company's new guidance assumes an LME (London Metal Exchange) price of $2,300/mt and Midwest Premium of $550/mt, compared to its prior assumption for LME of $2,500/mt and Midwest Premium of $700/mt.
- The weakness in ARNC, though, seems mostly tied to the significant production issues that are curtailing production. Specifically, the Tennessee plant is experiencing production outages and other operational challenges. During last quarter's earnings conference call, ARNC said that it expects the Tennessee ramp-up issues to be resolved in Q3 with the plant running at full capacity in Q4. That prediction is not coming to fruition, though.
- Compounding the issue, ARNC's Davenport facility has dealt with casting operations disruptions in recent weeks, further reducing volumes. While the company anticipates higher production rates in Q4, the major equipment repairs that are underway are putting pressure on ARNC's working capital and its cash flow.
The main takeaway is that the significant production problems that ARNC is grappling with separates it from some other basic materials companies that also guided this week. It's evident that macro-related challenges for ARNC and others are emerging -- particularly in Europe -- but the business climate may not be as soft as first imagined. However, with interest rates on the rise, the risk of a more profound slowdown for metal producers like ARNC, STLD, and NUE, is escalating.
Adobe under pressure on earnings and it makes a big bet on collaborative design platform (ADBE)
Adobe (ADBE -17%) is heading sharply lower following its Q3 (Aug) earnings report this morning. The timing was a surprise, because it had been scheduled for today after the close. However, Adobe moved it up to the pre-market likely because the company also announced some big news on the M&A front: it will acquire Figma, a web-first collaborative design platform, for approximately $20 bln. Half is being paid in cash and half in stock.
- Let's tackle the earnings first. Adobe posted a solid EPS beat, its largest in the past four quarters, while revs were in-line. The Q4 (Nov) guidance was a bit disappointing with upside EPS but slight downside revs.
- Its Digital Media segment performed well with revenue rising 13% yr/yr to $3.23 bln. Growth slowed a bit from +15% yr/yr in Q2 (May), but still was a solid result. Within this segment, Creative revenue grew +11% to $2.63 bln, while Document Cloud revenue jumped 23% yr/yr to $607 mln. Adobe's other major segment is Digital Experience, which saw revenue grow 14% yr/yr to $1.12 bln, also a bit lower from +17% in Q2.
- This was going to be an interesting quarter because Adobe bumped up prices in late Q2, its first real change since 2017. We were not sure how customers would respond, but they seem to have not pushed back too hard. Also, Adobe notes that it has added many new features since the last price increase. Adobe probably could have gotten an even bigger price increase, but wanted to focus more on adding millions of new users. Adobe sees itself as a growth business at heart.
- Turning to the Figma deal, this is a $20 bln transaction, so it is quite large relative to Adobe's $150 bln market cap. Figma is geared toward people who design mobile and web applications by allowing them to collaborate through multi-player workflows, sophisticated design systems and a developer ecosystem. Figma is used by millions of developers. Adobe already offers a collaborative design platform with its XD product but Figma adds a lot of capabilities and a huge built-in base of customers.
- With more people working remotely, it makes sense to focus more on design platforms that allow for collaboration from different locations. However, the one thing investors may not like is that half of the deal is being financed with stock. That does seem a bit high and will dilute shareholder value. Also, it provides a clue that maybe management thinks its stock price is high, which is not great from a sentiment perspective.
Overall, the stock is sharply lower on today's news. We think the combination of mediocre guidance, yr/yr growth for its major segments slowing a bit from Q2 plus the high price being paid for Figma is spooking investors ($20 bln while Figma's ARR is just north of $400 mln). With the economy looking a bit weak and the Fed raising rates, is this really the best time to shell out $20 bln for an acquisition, especially with half of that being stock?
Flowserve streams lower as Q3 EPS takes a hit from two events, but more pressing issue emerges (FLS)
Flowserve (FLS), which manufactures pumps, seals, and valves to control the flow of liquids and gases, is streaming lower today after disclosing that a pair of non-recurring events are expected to negatively impact Q3 EPS by $0.18-$0.22.
Specifically, the implementation of a new enterprise resource planning (ERP) system has gone awry at certain high-volume manufacturing and quick response centers in North America. The new system is intended to improve FLS's operational and customer service capabilities, but the transition from the legacy platform has not been smooth, causing volumes to be disrupted. Making matters worse, FLS expects to incur higher-than-anticipated corporate expenses related to annual liability accruals for a third-party actuarial consultant. Combined, FLS projects that these two developments will negatively impact Q3 EPS by $0.18-$0.22.
That's a fairly significant dent to FLS's EPS. For some context, the company guided for FY22 EPS of $1.50-$1.70 when it reported Q2 results on July 27. Beyond the sheer financial impact, the perception that FLS dropped the ball from an execution standpoint may also ding investors' confidence levels in the company's management. However, CEO Robert Rowe stated that the majority of the impact from these developments will be limited to Q3, adding that FLS has made significant progress recently with the ERP implementation.
Furthermore, Rowe commented that FLS continues to generate strong bookings in Q3, positioning the company to potentially achieve its highest bookings quarter of the year. Last quarter, bookings increased by nearly 10% to $1.04 bln, marking back-to-back quarters with bookings above the $1.0 bln level. Fueling FLS's bookings growth is its 3D strategy (Diversify, Decarbonize, Digitize) as decarbonization and energy transition projects expand globally. In Q2, the 3D categories accounted for a majority of the company's large order bookings.
Given that these hiccups in Q3 shouldn't have a lasting effect, and that bookings trends remain solid, it's a bit surprising that the stock is selling off so sharply. There is another possible explanation, though, for FLS's weakness.
- While the company's largest end market is the oil and gas industry (~35% of revenue), the chemical industry is also substantial, accounting for nearly 25% of its revenue.
- Yesterday, specialty chemical producer Eastman Chemical (EMN) sharply lowered its Q3 EPS guidance, partly due to a steeper-than-expected slowdown in the consumable durables end market.
- EMN's downside guidance was followed by cautious commentary today from chemical giant Dow (DOW) at a Credit Suisse investor event. The company expects Q3 net sales to be lower by $600 mln compared to consensus expectations as demand in Europe weakens, and as the recovery in China sputters. As a result, DOW is temporarily reducing polyethylene production.
While the mishaps in Q3 are aggravating, they aren't overly concerning since the issues are being remedied and should mostly be in the rearview mirror by next quarter. More concerning is the prospect of a significant slowdown in FLS's chemical end market. As a highly cyclical company that's sensitive to changes in macroeconomic conditions, we worry that the healthy bookings growth that FLS is seeing now could dissipate as consumers and business pull-back on spending. Perhaps this concern, rather than the short-term EPS impact from the two non-recurring items, is more to blame for today's weakness.
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