Market Snapshot
briefing.com
| Dow | 34635.50 | -28.22 | (-0.08%) | | Nasdaq | 13772.32 | -145.58 | (-1.05%) | | SP 500 | 4460.91 | -26.55 | (-0.59%) | | 10-yr Note | +2/32 | 4.26 |
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| | NYSE | Adv 1328 | Dec 1521 | Vol 780 mln | | Nasdaq | Adv 1904 | Dec 2348 | Vol 4.6 bln |
Industry Watch
| Strong: Energy, Financials, Industrials |
| | Weak: Information Technology, Communication Services, Consumer Discretionary, Consumer Staples, Real Estate |
Moving the Market
-- Big loss in Oracle (ORCL) following its earnings report hanging over market
-- Relative weakness in mega caps weighing on broader market
-- Another jump in oil prices keeping pressure on stocks
-- S&P 500 and Nasdaq slipping back below their 50-day moving averages
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Closing Summary
12-Sep-23 16:25 ET
Dow -17.73 at 34645.99, Nasdaq -144.28 at 13773.62, S&P -25.56 at 4461.90
[BRIEFING.COM] Today's session started with a positive bias under the surface despite a mixed performance at the index level. The S&P 500 and Nasdaq were in negative territory early on, albeit with somewhat modest losses. That weakness had them both below their 50-day moving averages. At the same time, the Dow Jones Industrial Average and Russell 2000 were trading up and market breadth was positive.
The early underperformance seen in the S&P 500 and Nasdaq was largely driven by softness in the mega cap space and a big decline in Oracle (ORCL 109.61, -17.10, -13.5%) following its earnings report and relatively disappointing guidance.
A mid-day push higher saw the S&P 500 briefly climb past its 50-day moving average, but it was unable to maintain that posture, which invited increased selling activity in the afternoon trade. The major indices spent most of the afternoon in a steady decline. The Dow Jones Industrial Average finished with a fractional loss while the S&P 500 and Nasdaq Composite closed near their worst levels of the day.
Losses were broad based, but mega caps had an outsized influence on index performance. The Vanguard Mega Cap Growth ETF (MGK) fell 1.2%; meanwhile, the market-cap weighted S&P 500 declined 0.6% versus a more modest 0.1% decline in the Invesco S&P 500 Equal Weight ETF (RSP).
Apple (AAPL 176.30, -3.06, -1.7%) was weak in front of its closely-watched product event and pulled back following a slate of announcements that featured the introduction of the iPhone 15.
Rising oil prices ($89.95/bbl, +1.66, +1.9%), which hit their highest level since last November, were another overhang for the market. That move benefited the S&P 500 energy sector (+2.3%), which closed at the top of the leaderboard by a wide margin.
The heavily-weighted information technology sector (-1.8%) logged the biggest decline.
Treasuries settled little changed from yesterday ahead of the August Consumer Price Index at 8:30 a.m. ET on Wednesday. The 2-yr note yield rose one basis points to 5.00% and the 10-yr note yield fell two basis points to 4.26%.
Today's economic data was limited to the August NFIB Small Business Optimism index, which declined to 91.3 from 91.9.
- Nasdaq Composite: +31.6% YTD
- S&P 500: +16.2% YTD
- S&P Midcap 400: +6.1% YTD
- Russell 2000: +5.3% YTD
- Dow Jones Industrial Average: +4.5% YTD
Aside from CPI, other economic releases tomorrow include:
- Weekly MBA Mortgage Applications Index at 7:00 a.m. ET
- Weekly EIA Crude Oil Inventories at 10:30 a.m. ET
- August Treasury budget at 2:00 p.m. ET
Market languishes near lows
12-Sep-23 15:35 ET
Dow -29.13 at 34634.59, Nasdaq -147.23 at 13770.67, S&P -27.56 at 4459.90
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Downside moves coincided with many stocks pulling back, but mega cap losses are having an outsized influence on index performance. The Vanguard Mega Cap Growth ETF (MGK) is down 1.4% versus a 0.2% decline in the Invesco S&P 500 Equal Weight ETF (RSP).
Apple (AAPL 175.53, -3.83, -2.1%) shares didn't have an outsized reaction to the company's product event. AAPL was down 1.3% when the event started at 1:00 p.m. ET.
Market declines; energy settles higher
12-Sep-23 15:05 ET
Dow -28.22 at 34635.50, Nasdaq -145.58 at 13772.32, S&P -26.55 at 4460.91
[BRIEFING.COM] The major indices continue to descend.
Energy complex futures settled higher. WTI crude oil futures rose 1.9% to $88.95/bbl and natural gas futures jumped 5.7% to $2.75/mmbtu.
On a related note, the S&P 500 energy sector (+2.2%) has maintained its outperformance today. The next best performers are the financials (+0.9%) and utilities (+0.2%) sectors.
S&P 500 constituents' investor conference comments in focus on Tuesday
12-Sep-23 14:30 ET
Dow +53.24 at 34716.96, Nasdaq -106.43 at 13811.47, S&P -15.67 at 4471.79
[BRIEFING.COM] The S&P 500 (-0.35%) is in its familiar second place once more among the major averages.
S&P 500 constituents Northern Trust (NTRS 72.2, -4.16, -5.40%), Eaton (ETN 226.25, -11.79, -4.95%), and Accenture (ACN 314.85, -11.02, -3.38%) dot the bottom of the index. NTRS slips after guiding Q3 NII down in today's conference appearance, ETN also presented today an an investor conference, while ACN falls despite two sell side target raises.
Meanwhile, Utah-based regional bank Zions Bancorp (ZION 37.41, +2.68, +7.72%) is today's top performer ahead of tomorrow's presentation at the 2023 Barclays Financial Services Conference.
Gold slips ahead of tomorrow's CPI data
12-Sep-23 14:00 ET
Dow +85.45 at 34749.17, Nasdaq -105.38 at 13812.52, S&P -14.13 at 4473.33
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-0.76%) remains the top loser among the major averages, falling to near lows of the day down about 105 points.
Gold futures settled $12.10 lower (-0.6%) to $1,935.10/oz as investors move away from the yellow metal ahead of tomorrow's CPI reading.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $104.74.
Moving at stall speed
The stock market had a positive showing on Monday, yet things are moving at stall speed this morning.
Currently, the S&P 500 futures are down 13 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 55 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 53 points and are trading 0.2% below fair value.
Oracle (ORCL) is down 9% following an earnings report and outlook that were deemed underwhelming relative to more bullish-minded expectations. That weakness, and some softness in the mega-cap stocks, has been a key restraint on the equity futures market.
We are also hearing some chatter that market participants are shifting into a wait-and-see mode in front of Apple's (AAPL) product event at 1:00 p.m. ET today and ahead of the release of the August Consumer Price Index on Wednesday.
We consider that chatter plausible given the weight of expectations Apple carries on just about everything it does and how its product development, particularly for the iPhone, influences investors' sales and earnings expectations. Meanwhile, the trend in CPI and particularly core-CPI, which excludes food and energy, holds great influence over monetary policy expectations.
The CME FedWatch Tool shows a tiny 7% probability of a rate hike at next week's FOMC meeting, so the weight of the August CPI will pertain to the outlook for the October 31-November 1 FOMC meeting. Currently, there is a 47.2% probability of a 25 basis points rate hike on November 1.
The wait-and-see mode is on in the Treasury market, too.
The 2-yr note yield is up one basis point to 5.00% and the 10-yr note yield is down one basis point to 4.28% in what has been a tightly-traded overnight session. There will be a $35 billion 10-yr note reopening today with results announced at 1:00 p.m. ET.
Separately, oil prices aren't waiting for anything. They are on the move (again). WTI crude futures are up 1.3% to $88.38 per barrel, hitting their highest level since last November, which is something that won't escape the market's eye as a simmering problem with respect to inflation expectations, consumer spending activity by way of rising gas prices, and potential profit margin pressures.
-- Patrick J. O'Hare, Briefing.com
CVS Health sees relief from ailing shares on reaffirmed FY23 targets; may be turning a corner (CVS)
CVS Health (CVS +3%) sees relief from its ailing stock price following its reiterated FY23 EPS and free cash flow guidance, as well as encouraging remarks from management during its Morgan Stanley Global Healthcare Conference today. The retail pharmacy and health insurance giant has struggled over the past year following a series of setbacks, including a Star Rating cut, withdrawn FY25 EPS guidance, and a lost contract with Blue Shield of California. Although shares are potentially running into resistance at their 50-day moving average (70.86) today, perhaps the worst of CVS's headwinds are behind it, setting up for a turnaround over the next several quarters.
- Over the past year, CVS has made two monumental acquisitions, purchasing Signify Health for $8.0 bln and Oak Street Health for $10.6 bln. The market did not respond overwhelmingly positively toward these deals, especially since they coincided with macroeconomic headwinds within CVS's retail business. However, the company noted today that it has been constantly identifying synergies across Signify and Oak Street and has started seeing positive results.
- The Star Rating cut regarding CVS's Medicare Advantage business was a concerning development. However, CVS has been pouring resources into improving its overall Stars performance. There are a few more weeks until the final CMS results are released, which could produce a volatile trading day. However, based on internal indicators, management was optimistic about where it would land.
- There were concerns last quarter regarding a 350 bp uptick yr/yr in CVS's medical benefit ratio (MBR), the percent of premiums spent on clinical services. CVS repeated today that it assumes utilization pressure would persist for the rest of the year, seeping into 2024, albeit to a much lesser degree.
- On a side note, a rising MBR could adversely impact other health insurers, such as UnitedHealth Group (UNH) and Humana (HUM), which have already touched on this dynamic in recent quarters.
- The lost Blue Shield contract was disappointing, but CVS did not express much concern, stating that it was just an unbundling of PBM services. In fact, CVS commented that Blue Shield continues to engage with the company surrounding specialty services, winning business in Massachusetts and Tennessee. Also, because of the magnitude of the Blue Shields California contract, it carried lower margins.
CVS has had to clear plenty of hurdles over the past year. However, despite the numerous obstacles, CVS remains committed to generating double-digit EPS growth over the long haul. Although its FY24 earnings target translates to flat yr/yr growth, as benefits from improving pharmacy growth and expense actions will be canceled by headwinds in Health Care Benefits and retail, CVS may finally get back on track for FY25, albeit not at double-digits.
While its primary rival, Walgreens Boots Alliance (WBA), manages through a CEO departure and a cloudy roadmap regarding its several acquisitions, CVS may be finally turning a corner, potentially giving it a leg up to capture market share. With shares recently hitting multi-year lows, CVS is beginning to look attractive as a turnaround play.
WestRock boxes up some gains as company agrees to merge with packaging giant Smurfit Kappa (WRK)
Packaging company WestRock (WRK) is trading sharply higher after agreeing to merge with Ireland-based Smurfit Kappa (SMFKY) in a cash and stock deal worth about $20 bln. Last Wednesday night, the Wall Street Journal first reported that the two packaging companies were in talks regarding a potential merger, sparking a rally in WRK shares the following day.
Based on the terms of the deal and Smurfit Kappa's closing price from yesterday, WRK shareholders would receive the equivalent of $43.51/share in cash ($5/share) and stock (one new Smurfit WestRock share), representing a premium of about 36% versus WRK's unaffected closing price from September 6. However, that premium is diminishing as Smurfit Kappa's stock drops in the wake of the merger announcement.
- The merger comes at a time when the highly cyclical paper and packaging industry is struggling from a downturn in consumer spending. This weakness was evident when WRK reported Q3 results on August 3. Although the company beat EPS expectations, the better-than-expected earnings were mainly driven by cost-cutting measures as revenue fell by 7% yr/yr to $5.1 bln. Consolidated adjusted EBITDA also slid lower by more than 20% to $204 mln.
- By combining, WRK and SMFKY would become a global packaging leader with market leadership across Europe and in U.S., with a strong presence also in Brazil and Mexico. That geographic diversity, along with the expected improvement in operating efficiencies due to greater scale, should bolster the combined company's earnings growth in this challenging environment.
- On that note, SMFKY expects the deal to be high single-digit accretive to its EPS on a pre-synergy basis by the end of the first year following completion.
- Despite the anticipated EPS accretion, shares of SMFKY are selling off on the merger news. Investors may be balking at the structure of the deal, which includes stock, but also includes debt financing to fund the cash portion of the transaction. It's also notable that WRK holds over $9.0 bln in total debt as of June 30, 2023, which now becomes the combined company's burden.
The clear advantage to this deal is that it would add significant scale to the combined company in an industry in which scale is of utmost importance. Together, WRK and Smurfit Kappa generated adjusted revenue of $34 bln over the last twelve months, making the combined company a packaging powerhouse. The merger, though, still needs to gain shareholder approval, and based on the stock action in Smurfit Kappa today, it's apparent that its investors aren't enthusiastic about the deal.
Oracle under pressure as weak guidance provides a reason to lock in some profits (ORCL)
Oracle (ORCL -12%) is under some pressure today following its Q1 (Aug) results last night. Oracle reported decent results with EPS upside, but not as large as last quarter. Also, revenue grew 8.8% yr/yr to $12.45 bln, but that was a bit shy of analyst expectations. Probably the biggest issue was the Q2 (Nov) guidance, especially on the top line, which was below analyst expectations.
- Let's start with some positives. Q1 Cloud Revenue (IaaS plus SaaS) rose 30% yr/yr to $4.6 bln while Cloud Infrastructure (IaaS) revenue jumped 66% yr/yr to $1.5 bln. In Q1, RPO climbed to nearly $65 bln with the portion excluding Cerner up 11%. Oracle noted that it has now signed several deals for OCI greater than $1 bln in total value. Approximately 49% of total RPO is expected to be recognized as revenue over the next 12 months.
- Non-GAAP operating margin is a metric we like to track. In Q1, including Cerner, it grew to 41% from 39% a year ago, although down from 44% in Q4 partially due to a smaller revenue base. As Oracle continues to benefit from economies of scale in the cloud and drive Cerner profitability to Oracle standards, ORCL expects it will grow operating margin.
- Turning to the guidance. Oracle says it has a great line of sight into the trajectory of the business given the bookings momentum. The company is extremely confident about its revenue acceleration for the year, even though in any quarter, there may be small fluctuations. Also, because it has far more demand than it can supply, ORCL says its biggest challenge is building data centers as quickly as possible.
- Another issue is that Oracle is in an accelerated transition of its Cerner unit to the cloud. This transition is resulting in some near-term headwinds to Cerner's growth rate as customers move from license purchases, which are recognized upfront, to cloud subscriptions, which are recognized ratably. Excluding Cerner, Oracle remains committed to accelerating its total revenue growth rate this fiscal year.
The stock is being hit pretty hard, we think the Q2 guidance is spooking investors a bit. Overall, demand seems good but transitioning Cerner clients to cloud subscriptions is creating a headwind for near term revenue recognition. We also think, as we said in our preview, that expectations were running quite high heading into this report. The stock had more than doubled from its lows in early October 2022 and it had made a strong move since mid-July. The guidance is presenting a reason to lock in some profits.
Casey's General's massive JulQ EPS beat shows it has plenty of fuel left in its tank (CASY)
After heading downhill over the past two months, Casey's General (CASY +10%) shares spiked today following a substantial Q1 (Jul) earnings beat during after-hours yesterday. The fuel station and convenience store chain enjoyed a sequential bump in fuel and inside-store margins as gasoline prices ticked back up while input costs continued to ease. Still, CASY remained cautiously optimistic on the road ahead, keeping its FY24 financial targets unchanged.
- The head-turning figure from JulQ was CASY's EPS of $4.52, which annihilated analyst forecasts and represented the company's widest beat in three years. Fuel margins of 41.6 cents translated to a meaningful 7.0 cent jump over the 34.6 cent margins from Q4 (Apr) and a minor 3.1 cent decline from the year-ago period when gas prices were considerably higher, averaging over $1.06 more than in JulQ.
- CASY noted that without any significant macro event during JulQ, it did not have to contend with a volatile quarter from a fuel margin perspective like in Q4 (Apr) when margins fluctuated wildly. The company added that a relatively benign quarter can indicate sustained higher industry fuel margins. Grocery chain Kroger (KR), which boasts over 1,300 more fuel stations than CASY, commented last week that despite a contraction in fuel margins yr/yr in JulQ, they remain very healthy compared to historical trends.
- CASY's fuel margins have stayed above $0.345/gal for the ninth-consecutive quarter and over $0.40/gal in four out of the past five quarters.
- Total revenue still fell 13.1% yr/yr to $3.87 bln, consistent with consensus. However, inside same-store sales exceeded CASY's FY24 forecast, jumping +5.4%. Management highlighted pizza, bakery, and beverages as notable standouts. Meanwhile, inside margins landed within the company's FY24 target range, expanding 80 bps yr/yr to 40.6%, as commodity prices, importantly cheese (CASY's primary seller is its pizzas), softened.
- Looking ahead, CASY detailed August trends, observing same-store sales, both inside and fuel gallons, slightly below the midpoint of their respective FY24 outlooks. Furthermore, fuel margins are tracking in the high 30s while cheese prices remain modestly favorable versus the year-ago period but less than CASY experienced in JulQ.
- As such, CASY reiterated its FY24 outlook, maintaining its inside comp prediction of +3-5%, inside margins of approximately 40-41%, and same-store fuel gallons sold between negative 1% and positive 1%.
The main takeaway is that CASY is operating in an increasingly normal environment. Most of the company's locations are around the Midwestern U.S., where residents have essentially returned to a lifestyle resembling that before the pandemic, assisting a return to normalized fuel and inside volumes.
However, CASY is not settling for normal, boasting +0.4% fuel comps in JulQ, outpacing the industry of negative 4.1% in its geography, a testament to its business model. A differentiating factor for CASY is its curb appeal, with most locations held to a high standard of cleanliness, a refreshing alternative to many competing fuel stations. Although shares are making one-year highs today, CASY still has plenty of gas left in its tank over the long run.
Tesla receives a jolt on Morgan Stanley upgrade, putting FSD technology in the spotlight (TSLA)
Shares of Tesla (TSLA) are receiving a charge today after Morgan Stanley (MS) upgraded the stock to Overweight from Equal Weight while also raising its price target to $400 from $250. That new price target indicates a near 50% move higher from current levels, reflecting the firm's very bullish stance. The main basis for MS's upgrade is its belief that TSLA's Dojo supercomputer, which will power its full self-driving (FSD) technology, is set to become a major growth catalyst as the EV maker moves closer towards selling software and services.
- Elon Musk raved about Dojo during the Q2 earnings call, stating that it will ultimately make the company's current financial metrics "look silly." Of course, taking Musk's comments with a grain of salt is typically advised given his propensity to make grandiose statements. However, his comments shouldn't be totally dismissed, either.
- Over the past few years, TSLA has accumulated a massive amount of driving video data while also spending billions in capital on computing to train its FSD technology. That gives TSLA a huge competitive advantage over up-and-coming EV makers who may be looking to replicate its FSD offering.
- There are still plenty of questions and uncertainties, though, revolving around FSD. For instance, Musk has claimed that TSLA will achieve full self-driving capability sometime this year, but that seems highly unlikely. Therefore, nobody really knows when FSD will fully move out of the beta version and into an actual sellable service. Furthermore, Musk has promised that FSD will eventually enable TSLA to launch a robotaxi service, but the timeline for that is also uncertain.
- In the meantime, TSLA has returned to its price-cutting ways with the company reducing the selling price on its Model 3 inventory by up to $5,500 earlier this month. Prior to that, the company cut Model Y and Model X prices in China back in August and July.
- With the economy souring -- especially in China, which is TSLA's second largest market -- the company returned to a familiar strategy of driving deliveries higher at the expense of margins. There was some hope that margins bottomed out last quarter after gross margin plunged by 682 bps yr/yr to 18.2%, but it seems that a trough hasn't been reached yet.
From Musk's perspective, sacrificing margins in the near term to push volume higher is a worthwhile trade off since more cars on the road now will equate to greater FSD-related revenue down the road. Market participants haven't exactly shared that sentiment, but MS's vote of confidence is helping to turn some doubters into believers.
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