Market Snapshot
briefing.com
| Dow | 36124.56 | -79.88 | (-0.22%) | | Nasdaq | 14229.91 | +44.42 | (0.31%) | | SP 500 | 4567.18 | -2.60 | (-0.06%) | | 10-yr Note | +28/32 | 4.18 |
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| | NYSE | Adv 843 | Dec 1945 | Vol 910 mln | | Nasdaq | Adv 1432 | Dec 2846 | Vol 6.2 bln |
Industry Watch
| Strong: Information Technology, Consumer Discretionary, Communication Services |
| | Weak: Energy, Materials, Utilities, Financials, Real Estate, Industrials |
Moving the Market
-- A Moody's downgrade of China's credit outlook to Negative from Stable, due in part to concerns about structurally weaker growth prospects
-- Treasury yields moving lower
-- Mega caps bouncing back
-- Reacting to this morning's economic data |
Closing Summary
05-Dec-23 16:25 ET
Dow -79.88 at 36124.56, Nasdaq +44.42 at 14229.91, S&P -2.60 at 4567.18
[BRIEFING.COM] Today's trade had a negative bias. The A-D line favored decliners by a 7-to-3 margin at the NYSE and the equal weighted S&P 500 closed down 0.9%. Mega cap stocks, which benefitted from some safe-haven buying activity, acted as support for the three major indices.
The Nasdaq Composite closed with a 0.3% gain; the S&P 500 registered a 0.1% decline; and the Dow Jones Industrial Average fell 0.2%.
Buyers were presumably drawn to mega caps on renewed concerns about global growth prospects, which also sent Treasury yields lower today. The 2-yr note yield fell nine basis points to 4.56% and the 10-yr note yield declined 10 basis points to 4.18%.
A Moody's downgrade of China's credit outlook to Negative from Stable that was tied in part to concerns about structurally weaker growth prospects and an October JOLTS - Job Openings Report that featured the lowest number of job openings (8.733 million) since March 2021 were the primary factors that stoked worries about an economic slowdown.
The latter news overshadowed a slight uptick in the ISM Non-Manufacturing Index for November to 52.7% from 51.8%.
Just about everything, aside from mega caps, participated in today's retreat. Eight of the 11 S&P 500 sectors registered a decline while the information technology (+0.8%), consumer discretionary (+0.3%), and communication services (+0.2%) sectors, which all house mega cap constituents, closed with gains.
Small cap stocks underperformed their larger peers in another manifestation of growth concerns. The Russell 2000 closed with a 1.4% decline.
- Nasdaq Composite: +36.0%
- S&P 500: +19.0%
- Dow Jones industrial Average: +9.0%
- S&P Midcap 400: +7.4%
- Russell 2000: +5.4%
Reviewing today's economic data:
- November S&P Global US Services PMI - Final 50.8; Prior 50.6
- November ISM Non-Manufacturing PMI 52.7% (Briefing.com consensus 52.4%); Prior 51.8%
- The key takeaway from the report is that the largest sector of the U.S. economy saw a pickup in activity in November that is supportive of the soft landing view.
- October JOLTS -Job Openings 8.773 mln; Prior was revised to 9.350 mln from 9.553 mln
Wednesday's economic calendar features:
- 07:00 ET: MBA Mortgage Applications Index (Prior 0.3%)
- 08:15 ET: November ADP Employment Change (Briefing.com consensus 127K; Prior 113K)
- 08:30 ET: Q3 Productivity - Revised (Briefing.com consensus 4.8%; Prior 4.7%) and Unit Labor Costs (Briefing.com consensus -0.8%; Prior -0.8%)
- 08:30 ET: October Trade Balance (Briefing.com consensus -$64.4B; Prior -$61.5B)
KEY slides after noninterest income forecast
05-Dec-23 15:00 ET
Dow -70.20 at 36134.24, Nasdaq +39.65 at 14225.14, S&P -1.20 at 4568.58
[BRIEFING.COM] The S&P 500 is trading flattish while the Nasdaq Composite holds a slim gain, up 0.3%.
JPMorgan Chase CEO Jamie Dimon was highly critical of proposed regulations in prepared remarks to the Senate Banking Committee.
On a related note, the Goldman Sachs U.S. Financial Services Conference is being held today.
KeyCorp (KEY 13.01, -.043, -3.3%) is sliding today after lowering its Q4 noninterest income forecast. KEY is among the worst performing components in the S&P 500 financial sector (-0.4%).
MarketAxess, Discover Financial among top S&P 500 performers on Tuesday
05-Dec-23 14:30 ET
Dow -90.84 at 36113.60, Nasdaq +33.65 at 14219.14, S&P -2.22 at 4567.56
[BRIEFING.COM] The S&P 500 (-0.05%) is modestly lower, trading just to the under side of flat lines as we approach the last bit of trading on Tuesday.
Elsewhere, S&P 500 constituents MarketAxess (MKTX 253.91, +15.35, +6.43%), Discover Financial Services (DFS 99.07, +4.33, +4.57%), and Citizens Financial Group (CFG 29.05, +0.40, +1.40%) are among today's top gain getters. MKTX released November 2023 volume metrics this morning, DFS is up on management conference comments, while reports recently hit that CFG was eyeing partners to aid private credit business growth.
Meanwhile, Charter Comm (CHTR 368.17, -30.97, -7.76%) is the worst-performing component after conference comments from management suggested it could end up with negative internet net adds inside of Q4 amid certain impacts.
Gold narrowly lower after forming golden cross
05-Dec-23 14:00 ET
Dow -88.55 at 36115.89, Nasdaq +22.30 at 14207.79, S&P -4.87 at 4564.91
[BRIEFING.COM] With about two hours remaining on Tuesday the tech-heavy Nasdaq Composite (+0.16%) remains narrowly above flat lines.
Gold futures settled $5.90 lower (-0.3%) to $2,036.30/oz, giving up morning gains wherein the yellow metal formed a golden cross.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $104.08.
Procter & Gamble, AmEx underperform in DJIA on Tuesday
05-Dec-23 13:30 ET
Dow -68.87 at 36135.57, Nasdaq +30.86 at 14216.35, S&P -2.05 at 4567.73
[BRIEFING.COM] The Dow Jones Industrial Average (-0.19%) is underperforming, but currently stands near HoDs on losses of about 69 points.
A look inside the DJIA shows that Procter & Gamble (PG 147.38, -4.68, -3.08%), American Express (AXP 169.32, -3.93, -2.27%), and Dow (DOW 51.31, -0.79, -1.52%) are among today's top laggards.
Meanwhile, Apple (AAPL 193.26, +3.83, +2.02%) is outperforming.
The DJIA is up about +0.51% thus far in December.
Page One
Last Updated: 05-Dec-23 08:58 ET | Archive
From the eye test to the smell test
The stock market has a big weight on its shoulders. The mega-cap stocks are weak again and that is weighing on the equity futures market.
Currently, the S&P 500 futures are down 14 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 63 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 92 points and are trading 0.3% below fair value.
The mega-cap malaise follows what has been an extraordinary run since late October and, really, all year. Illustrative of the point, the Vanguard Mega-Cap Growth ETF (MGK) is up 44.2% for the year entering today's session.
There will be periods like this when a profit-taking inclination kicks in, and when there are, it will be challenging for the major indices to pass the eye test. The question is, can they pass the smell test?
The smell test incorporates the rest of the market and how it does when the mega-cap stocks aren't doing so well. The rest of the market did just fine yesterday when the mega-cap stocks did not. One could see the rotation in the air, and also smell it.
To that end, the market-cap weighted S&P 500 declined 0.5% on Monday, but the equal-weighted S&P 500 managed a fractional gain.
There is a feeling of thickness in the air today, however, with market participants questioning if stocks in general can keep running like they have. The Equal-Weighted S&P 500 Index has had a parabolic move of its own, surging 12.6% from its October 27 low.
Investor sentiment readings skewing strongly to the bullish side of things have created a bit of a contrarian headwind. The news that Moody's cut China's credit outlook to Negative from Stable, due in part to concerns about structurally weaker growth prospects, has also tempered some of the buying interest this morning along with the impending release of the ISM Non-Manufacturing PMI for November (Briefing.com consensus 52.4%; prior 51.8%) and the JOLTS - Job Openings Report for October (Prior 9.553 million) at 10:00 a.m. ET.
Treasury yields are sliding in front of those reports. The 2-yr note yield is down four basis points to 4.61% and the 10-yr note yield is down seven basis points to 4.21%. These lower yields pass the eye test as a good thing, but whether they pass the smell test is another question. If they are moving lower on growth concerns, that will inevitably invite concerns about earnings prospects.
That doesn't seem to be the prevailing case at the moment, but it is something to keep an eye on and to have a nose for.
-- Patrick J. O'Hare, Briefing.com
Autozone stuck in neutral as domestic same-store sales growth is in need of a jumpstart (AZO)
Topping quarterly EPS estimates has become rather routine for auto parts retailer AutoZone (AZO) and the company's winning streak against earnings expectations, which spans over five years, continued on with today's Q1 report.
- With the average price of a new car approaching $50,000 -- which is up by about 20% since 2020 -- and with interest rates at high levels, many people are choosing to hang onto their current vehicles rather than purchasing a new one. This, in turn, is driving steady demand for maintenance and repair products and services as the average U.S. vehicle age continues to rise.
- Business conditions remain healthy as AZO prepares to execute its CEO transition next month. Current EVP of Merchandising, Marketing, and Supply Chain Philip Daniele will take the reins from Bill Rhodes, who decided to relinquish his positions as President and CEO this past June.
- A key priority for Mr. Daniele will be to expand and grow market share for its domestic commercial, or its DIFM (do-it-for-me), business.
- Last quarter, the domestic commercial business disappointed investors as sales growth slowed to 3.9%, missing expectations, compared to growth of 6.3% in Q3. In Q1, though, sales growth accelerated to 5.7%, despite lapping a tough yr/yr comparison of 14% growth.
- Meanwhile, the international business was once again a standout as same-store sales surged by 25.1% on top of growth of 23.3% in the year-earlier quarter. As AZO continues to aggressively expand its footprint in Mexico and Brazil, the international business is becoming a larger contributor to its top-line.
- As of November 18, 2023, AZO had 745 stores in Mexico, up from 706 in the year-earlier period, and 104 stores in Brazil, compared to 76 a year ago.
- The company intends to keep its foot on the accelerator, too, planning to open 200 more stores internationally by FY28.
There were indeed plenty of positives within AZO's earnings report, but the stock is still struggling to gain much traction this morning. We believe there are a couple main factors that may be keeping a lid on shares.
- For starters, AZO has already rallied by over 10% since late October, pushing shares close to all-time highs ahead of the print. Therefore, much of the good news may already be priced in.
- Additionally, Q1 domestic same-store sales growth of 1.2% remained light, roughly in line with last quarter's increase of 1.7% and Q3's growth of 1.9%. AZO is lapping solid same-store sales growth of 5.6%, but the drop-off is providing enough of an excuse to take some gains on the stock.
All in all, though, it was another solid performance for AZO and the company remains well-positioned to benefit from favorable trends, including an average vehicle age that seems bound to rise even further.
GitLab makes a strong move following surprise profit in Q3 and upside Q4 guidance (GTLB)
GitLab (GTLB +13%) is sharply higher today after it reported a surprise profit in Q3 (Oct) when a loss was expected. This provider of software development tools, also known as DevOps Platforms, also reported healthy revenue upside and guided above analyst expectations for Q4 (Jan). After a big guide down in Q4 of last year, GitLab has now posted three consecutive large beats-and-raises. Notably, GTLB guided to another profit in Q4 even though analysts had been expecting a loss.
- The strong Q3 results were driven by the continued adoption of its DevSecOps Platform. GitLab notes that it's the only DevSecOps company that integrates security, compliance, and AI into one platform. GitLab has also been winning larger deals. It ended Q3 with over 8,100 customers with ARR of at least $5,000 vs 7,800 in Q2 and 6,400 a year ago. The company also had 874 customers with ARR of at least $100,000, up 37% yr/yr.
- A standout metric was non-GAAP operating margin, which jumped to 3% from -19% a year ago. In fact, this was GitLab's first-ever non-GAAP operating profit even as it has continued to invest in key product areas. Also, in April 2023, it raised the price of its Premium tier for the first time in five years. This should act as a tailwind, especially as deals renew in FY24-26.
- It was not uniformly good news. GitLab conceded that overall sales cycles lengthened in Q3 relative to Q2. During Q3, buying behavior in its Enterprise segment stabilized. However, in the midmarket and SMB, GitLab is seeing customers continue to be cautious in the uncertain macro environment. It did not sound like competitive issues as GitLab noted that its win rates have improved as the value of its platform is resonating in the market.
- Contraction during Q3 also improved for the third consecutive quarter and is in line with levels from Q3 last year. GitLab continues to see strong adoption of Ultimate, its top tier product, which represents over 50% of Q3 ARR bookings. Another driver is the launch of GitLab Dedicated, which helps clients that operate in highly regulated industries with complex security and compliance requirements.
Overall, we think investors are quite pleased with the Q3 results, especially the surprise profit and significant margin expansion. The comment about sales cycles lengthening in Q3 was a bit of a concern but not entirely a surprise. Many tech names have talked about tighter deal scrutiny and macro headwinds generally. The strong upside guidance for Q4 makes us less worried about that. Looking ahead, management sounds pretty confident about its outlook. And that's before the full benefits of the price increase really kick in.
J.M. Smucker's sliced FY24 EPS guidance due to its TWNK purchase shrugged off; shares higher (SJM)
Even though J.M Smucker (SJM +5%) sliced its FY24 (Apr) adjusted EPS outlook, its performance during Q2 (Oct) is proving to be investor's jam today, shoving aside this minor blemish. The consumer-packaged-goods giant, supplying well-known brands like Jif, Folgers, and Uncrustables, exceeded bottom-line estimates in the quarter while keeping revenue consistent with analyst forecasts. Meanwhile, SJM's reduced FY24 earnings outlook directly resulted from its recently announced $5.6 bln acquisition of Hostess Brands (TWNK). Excluding the dilution of the acquisition, SJM would have raised its FY24 outlook, projecting $9.85 at the midpoint, a roughly 10% jump yr/yr.
While today's upward movement is aided by the fact that shares of SJM tumbled by approximately 20% since announcing its intention to purchase TWNK on September 11, there were plenty of positives from OctQ that underscored a decently sized economic moat and a healthy portfolio to lean on despite challenging macroeconomic conditions.
- Adjusted EPS grew by 8% yr/yr to $2.59, including an approximately $0.29 headwind related to a termination of a coffee supplier agreement. Revenue fell 12.1% yr/yr to $1.94 bln. Comparable net sales grew 7%, consistent with SJM's expectations, driven by volume gains across its portfolio.
- Coffee was SJM's only segment to experience a net sales decline, slipping by 3% yr/yr, primarily fueled by an unfavorable 4 pt net price realization as it narrows the gap with competitors. U.S. Retail Consumer sales edged 7% higher, aided by net price realization, which added 7 pts. Smucker's Uncrustables remained a positive standout, registering 22% net sales growth. Pet Foods grew 20% yr/yr when excluding noncomparable sales related to divested pet foods brands. International and Away From Home sales expanded 13% when removing noncomparable items.
- Looking ahead, SJM did cut its FY24 adjusted EPS forecast to $9.25-9.65 from $9.45-9.85. However, $0.40 of the reduction was related to the TWNK acquisition. The company also maintained its comparable net sales growth forecast of +8.5-9.0%, reflecting the ongoing momentum of its overall business.
SJM is known to be a steady grower, providing investors with a solid dividend yield of 3.8%. As such, its rapid decline over the past three months highlighted how off-putting its acquisition of TWNK was to the market. CEO Mark Smucker outlined several factors that influenced the company's decision to pay a 50+% premium for TWNK, highlighting its established position in the snacking market, resilient consumer snacking demand, mutual growth opportunities, and TWNK's iterative product innovation and convenience channel expertise. While we agree with Mr. Smucker on his reasons behind snatching up TWNK, it came at a hefty price, causing SJM's total debt balance for the combined businesses to balloon to around $8.7 bln. With so much accumulated debt, SJM plans to prioritize debt reduction over the near term, halting its share purchases.
Bottom line, OctQ results were solid. However, SJM has a steep hill to climb with the cloud of its TWNK purchase and the rising popularity of weight-loss medications hanging over its shares.
Science Applications capitalizing on upgrade cycles at intelligence and military customers (SAIC)
Government and defense contractor Science Applications (SAIC) is jumping to all-time highs after delivering another beat-and-raise earnings report as the company continues to see strong bookings activity from various military and intelligence branches, including the Navy and U.S. Space Force. In particular, these organizations are modernizing and enhancing their IT systems, while also bolstering their cybersecurity capabilities, creating steady demand for SAIC's engineering, technical, installation, and maintenance services.
- SAIC also successfully navigated through a leadership transition with Toni Townes-Whitley assuming the role of CEO on June 12, taking the reins from Nazzic Keene, who announced her intention to retire in May.
- This morning was the first earnings call for Ms. Townes-Whitley and, after coming over from Microsoft (MSFT) where she served as President of U.S. Regulated Industries, all indications are that the transition is going as smoothly as possible.
- As the company's raised guidance would suggest, its close-knit relationships with its customers remain fully intact following the leadership transition. More specifically, SAIC increased its FY24 EPS guidance to $7.20-$7.40 from $7.00-$7.20 and its revenue forecast to $7.20-$7.25 bln from $7.125-$7.225 bln.
- In fact, in each quarter of this fiscal year, SAIC has raised its FY24 guidance, reflecting the ramp up of work on new and existing programs and improved labor productivity.
- During last quarter's earnings call, SAIC commented that certain contract transitions could affect the timing of revenue recognition with growth weighted toward the back half of the fiscal year. This morning, the company reassured investors that its upgraded outlook not only reflects this factor, but it also takes into account the possibility of a short-lived disruptive government funding environment.
- Additionally, during SAIC's 2023 Investor Day in April, it targeted sustainable organic revenue growth of 2-4%, but Ms. Townes-Whitley stated this morning that the new leadership team has a goal of outperforming that growth.
The main takeaway is that SAIC continues to capitalize on technical and IT upgrade cycles within the U.S. government, intelligence, and military branches, as illustrated by net new bookings of $2.5 bln in Q3. Potential disruptions in revenue recognition are a risk, but SAIC's consistent beat-and-raise performances show that it is more insulated than most IT-related companies from macroeconomic headwinds.
Alaska Air sees some turbulence after saying Aloha to acquiring Hawaiian Airlines (ALK)
Alaska Air (ALK -16%) and Hawaiian Holdings (HA +180%) are joining forces. The two companies have signed a definitive agreement under which Alaska Airlines will acquire Hawaiian Airlines for $18 per share in cash, for a transaction value of approximately $1.9 bln, inclusive of $0.9 bln of Hawaiian Airlines net debt. The deal has been approved by both boards and is expected to close within 12-18 months. The combined company will be based in Seattle under the leadership of Alaska Airlines CEO Ben Minicucci.
- In terms of the rationale, the companies cite complementary domestic, international, and cargo networks. This will expand choices for consumers on the West Coast and throughout the Hawaiian Islands. Passengers will benefit from more choice and increased connectivity across both airlines' networks, with service to 138 destinations in the Americas, Asia, Australia and the South Pacific. ALK travelers will benefit from HA's international and long-haul offerings.
- Importantly, the combined airline will maintain both its Alaska Airlines and Hawaiian Airlines brands while integrating into a single operating platform. The combination will be able to offer a range of price points across a range of cabin classes, including Alaska Airlines' high-value, low-fare options and Hawaiian Airlines' international and long-haul product, which is on par with network carriers. The deal will maintain Neighbor Island service to serve air dependent communities in Hawaii.
- Hawaii residents will benefit because the combination will triple the number of destinations throughout North America that can be reached nonstop or one stop. Honolulu will become ALK's second largest hub. ALK believes Honolulu has the potential over time to approach Seattle in terms of revenue. Also, the deal enables greater international connectivity for West Coast travelers throughout the Asia-Pacific region with one-stop service through Hawaii.
- The stock reactions are quite stark. HA is surging today, which is no surprise. The stock closed at $4.86 on Friday and now they are getting a whopping $18/sh offer price, all in cash. Nevertheless, HA shares are trading a good bit below the $18 offer price, which tells us investors perhaps have concerns over whether the deal will survive regulatory scrutiny and perhaps questions as to whether investors will vote to approve the deal at the current price.
- ALK is sharply lower, which we think is for several reasons. First, the premium seems quite hefty. ALK argues that the 0.7x revenue multiple falls well below the industry transaction average of 1.7x. We would push back on that a bit because HA's revs have been depressed because of the recent wildfires. Also, the share price premium is what it is, and that is quite frothy. Also, the deal was all in cash, which makes the hefty premium all the more surprising.
- Other issues that are weighing on ALK's share price is the fact that Southwest (LUV) has been adding a good number of flights in Hawaii, making competition tougher. ALK is also taking on a good amount of debt. We think regulatory concerns are another factor. Recall that the DOJ is suing to block JetBlue's (JBLU) acquisition of Spirit Airlines (SAVE), so this deal could face some challenges as well.
- And finally, analysts seemed concerned on the call that ALK uses Boeing 737s. Buying HA will add Airbus planes, both narrow body and wide body. That will add complexity/costs to maintenance. On the call, ALK conceded the increased complexity, but the advantages far outweigh the complexities.
Overall, ALK investors are not too excited about this deal. There are definitely positives to it, but they are not liking the lofty premium being paid. That is especially the case for an airline (HA) that is facing increased competition from Southwest and has a fleet that is not 737-focused. However, HA shareholders are quite happy with this combination.
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