Market Snapshot
briefing.com
| Dow | 37305.16 | +56.81 | (0.15%) | | Nasdaq | 14813.92 | +52.36 | (0.35%) | | SP 500 | 4719.19 | -0.36 | (-0.01%) | | 10-yr Note | -1/32 | 3.93 |
|
| | NYSE | Adv 887 | Dec 1864 | Vol 3.8 bln | | Nasdaq | Adv 1732 | Dec 2583 | Vol 8.7 bln |
Industry Watch
| Strong: Information Technology, Consumer Discretionary |
| | Weak: Health Care, Energy, Utilities, Real Estate, Financials, Industrials |
Moving the Market
-- Huge quarterly options and futures expiration today
-- Relative strength in some mega caps
-- Sense that the market is overbought on a short-term basis
-- New York Fed President Williams (FOMC voter) telling CNBC that rate cuts are not the topic of discussions at the FOMC
| Closing Summary
15-Dec-23 16:30 ET
Dow +56.81 at 37305.16, Nasdaq +52.36 at 14813.92, S&P -0.36 at 4719.19
[BRIEFING.COM] The stock market closed out this solid week on a somewhat mixed note. The Nasdaq Composite climbed 0.4% and the Dow Jones Industrial Average gained 0.2%. Meanwhile, the S&P 500 closed little changed from yesterday and the Russell 2000 declined 0.8%.
There was a brief spike in the afternoon trade that was likely related to today's huge quarterly options and futures expiration, which led to heavy volume at the NYSE and Nasdaq throughout the session. Increased activity was also related to a rebalance of the S&P 500 and Nasdaq 100.
Mega cap stocks, growth stocks, and semiconductor stocks exhibited relative strength while the "rest" of the market traded down. The Vanguard Mega Cap Growth ETF (MGK) registered a 0.4% gain; the Russell 3000 Growth Index saw a 0.4% gain; and the PHLX Semiconductor Index climbed 0.5%. Meanwhile, the equal-weighted S&P 500 fell 0.7%.
Decliners had a better than 2-to-1 lead over advancers at the NYSE and a 3-to-2 lead at the Nasdaq.
Three of the S&P 500 sectors closed higher, boosted by their mega cap constituents, while eight sectors declined. The information technology sector (+0.7%) saw the biggest gain while the utiltiies sector (-1.7%) registered the biggest loss.
Selling efforts had been driven by a lingering sense that stocks are overbought on a short-term basis. Still, selling was modest considering the scope of recent gains. The S&P 500 closed 14.6% higher than its late October low.
The negative bias had also been related in part to New York Fed President Williams (FOMC voter) in a CNBC interview seemingly contradicting Fed Chair Powell's remarks on Wednesday. He said that it is premature to think about the timing of rate cuts, but Mr. Powell indicated that the committee discussed at this week's meeting when the timing would be appropriate to dial back policy restraint.
Atlanta Fed President Bostic (2024 FOMC voter) told Reuters, meanwhile, that he expects two rate cuts in 2024, starting in the second half of the year.
Treasuries had a volatile response to the commentary from Fed President Williams, but things calmed down as the session progressed. The 2-yr note jumped to 4.50% from 4.41% after his remarks, but settled at 4.46%, which is six basis points higher than yesterday. The 10-yr note yield moved from 3.92% to 3.98%, but settled unchanged from yesterday at 3.93%.
Some generally soft industrial production data for November, and further slippage in the preliminary December S&P Global US Manufacturing PMI to 48.2 from the final reading of 49.4 for November, helped spur some rebound action in the Treasury market.
- Nasdaq Composite: +41.5%
- S&P 500: +22.9%
- Dow Jones industrial Average: +12.5%
- S&P Midcap 400: +13.0%
- Russell 2000: +12.7%
Reviewing today's economic data:
- December Empire State Manufacturing -14.5 (Briefing.com consensus 3.0); Prior 9.1
- November Industrial Production 0.2% (Briefing.com consensus 0.2%); Prior was revised to -0.9% from -0.6%; November Capacity Utilization 78.8% (Briefing.com consensus 79.1%); Prior was revised to 78.7% from 78.9%
- The key takeaway from the report is that industrial production was boosted by the end of the UAW strike, which bolstered manufacturing output. Excluding motor vehicles and parts, the index for manufacturing decreased 0.2%.
- December S&P Global US Manufacturing PMI - Prelim 48.2; Prior 49.4
- December S&P Global US Services PMI - Prelim 51.3; Prior 50.8
Looking ahead, economic data is limited to the December NAHB Housing Market Index (prior 34) at 10:00 a.m. ET.
Stocks moving somewhat higher ahead of the close
15-Dec-23 15:35 ET
Dow -23.56 at 37224.79, Nasdaq +45.84 at 14807.39, S&P -6.25 at 4713.30
[BRIEFING.COM] Stocks are moving slightly higher ahead of the close.
The Nasdaq Composite is up 0.3%, but other major indices are all trading down. The Russell 2000 sports a 0.9% decline.
Looking ahead, economic data is limited to the December NAHB Housing Market Index (prior 34) at 10:00 a.m. ET.
Stocks remain near session lows
15-Dec-23 15:05 ET
Dow -52.73 at 37195.62, Nasdaq +37.45 at 14799.00, S&P -8.34 at 4711.21
[BRIEFING.COM] The S&P 500 is little changed over the last half hour, trading down 0.2%. The Invesco S&P 500 Equal Weight ETF (RSP) is down 0.9%.
The only sectors showing strength -- information technology (+0.7%), consumer discretionary (+0.2%), and communication services (+0.1%) -- house mega cap constituents.
WTI crude oil futures settled 0.3% lower at $71.40/bbl. Natural gas futures climbed 4.2% to $2.49/mmbtu. On a related note, the S&P 500 energy sector is trading down 0.9%.
First Solar outperforming in S&P 500 on Friday; utilities, Exelon slip after ICC ruling
15-Dec-23 14:30 ET
Dow -75.17 at 37173.18, Nasdaq +16.72 at 14778.27, S&P -12.25 at 4707.30
[BRIEFING.COM] The S&P 500 (-0.26%) is today's top lagging index, down a little more than 12 points.
Elsewhere, S&P 500 constituents First Solar (FSLR 166.74, +8.49, +5.36%), Steel Dynamics (STLD 124.55, +5.42, +4.55%), and Old Dominion (ODFL 391.56, +9.04, +2.36%) dot the top of today's standings. FSLR caught a Buy initiation out of Jefferies this morning while shares continue to ride the rate-cut sentiment higher, STLD gains after this morning's upside Q4 EPS guidance, and ODFL recoups more of the early-December LTL tonnage volume-related losses.
Meanwhile, Exelon (EXC 35.72, -2.18, -5.75%) is underperforming as a duo of sell side downgrades hit following yesterday's adverse ruling from the Illinois Commerce Commission, rejecting ComEd and Ameren's (AEE 72.08, -2.94, -3.92%) grid plans .
Gold trims weekly gains on Friday
15-Dec-23 14:00 ET
Dow -45.90 at 37202.45, Nasdaq -2.90 at 14758.65, S&P -12.51 at 4707.04
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.02%) has sunk into the red in the last half hour.
Gold futures settled $9.20 lower (-0.4%) to $2,035.70/oz, trimming weekly gains to +1.1%, helped along by this week's losses in the greenback and treasury yields following the latest policy directive from the Fed.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $102.58.
Scholastic Corp's investors turn the page on the stock following rough Q2 report (SCHL)
Scholastic Corp (SCHL), the publisher and distributor of popular children's and young adult books such as Harry Potter, Hunger Games, and Dog Man, experienced weakness again in its school-based channels during its seasonally important back-to-school second quarter. As a result, EPS fell short of expectations and the company cut its FY24 revenue guidance, forecasting revenue to be flat yr/yr versus its prior guidance of 3-5% growth.
- School book club revenues plunged by 44% yr/yr to $32.4 mln, causing revenue for the Children's Book Publishing and Distribution segment to fall by 6% to $392.8 mln. The drop in book club revenue was partly planned as SCHL cut back on unprofitable promotional offers, but external factors are mostly to blame.
- During the earnings call, CEO Peter Warwick highlighted the increasingly complex and challenging U.S. school environment that SCHL is facing. More specifically, he discussed how schools and school boards have become more polarized, and how student absenteeism has grown at the same time that teacher shortages have increased.
- These factors are combining to put greater demands on schools and teachers, including more restrictions on teachers, parents, and kids regarding how reading is taught.
- Adding to the problem, a slowdown in consumer spending has slowed sales in the School Reading Events division. The company expects these industry-related and macroeconomic headwinds to persist for the remainder of the school year, prompting it to lower its FY24 guidance.
However, there is some good news to share.
- SCHL has been buying back stock -- $58 mln worth during Q2 -- and it plans to buy even more stock as it approved an additional $66 mln to its share repurchase authorization. This vote of confidence stems from SCHL's positive longer-term outlook, which is largely based on its strong positioning in the children's book market and the prioritization of literacy among educators and families.
- Furthermore, in recent weeks the company has seen signs of a sales rebound for its school-based business, suggesting that the worst of the decline may be in the rearview mirror.
Overall, it was clearly another disappointing earnings report for SCHL, especially since Q2 is its most important quarter as it includes the back-to-school season. The enhanced share buyback program does offer some solace, but after back-to-back rough quarters, SCHL will remain a "show me stock" until the company starts delivering stronger results.
Hershey Foods' struggles continue following a downgrade at BofA Securities today (HSY)
Investors remain bitter toward Hershey Foods (HSY -1%) today following a downgrade to "Neutral" from "Buy" at BofA Securities. Analyst downgrades have become the norm for HSY lately, with four separate brokerages lowering their ratings on the stock in just the two months since the company topped Q3 earnings and sales expectations.
Briefing.com notes that the latter half of this year has not been too kind toward HSY, with shares constantly grinding lower since achieving all-time highs in May, immediately after the company's impressive Q1 report. With the stock beginning to consolidate after an over -30% drop in the past six months, perhaps HSY is carving out a bottom.
While headwinds, including a surge in popularity of weight-loss drugs (GLP-1s) and stubborn cost inflation, remain present, several encouraging trends may trigger a more meaningful turnaround.
- Adjusted gross margins have been steadily expanding this year. After several price hikes, HSY likes its current positioning across the categories in which it competes. While further pricing action is not off the table, to counter cost inflation, HSY is leaning on upcoming capacity that should come online in the near future. Management mentioned that demand remains healthy, but it has not been able to capitalize on it, particularly in its Sweet segment. Adding more capacity should help increase productivity, which should keep margins afloat.
- Volumes have held up despite consistently rising prices. While volume growth has been up and down throughout FY23, it never fell by more than low single digits. HSY's product portfolio is filled with familiar brands from which consumers are unlikely to trade down. While management did note that it has seen a minor uptick in private labels, it remains a "very small" part of its business. We find it unlikely for generic brands to steal a material percentage of sales away from many of HSY's powerful brands, like Reese's and Hershey Kiss.
- HSY is currently unaffected by the rise in GLP-1s and does not anticipate the drugs to have a material impact on its business over the immediate term. While it is still too early to tell if weight-loss treatments will eat into HSY's overall growth over the long term, like other snack food titans, including PepsiCo (PEP) and Conagra (CAG), HSY is not overly concerned. If adoption rates begin to climb rapidly, there are levers HSY can pull to offset potential damage, including bolstering its portfolio of smaller snack sizes and exploring opportunistic M&A.
HSY has been amid a lengthy decline since May, similar to its peer group. However, separating it from the field of consumer packaged goods companies is an impressive market share, with estimates placing it at a nearly 50% share of the U.S. chocolate market, and a robust portfolio of hard-to-replicate products. While downward pressure may linger through 2023 as investors harvest tax losses, HSY may be close to a bottom, with plenty of upside heading into the new year.
Costco shares being bought in bulk as upside Q1 report confirms solid holiday shopping season (COST)
For many retailers, the holiday shopping season has been a disappointment again, but that's not the case for Costco (COST), which delivered better-than-expected 1Q24 earnings and stated that discretionary merchandise trends continue to improve. And while the company didn't announce a membership price hike as many have been anticipating, it did announce a $15/share special cash dividend, putting the cherry on top of another solid quarterly report.
- Similar to last quarter, COST experienced healthy traffic at its stores as shopping frequency increased by 4.7% worldwide, helping to push adjusted comparable sales higher by 3.8%. Staying true to recent form, food and sundries were standout categories as consumers continue to look for value by purchasing products in bulk, but it's the upswing in demand for non-food categories that's most encouraging.
- Recall that last quarter, COST began to see an improvement in sales trends for big-ticket items such as appliances, jewelry, electronics, and home furnishings. Those product categories were only down by 5% in Q4, compared to declines of 15% and 20% in Q3 and Q2, respectively.
- In Q1, that momentum continued, especially for appliances, which generated yr/yr growth in the mid-20% range.
- TVs were another area of strength, up in the high-single-digits, offsetting softness in other consumer electronics like computers.
- The strengthening demand for non-food and big-ticket products is seen in COST's improving eCommerce same store sales growth of +6.3%. Looking back at the prior three quarters, eCommerce same store sales growth came in at +1.1% for Q4, +0.3% for Q3, and -9.6% for Q2.
- Notably, big-ticket categories account for about 50-60% of COST's total eCommerce sales.
- Meanwhile, COST's membership renewal rates and total membership are still climbing higher. In the U.S. and Canada, the renewal rate edged higher by 10 bps from last quarter to 92.8%, while paid household members grew by 7.6% yr/yr to 72.0 mln.
- During the earnings call, CFO Richard Galanti highlighted the fact that COST benefited from more members and higher volumes during the pandemic years and that the company hasn't just held onto those gains, but it has added to them.
- With inflation cooling off, there is a sense that COST will implement a membership price hike in the very near future, especially since the last time it raised fees was all the way back in June of 2017. The price hike wasn't announced last night, although Mr. Galanti reiterated that it's a question of when, not if, regarding a possible increase.
The main takeaway is that COST's upside Q1 results and positive commentary regarding recent sales trends shows that it's a clear winner in the retail space this holiday shopping season as budget-conscious consumers flood its stores to seek out better values.
Darden Restaurants pulls back modestly as Q2 comps were not as strong as recent quarters (DRI)
Darden Restaurants (DRI) is ticking lower despite reporting decent Q2 (Nov) earnings this morning. DRI operates several restaurant chains, including Olive Garden, LongHorn Steakhouse and the recently acquired Ruth's Chris Steak House. This was DRI's first full quarter of Ruth's Chris results. To its credit, DRI reported its first double-digit EPS beat in nine quarters although revenue was just in-line. DRI also upped its FY24 adjusted EPS guidance to $8.75-8.90 from $8.55-8.85. However, it did slightly lower FY24 revenue guidance to $11.5 bln from $11.5-11.6 bln.
- DRI reported decent Q2 comps at +2.8% on a consolidated basis, but they were below the +5.0% comps in Q1 and +4.0% comps in Q4. In a similar pattern to what we have seen in recent quarters, comps were led by LH at +4.9%, followed by OG at +4.1%. Fine Dining comps were the laggard at -1.7%. DRI slightly lowered its FY24 comp guidance to +2.5-3.0% from +2.5-3.5% with two quarters remaining.
- The holidays are the busiest time of the year for all of its restaurants. And while DRI experienced some softness at its Fine Dining brands during Q2, the company is encouraged by the strong holiday bookings is it seeing.
- When a company reports in-line sales but strong upside EPS, that usually means margins were better-than-expected. DRI said its margin growth was driven by positive comps with strong labor management and lower-than-anticipated restaurant and commodities expenses. Food and beverage expenses were 190 bps better yr/yr, driven by pricing leverage. Total commodities inflation was flat yr/yr and slightly better than internal expectations. While beef inflation continues to track in-line with expectations, most other categories are seeing some favorability.
- In terms of pressures on the consumer and the impact that is having on DRI, it has been a little tough, but not too terribly bad. DRI has seen some check softness, but that's being offset by lower inflation. That is why DRI went to the lower end of its prior FY24 sales guidance while increasing its earnings outlook. Traffic remains flat to slightly negative for the full year.
Overall, this was a decent result for DRI. Investors appear to be reacting to the comp number being notably smaller than the prior two quarters. However, in DRI's defense, it was lapping tough +7.3% comps last year while the year ago hurdle in Q1 was easier (+4.2%). Another factor here is that the stock had run +24% from its mid-Oct lows, so maybe some good news was priced in already. Finally, we think this report is perhaps a slight positive for other casual restaurant chains set to report when earnings season kicks off next month, including BJRI, BLMN, CAKE, EAT, TXRH.
Lennar retreats after hitting record highs yesterday on lighter-than-expected Q4 gross margins (LEN)
Homebuilder Lennar (LEN -1%) constructed impressive results in Q4 (Nov), surpassing its new orders and deliveries forecasts while clearing analysts' earnings and sales estimates. This type of performance has become commonplace for LEN, putting together similar quarterly results throughout FY23.
However, there was one striking difference this time around: LEN missed its gross margin target in Q4 for the first time all year, posting 24.2% versus its 24.4-24.6% prediction. While a slim margin miss may not have been troubling in previous quarters, LEN was skyrocketing recently, up over +45% since November 1 and +10% in just this past week alone to all-time highs. As a result, investors are taking some risk off the table, initiating a mild pullback today.
Still, even when incorporating today's downbeat reaction, shares of LEN are still up significantly this week, underpinning bubbling enthusiasm over the outsized demand that could result from the Federal Reserve potentially cutting interest rates next year; 30-yr mortgage rates recently dropped below 7.00%, an approximately 80 bp drop from late October.
- During most of Q4, mortgage rates continued to climb, only falling in November. With rates still elevated for much of the quarter, LEN remained committed to offering incentives to enable affordability, such as buying down mortgage rates. As a result, gross margins took a more significant hit than the LEN anticipated.
- Also not helping was a continued contraction in average home prices. During Q4, LEN's average sales price, net of incentives, per home was $441K, down from $448K last quarter and $483K in the year-ago period. Management anticipates the average sales price will continue sliding during FY24, estimating roughly $420K.
- On a lighter note, headline numbers reflected healthy demand. New orders grew similar to last quarter at 32% yr/yr to 17,366, exceeding prior targets of 16,200-17,200. Meanwhile, LEN grew its top line by 7.8% yr/yr to $10.97 bln, assisted by a 19% jump in deliveries to 17,366, better than the 21,500-22,500 expected.
- Healthy demand dynamics are flowing into FY24, starting with upbeat Q1 (Feb) projections. Despite a typically quiet period, LEN expects Q1 (Feb) new orders and deliveries to remain robust, targeting 17,500-18,000 and 16,500-17,000, respectively. Gross margins will be relatively flat yr/yr at 21.00-21.25%. For the full year, LEN predicts deliveries to edge 9.5% higher yr/yr to 80,000. It is worth noting that LEN did not provide FY24 gross margin forecasts due to the variability in how interest rates could shake out.
Even though LEN continued to offer incentives to seal the deal on home sales, it is clear that higher interest rates are not acting as a meaningful deterrent in homebuying demand, underscoring a chronic supply shortage exacerbated by a demographic shift as first-time buyers flood the market. As mortgage rates inevitably drop in connection with possible reductions in the federal funds rate, homebuilders like LEN, as well as its many peers, including D.R. Horton (DHI), KB Home (KBH), PulteGroup (PHM), and Toll Brothers (TOL), are positioned to sustain their current upward momentum. However, a pullback following such a breathtaking rise is likely overdue.
|
