Market Snapshot
briefing.com
| Dow | 38612.24 | +48.44 | (0.13%) | | Nasdaq | 15580.87 | -49.91 | (-0.32%) | | SP 500 | 4981.80 | +6.29 | (0.13%) | | 10-yr Note | -4/32 | 4.33 |
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| | NYSE | Adv 1396 | Dec 1362 | Vol 902 mln | | Nasdaq | Adv 1541 | Dec 2693 | Vol 4.9 bln |
Industry Watch
| Strong: Energy, Utilities, Consumer Discretionary, Real Estate, Consumer Staples |
| | Weak: Information Technology |
Moving the Market
-- Ongoing selling activity in NVIDIA (NVDA) ahead of earnings this afternoon
-- Consolidation mindset after big run
-- Big loss in Palo Alto Networks (PANW) after issuing disappointing guidance
-- Muted response to the FOMC Minutes for the Jan. 30-31 meeting, which didn't contain any big surprises
| Closing Summary
21-Feb-24 16:30 ET
Dow +48.44 at 38612.24, Nasdaq -49.91 at 15580.87, S&P +6.29 at 4981.80
[BRIEFING.COM] Today's trade was largely driven by a wait-and-see mindset in front of the minutes for the January 30-31 FOMC meeting at 2:00 ET, which garnered a muted response from investors, and in front of this afternoon's influential earnings news.
Some speculative buy-the-dip interest/short-covering activity in the last 30 minutes of trading left the major indices near their best levels of the session, but stocks were trading mostly lower throughout the session.
The S&P 500 and Dow Jones Industrial Average each eked out a 0.1% gain while the Nasdaq Composite and Russell 2000 declined 0.3% and 0.5%, respectively.
Early selling activity was partially driven by sharp losses in Palo Alto Networks (PANW 261.97, -104.12, -28.4%), which reported disappointing guidance, and other growth stocks. Ongoing profit-taking activity in NVIDIA (NVDA 674.72, -19.80, -2.9%) also contributed to the early negative bias in front of its earnings report.
Growth stocks were still lagging relative to value stocks by the close. The Russell 3000 Growth Index declined 0.3% today while the Russell 3000 Value Index climbed 0.4%.
Losses in the aforementioned names, as well as Microsoft (MSFT 402.18, -0.61, -0.2%), left the S&P 500 information technology sector alone in negative territory at the close, down 0.8%. Meanwhile, the energy sector logged the largest gain, climbing 1.9%, as natural gas futures jumped 12.1% to $1.76/mmbtu.
Market participants were also digesting the minutes for the January 30-31 FOMC meeting today, which were scripted largely as expected. Fed Chair Powell effectively "wrote them" for the market when he conducted his press conference following that January meeting, and several Fed officials in the interim have paraphrased them.
- Nasdaq Composite: +3.8% YTD
- S&P 500: +4.4% YTD
- Dow Jones Industrial Average: +2.5% YTD
- S&P Midcap 400: +1.1% YTD
- Russell 2000: -1.6% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -10.6%; Prior -2.3%
Thursday's economic lineup features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 216,000; prior 212,000) and Continuing Claims (prior 1.895 mln)
- 9:45 ET: Preliminary February S&P Global U.S. Manufacturing PMI (prior 50.7) and preliminary February S&P Global U.S. Services PMI (prior 52.5)
- 10:00 ET: January Existing Home Sales (Briefing.com consensus 3.99 mln; prior 3.78 mln)
- 10:30 ET: Weekly natural gas inventories (prior -49 bcf)
- 11:00 ET: Weekly crude oil inventories (prior +12.02 mln)
Stocks turn higher ahead of the close
21-Feb-24 15:40 ET
Dow -63.56 at 38500.24, Nasdaq -87.56 at 15543.22, S&P -7.40 at 4968.11
[BRIEFING.COM] Many stocks are climbing ahead of the close. The S&P 500 is down just 0.1% now.
NVIDIA (NVDA) headlines the earnings calendar after today's close. Looking ahead, PG&E (PCG), Pioneer Natural Resources (PXD), Keurig Dr Pepper (KDP), Newmont Goldcorp (NEM), Wayfair (W), and Moderna (MRNA) are among the notable names reporting earnings ahead of Thursday's open.
Thursday's economic lineup features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 216,000; prior 212,000) and Continuing Claims (prior 1.895 mln)
- 9:45 ET: Preliminary February S&P Global U.S. Manufacturing PMI (prior 50.7) and preliminary February S&P Global U.S. Services PMI (prior 52.5)
- 10:00 ET: January Existing Home Sales (Briefing.com consensus 3.99 mln; prior 3.78 mln)
- 10:30 ET: Weekly natural gas inventories (prior -49 bcf)
- 11:00 ET: Weekly crude oil inventories (prior +12.02 mln)
Mega caps lead recent dip
21-Feb-24 15:00 ET
Dow -136.56 at 38427.24, Nasdaq -159.56 at 15471.22, S&P -21.79 at 4953.72
[BRIEFING.COM] The market is trading off session lows now. Mega cap stocks led the recent deterioration. The Vanguard Mega Cap Growth ETF (MGK) is down 1.0%.
Meanwhile, the market-cap weighted S&P 500 is down 0.4% and the Invesco S&P 500 Equal Weight ETF (RSP) shows a 0.2% loss.
Treasuries did not react much to the FOMC Minutes a short time ago. The 10-yr note yield is at 4.32% and the 2-yr note yield is at 4.66%.
Market reaction to FOMC minutes muted
21-Feb-24 14:30 ET
Dow -90.68 at 38473.12, Nasdaq -120.74 at 15510.04, S&P -15.00 at 4960.51
[BRIEFING.COM] The minutes for the January 30-31 FOMC meeting were scripted largely as expected, so the reaction in the market to them was muted. Fed Chair Powell effectively "wrote them" for the market when he conducted his press conference following that January meeting, and several Fed officials in the interim have paraphrased them. Recent trading has the S&P 500 (-0.30%) moving lower toward today's worst levels.
In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle. A couple of participants, however, pointed to downside risks to the economy associated with maintaining an overly restrictive stance for too long.
Further, some participants noted the risk that progress toward price stability could stall, particularly if aggregate demand strengthened or supply side healing slowed more than expected. Furthermore, several participants mentioned the risk that financial conditions were or could become less restrictive than appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall.
Also, many participants suggested that it would be appropriate to begin in-depth discussions of balance sheet issues at the Committee's next meeting to guide an eventual decision to slow the pace of runoff.
In recent trading the yield on the benchmark 10-yr treasury note is up three basis points at 4.312%.
Gold modestly lower ahead of Fed minutes
21-Feb-24 13:55 ET
Dow -47.13 at 38516.67, Nasdaq -111.62 at 15519.16, S&P -11.34 at 4964.17
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-0.71%) remains at the bottom of the major averages.
Gold futures settled $5.50 lower (-0.3%) to $2,034.30/oz, dented even as Houthi strikes continue in the Red Sea; investors are turning away from the yellow metal as they await the FOMC minutes.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $104.06.
La-Z-Boy declines as an ongoing slowdown in the furniture market clips JanQ performance (LZB)
An ongoing slowdown in the furniture and home furnishing industry made La-Z-Boy (LZB -5%) uncomfortable in Q3 (Jan), driving its top and bottom-line misses in the quarter. Coinciding with a depressed furniture market was a severe winter storm in January, hindering LZB's ability to produce and deliver products.
LZB's woes are not disappearing soon, either. The company projected revenue of $505-535 mln in Q4, translating to roughly flat sequential growth and a 7% yr/yr decline. CFO Robert Lucian remarked that nine months into the company's FY24 (Apr), the demand environment became much more challenging than initially expected.
However, despite the tumultuous economic backdrop, LZB noted that it outperformed the industry. While the overall furniture market was down around 7% YTD in FY24, LZB's written same-store sales growth inched just 1% lower, a testament to its brand quality and ability to navigate short-term headwinds.
- This uplifting development was not the only silver lining from Q3. While overall revenue fell 12.6% yr/yr to $500.4 mln, this represented a decent improvement from the -16.3% drop in Q2 (Oct) and -20.3% in Q1 (Jul).
- Meanwhile, although LZB posted its first earnings miss since 3Q22 (Jan), this was primarily due to the lower revenue as the company still expanded its non-GAAP gross margins by 140 bps yr/yr. The improvement stemmed from lower input costs, including better sourcing and lower commodity prices.
- Additionally, while non-GAAP operating margins declined in Q3, LZB anticipates a sequential improvement in Q4, targeting 7-8%. LZB mentioned that its guidance was prudent given the unfavorable furniture industry, leading to the possibility of meaningful upside if conditions begin to reverse over the near term.
LZB's Q3 results fell short. However, promising underlying developments are keeping shares well above intraday lows of over -8%. Also, it should be noted that the stock has run over +20% higher since November, when the market started pricing in potential interest rate cuts, which could spur a demand resurgence in the highly discretionary furniture market. LZB remains a company worth keeping on the radar as its ties to the housing market make it a compelling play on declining interest rates. In the meantime, a formidable furniture market may keep volatility elevated. Lastly, LZB's performance makes us nervous ahead of Wayfair's (W) DecQ report tomorrow before the open.
Toll Brothers right at home in high mortgage rate environment, due to affluent customer base (TOL)
Shares of luxury homebuilder Toll Brothers (TOL) are looking constructive today after the company once again crushed quarterly EPS and revenue estimates while providing a very bullish outlook for the remainder of FY24. On the heels of a disappointing earnings report from peer D.R. Horton (DHI) on January 23 in which the company missed EPS expectations for the first time since 4Q22, there was some concern that increasing concessions and incentives would also take a toll on TOL's Q1 homebuilding margins and earnings.
- However, TOL's more affluent customer base largely insulated the company from these pressures. This is reflected by a few key metrics, including an average selling price of approximately $1.0 mln, exceeding the midpoint of TOL's guidance of $985,000 to $1.005 mln. Astonishingly, about 25% of TOL's customers paid cash, partly as a result of them having significant equity built up in their existing homes to use towards the purchase of a new home.
- As a result, higher mortgage rates are much less of a burden for TOL's customer base, significantly easing affordability headwinds. Since TOL doesn't need to rely on incentives to drive home sales revenue, its margins are holding up better than most of its competitors.
- In Q1, TOL's adjusted home sales gross margin expanded by 140 bps yr/yr to 28.9%, edging past its guidance of 28.0%.
- In comparison, DHI's gross profit margin on home sales decreased by 220 bps yr/yr to 22.9%, missing its target of 23.7-24.2%.
- Furthermore, even as mortgage rates have crept higher in recent weeks, TOL has not seen a slowdown in demand as the spring season kicks into a higher gear. In fact, just the opposite is true as CEO Douglas Yearley noted during the earnings call that the company has seen a meaningful uptick in demand that continued through this past weekend.
- Given these encouraging trends, TOL had the confidence to raise its FY24 guidance, forecasting deliveries of 10,000-10,500 units, up from its prior guidance of 9,850-10,350 units. The company also nudged its adjusted home sales gross margin outlook higher to 28.0% from 27.9%, which could prove to be conservative if its average home selling price remains around that $1.0 mln mark.
- Lastly, the cherry on top is that TOL also sold a parcel of land to a commercial developer for about $181 mln. With those proceeds, the company will be looking to buy back more stock in FY24, increasing its stock repurchase authorization to $500 mln from $400 mln.
The main takeaway is that TOL's more affluent customer base is paying major dividends, allowing it to side-step costly incentives that are cutting into other homebuilders' margins. Overall, the new home market remains healthy due to the chronic undersupply of existing homes for sale and TOL should continue to be an outsized beneficiary from that lack of supply.
Wingstop investors "bawk" at slowing growth and rich valuation, but business still strong (WING)
According to Wingstop (WING) CEO Michael Skipworth, 2023 marked the strongest year in the company's history and it wrapped up that phenomenal year with impressive Q4 results that exceeded expectations, featuring stellar domestic same store sales growth of 21.2%. However, WING has become a victim of its own success. Despite issuing its sixth consecutive top and bottom-line beat, the stock has drifted moderately lower as shareholders lock in gains following a 75% run higher since early last November.
- That remarkable rally, which took shares to all-time highs last Friday, created an exorbitant valuation with WING trading at roughly 110x next year's earnings. Therefore, shares were priced to perfection heading into this morning's print, setting the table for some profit-taking.
- We believe the main issue is that WING's earnings growth has slowed appreciably. After jumping by 53% last quarter, adjusted EPS increased by a far more pedestrian 7% in Q4. To be fair, WING is lapping more challenging yr/yr comparisons than it did a couple of quarters ago, but when a stock's valuation is that rich, the benefit of the doubt isn't always available.
- Chipping away at WING's earnings growth was a 23% yr/yr increase in advertising expense and a 54% surge in SG&A expenses to $28.1 mln. These increases are significantly tied to the company's aggressive restaurant development activities. On that note, WING had 115 net new openings in Q4, blowing away last quarter's net additions of 53 new locations. This surge of new restaurant openings enabled WING to eclipse its FY23 guidance of 240-250 global net new units as it ended the year with 255 net new units.
- In order to keep its revenue growth rates high, WING will need to lean more heavily on new restaurant development as it laps very difficult yr/yr comparisons. With that in mind, the company's FY24 domestic same store sales guidance of mid-single digits may also be creating some disappointment.
- As chicken prices have eased, WING's cost of sales improved to 75.1% of company-owned restaurant sales from 76.4% a year ago, but it also has less ability to benefit from menu price increases. Therefore, the company is more reliant on transaction increases to drive same store sales growth, which is likely to taper off coming off such a strong year.
With all of that said, business is still very robust for WING. For a point of comparison, Restaurant Brands Int'l's (QSR) Popeyes generated comp growth of 5.5% in Q4, which is actually pretty solid, but it still trails WING by a huge margin. Today's weakness, then, can mostly be chalked up to a "sell-the-news" reaction in a pricey stock that is due for some consolidation.
Palo Alto Networks under pressure on billings guidance cut; demand good, but seeing fatigue (PANW)
Palo Alto Networks (PANW -27%) is under pressure today after reporting Q2 (Jan) results last night. The cybersecurity giant reported a nice EPS beat with in-line revenue. However, Q3 (Apr) guidance was below analyst expectations for both EPS and revs. In fairness, PANW tends to be conservative with its next quarter guidance and has some guidance shortfalls. However, what we find most troubling is that PANW lowered its FY24 outlook for both revenue and billings.
- Let's start with some positives. In its Network Security business, Q2 marked PANW's fifth consecutive quarter of 50+% ARR growth in its SASE business. Also, more than 30% of its new SASE customers signed in Q2 were new to PANW. In Prisma Cloud, PANW noted that it made significant investments in 1H to drive new customers and saw this pay off in Q2 with its highest new ACV growth in five quarters.
- Margins were another bright spot as non-GAAP operating margin jumped nearly 600 bps to 28.6%. Also, PANW continues to win large deals, including a steady stream of $1+ mln deals and 10 transactions over $20 mln in the quarter. Its ten highest spending customers in Q2 increased their spend by 36% in the period.
- PANW says the demand story is no different from prior quarters. The threat landscape continues to challenge customers with increasing scale and sophistication of attacks. PANW says breaches and ransomware attacks are being perpetrated across many industries with few repercussions for the bad actors. However, the company noted softness in its US federal government market. PANW was positioned well for several large projects but these deals did not close. The situation started off towards the end of Q1, worsened in Q2, and as a result, PANW had a significant shortfall in its US federal govt business. PANW expects this trend will continue into Q3 and Q4.
- So if demand has generally remained strong, why the reduced billings and revenue guidance? PANW says its guidance is not a consequence of a change in the demand outlook. It is more from a shift in strategy in wanting to accelerate both its platformization and consolidation and activating its AI leadership.
- Also, despite the many demand drivers it is seeing, PANW is beginning to notice "spending fatigue" in cybersecurity. Most customers now spend more on cybersecurity than on IT. As a consequence, PANW says customers are feeling like their cybersecurity budget keeps going up double digits every year, yet the number of breaches continues to rise. Customers are demanding to get more for the money they have allocated to cybersecurity. That's why PANW moving toward platformization and consolidation.
Overall, investors are pretty disappointed that PANW lowered its FY24 outlook for both revenue and billings. Its billings guidance was cut to $10.1-10.2 bln vs $10.7-10.8 bln, which is a pretty big drop. PANW was quite bullish on the demand picture on its Q1 call, so to see this guidance cut was a bit of a shocker in Q2. PANW tried to assuage concerns, explaining that it is moving to platformization and consolidation. However, the comments about customers having spending fatigue have spooked people. Also, PANW's view that its US govt vertical looks to remain weak through the end of the fiscal year was also not helpful. The stock had made a huge run since early November, which tells us sentiment was running high and a billings guidance cut was not on people's radar.
Analog Devices edges modestly higher as investors encouraged by a potential bottom in Q2 (ADI)
Analog Devices (ADI +1%) returned to delivering bottom-line upside in Q1 (Jan), snapping its string of two straight misses, and registered revenue consistent with analysts' forecasts. The signal processing and power management chip maker also commented that customer inventory adjustments should largely subside during Q2, marking a potential bottom for the company following an extended period of weakness, particularly in its industrial end market, which comprises half its total revs. Meanwhile, ADI raised its quarterly dividend by 7%, a vote of confidence in maintaining healthy cash flows. These highlights are looking to outshine dim Q2 (Apr) earnings and revenue guidance, which is adding some volatility today.
- Headline numbers in Q1 aligned with ADI's previous forecasts. Adjusted EPS sunk by 37.1% yr/yr to $1.73, and revenue declined by 22.7% to $2.51 bln, both landing around the midpoints of ADI's $1.60-1.80 and $2.4-2.6 bln estimates. Adjusted operating margins nosedived by over 900 bps yr/yr to 42.0%. Still, it stayed within management's previous commitment of delivering margins in the low 40s despite expected revenue deterioration.
- Like its peers, such as Texas Instruments (TXN) and STMicroelectronics (STM), ADI faced hurdles connected to inventory adjustments in the quarter. During the second half of 2023, ADI outlined a broad-based inventory correction unfolding across all its markets and geographies, underscoring a softening macroeconomic environment. The impact of this has been markedly noticeable in ADI's industrial end market, which has been enduring sequential revenue declines, falling by 12% in Q1, similar to the trend seen by TXN and STM.
- However, following one more quarter of pronounced weakness, ADI is optimistic that conditions will begin to turn, predicting the worst of the ongoing inventory rationalization to end in Q2, consistent with its remarks last quarter.
- ADI's glass-half-full view of the year's second half resembles the sentiment expressed by its peers. Based on customer feedback, STM predicts inventory adjustments will end in JunQ, with a rebound taking shape during 2H24. However, STM did note that its FY24 revenue guidance incorporates some uncertainty related to an expected back-half recovery. Meanwhile, even though TXN continued to have an upward bias on inventory, the company feels good about its inventory position when the cycle eventually reverses, potentially after a few more quarters.
- A bottom in inventory adjustments was fully displayed with ADI's Q2 guidance, projecting adjusted EPS and revenue well below consensus at $1.16-1.36 and $2.0-2.2 bln, respectively.
The landscape continues to prove challenging for ADI. However, following its counterparts' lukewarm quarterly results last month, particularly within industrial and automotive end markets, investors likely expected relative weakness from ADI in Q1, explaining today's mildly positive reaction. Over a longer timeframe, ADI remains in a firm position to pounce on outsized opportunities, such as increasing chip content in vehicles, especially EVs, brewing factory automation demand, and the ongoing rollout of 5G infrastructure. In the meantime, economic obstacles may inject elevated volatility.
The Big Picture
Last Updated: 16-Feb-24 15:14 ET | Archive
Mind the earnings estimate gap
Can we just stop for a minute and marvel at how extraordinary the stock market's performance has been since the lows last October?
Not that the rebound off the low seen in October 2002 wasn't remarkable, or the rebound off the low seen in March 2009 wasn't remarkable, but there is something about the move that has been made in the last three-and-a-half months that is truly extraordinary.
Since its low on October 27, the S&P 500 has surged 22.6%! The Nasdaq, which saw an earlier low on October 26, is up 26.5%!
It sure does look good on a chart, as one might expect knowing the market has gone up in 14 of the last 15 weeks.
There have been multiple precipitants for this market move:
- The Treasury Department's calming quarterly refunding plan announced in October
- Indefatigable buying of the mega-cap stocks
- Lower interest rates
- Improving inflation trends
- Expectations that the Fed is done raising rates and will shift this year to cutting rates
- Assumptions that the U.S. economy will avoid a recession
- Short-covering activity
- Performance chasing/momentum buying
- Increasing equity allocations from underweight (or sidelined) positions
- Rising earnings estimates
We might have missed some, but we trust that our readers get the point. There has been a lot driving this rally effort. The weakest driver of them all, though, is the one that matters most: earnings estimates.
Not Measuring Up
The earnings situation is much improved, but that's very much a relative barometer.
S&P 500 earnings declined three straight quarters from the fourth quarter of 2022 through the second quarter of 2023. The third quarter of 2023 featured 5.3% year-over-year growth, according to FactSet; meanwhile, the fourth quarter blended growth rate sits at 3.1%.
For good measure, first quarter 2024 earnings are projected to be up 3.7% and calendar 2024 earnings are projected to rise 10.9%.
We noted in last week's column that the S&P 500 was trading at 20.4x forward twelve-month earnings, which was 16% premium to its 10-year average. Today it still trades at 20.4x forward 12-month earnings -- but this is where the earnings estimate picture fails to measure up relative to the stock market's performance.
As noted above, the S&P 500 has surged 22.6% since its October 27 low. The market, to be fair, has followed the trend in earnings estimates (higher), but to be frank, it has overshot that trend by a mile.
In the same period the S&P 500 has gone up 22.6%, the forward 12-month EPS estimate has gone up just 2.7% to $246.17, according to FactSet.
What It All Means
The gap between the price of the S&P 500 and the forward earnings estimate is the footprint of multiple expansion. That's a fancy way of saying stock prices are going up faster than earnings estimates.
Multiple expansion isn't necessarily a bad thing. You see it in bull markets as performance chasing kicks in, or the fear of missing out on further gains compels added buying interest. Naturally, what you also hear amid multiple expansion is a lot of rationalization of the move:
- "The company is going to grow into its valuation."
- "Analysts aren't fully understanding the company's growth prospects."
- "The stock can sport a premium valuation today, because interest rates will be lower in the future."
- "Yeah, the stock is overvalued based on 2024 estimates, but if you look at it based on 2026 earnings estimates, then it isn't overvalued."
It all sounds reasonable in the moment -- until the moment arrives that squashes those growth expectations. It is then that the overvaluation becomes crystal clear in a material decline in the stock price. More than a few companies this earnings reporting season have had this comeuppance. Tesla (TSLA) and Snap (SNAP) are a few that come to mind.
In any case, we are not here to throw stones at any individual company. Our aim is only to highlight for index investors that valuation is a constraint for further price appreciation if forward earnings estimates don't start picking up.
Could the market move higher if the forward earnings estimate remains static or even falls? Sure, it could if the most heavily-weighted stocks keep moving higher or animal spirits keep speculative interest alive.
Just bear in mind that the further the market, or an individual stock, rises without a concurrent pickup in earnings estimates, the harder the fall could prove to be if prevailing earnings expectations are not met.
Ideally, the gap between earnings estimates and the S&P 500 price level will narrow because earnings estimates see a stronger pace of upward revision. The way things stand now is extraordinary in terms of the price level and remarkable in terms of the valuation.
It is indicative of a bull market, but it is also indicative of a market that has little room for challenges to the growth outlook that would diminish earnings prospects.
-- Patrick J. O'Hare, Briefing.com
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