Market Snapshot
briefing.com
| Dow | 38972.41 | -96.82 | (-0.25%) | | Nasdaq | 16035.30 | +59.05 | (0.37%) | | SP 500 | 5078.18 | +8.65 | (0.17%) | | 10-yr Note | -3/32 | 4.32 |
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| | NYSE | Adv 1589 | Dec 1193 | Vol 910 mln | | Nasdaq | Adv 2557 | Dec 1739 | Vol 5.4 bln |
Industry Watch
| Strong: Utilities, Consumer Discretionary, Communication Services, Materials, Industrials |
| | Weak: Energy, Health Care, Consumer Staples |
Moving the Market
-- Still lacking directional drivers with stocks near all-time highs
-- Lack of concerted selling interest driving further upside moves
-- Loss in UNH weighing down the price-weighted DJIA
-- AAPL turning around from early loss after news that it's cancelling efforts to build electric car
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Closing Summary
27-Feb-24 16:25 ET
Dow -96.82 at 38972.41, Nasdaq +59.05 at 16035.30, S&P +8.65 at 5078.18
[BRIEFING.COM] Today's index-level price action was fairly limited. The S&P 500 (+0.2%) and Nasdaq Composite (+0.4%) spent most of the session trading near yesterday's closing levels while the Russell 2000 continued its recent outperformance, climbing 1.3%.
Meanwhile, the price-weighted Dow Jones Industrial Average declined 0.3% due in part to a loss in its heaviest component, UnitedHealth (UNH 513.42, -11.90, -2.3%), on news that the Department of Justice has launched an antitrust investigation into the company, according to The Wall Street Journal.
The overall vibe in the market was positive, but there wasn't a lot of conviction on the part of buyers. Importantly, though, there wasn't a lot of conviction on the part of sellers either, which acted as a positive catalyst for the market.
A turnaround in shares of Apple (AAPL 182.63, +1.47, +0.8%) also supported market today, propelling the S&P 500 and Nasdaq Composite to session highs in the afternoon trade. Apple had been down as much as 0.9%, but settled 0.8% higher after news that it's cancelling efforts to build an electric car and will focus on generative artificial intelligence, according to Bloomberg.
The indices were already heading slightly higher in front of the Apple news, though, in response to today's solid $42 billion 7-yr note offering. This followed yesterday's weak sales of 2- and 5-yr notes. The Treasury market didn't react much to today's auction results. The 2-yr note yield declined two basis points today to 4.71% and the 10-yr note yield rose two basis points to 4.32%.
Many stocks participated in the afternoon climb, leaving seven of the 11 S&P 500 sectors higher. The utilities sector saw the biggest gain, 1.9%, thanks to a big earnings-related rise in shares of Constellation Energy (CEG 155.76, +22.54, +16.9%).
Constellation Energy was one of the top performing stocks in the S&P 500 today, trailing only Norwegian Cruise Line (NCLH 19.09, +3.16, +19.8%), which also traded higher following pleasing earnings news.
Macy's (M 19.92, +0.65, +3.4%) and Lowe's (LOW 235.39, +4.07, +1.9%) were also notable names that reported earnings since yesterday's close, receiving positive reactions from investors.
- Nasdaq Composite: +6.8% YTD
- S&P 500: +6.5% YTD
- Dow Jones Industrial Average: +3.4% YTD
- S&P Midcap 400: +3.1% YTD
- Russell 2000: +1.4% YTD
Reviewing today's economic data:
- January Durable Orders -6.1% (Briefing.com consensus -4.4%); Prior was revised to -0.3% from 0.0%; January Durable Goods - ex transportation -0.3% (Briefing.com consensus 0.3%); Prior was revised to -0.1% from 0.6%
- The key takeaway from the report is that it sends a poor signal about the state of business spending, as nondefense capital goods orders were down 19.4%.
- January FHFA Housing Price Index 0.1%; Prior was revised to 0.4% from 0.3%
- December S&P Case-Shiller Home Price Index 6.1% (Briefing.com consensus 6.0%); Prior 5.4%
- February Consumer Confidence 106.7 (Briefing.com consensus 114.6); Prior was revised to 110.9 from 114.8
- The key takeaway from the report is that consumers have become a bit more pessimistic about the short-term outlook for business and the labor market, but their view of short-term income prospects improved slightly.
Looking ahead, Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Index (prior -10.6%)
- 8:30 ET: Q4 GDP -- second estimate (Briefing.com consensus 3.2%; prior 3.3%), Q4 GDP Deflator -- second estimate (Briefing.com consensus 1.5%; prior 1.5%), advance January goods trade balance (prior -$88.5 bln), advance January Retail Inventories (prior 0.8%), and advance January Wholesale Inventories (prior 0.4%)
- 10:30 ET: Weekly crude oil inventories (prior +3.51 mln)
Treasuries settle mixed
27-Feb-24 15:40 ET
Dow -87.05 at 38982.18, Nasdaq +52.29 at 16028.54, S&P +5.61 at 5075.14
[BRIEFING.COM] The major indices haven't moved up or down much in recent trading.
The 2-yr note yield declined two basis points today to 4.71% and the 10-yr note yield rose two basis points to 4.32%. The price action in Treasuries was influenced by today's solid $42 billion 7-yr note offering.
Looking ahead, Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Index (prior -10.6%)
- 8:30 ET: Q4 GDP -- second estimate (Briefing.com consensus 3.2%; prior 3.3%), Q4 GDP Deflator -- second estimate (Briefing.com consensus 1.5%; prior 1.5%), advance January goods trade balance (prior -$88.5 bln), advance January Retail Inventories (prior 0.8%), and advance January Wholesale Inventories (prior 0.4%)
- 10:30 ET: Weekly crude oil inventories (prior +3.51 mln)
AAPL recover early loss on EV news
27-Feb-24 15:00 ET
Dow -113.93 at 38955.30, Nasdaq +59.56 at 16035.81, S&P +6.06 at 5075.59
[BRIEFING.COM] The S&P 500 and Nasdaq Composite trade at or near session highs. The improvement coincided with some mega caps either extending early gains or recouping early losses.
Shares of Apple (AAPL 182.86, +1.72, +1.0%) had been down as much as 0.9% earlier, but trade higher now on news that it's cancelling efforts to build an electric car and will focus on generative artificial intelligence, according to Bloomberg.
The Vanguard Mega Cap Growth ETF (MGK) is up 0.2%.
S&P 500 back in the green; AES & SBA Comm underperforming after earnings
27-Feb-24 14:25 ET
Dow -132.67 at 38936.56, Nasdaq +48.45 at 16024.70, S&P +2.63 at 5072.16
[BRIEFING.COM] The S&P 500 (+0.1%) has returned to modest gains on the day, up about three points.
Elsewhere, S&P 500 constituents AES (AES 14.70, -0.85, -5.47%), SBA Comm (SBAC 198.11, -9.67, -4.65%), and Electronic Arts (EA 138.96, -3.43, -2.41%) pepper the bottom of the average. AES and SBAC fall following earnings reports, while EA and the video game space in general is reeling following Sony's (SONY 85.59, -0.48, -0.56%) layoff, London office shutdown news. EA also trades ex-dividend today.
Meanwhile, Albemarle (ALB 127.71, +6.19, +5.09%) is near the top of today's trading.
Gold finds modest gains ahead of this week's inflation data
27-Feb-24 14:00 ET
Dow -149.81 at 38919.42, Nasdaq +4.30 at 15980.55, S&P -4.55 at 5064.98
[BRIEFING.COM] The tech-heavy Nasdaq Composite is narrowly higher as we approach two hours left of trading on Tuesday.
Gold futures settled $5.20 higher (+0.3%) to $2,044.10/oz, modestly higher in view of a modestly weaker dollar and slight declines in shorter-tenor yields as investors jockey for position ahead of this week's inflation data.
Meanwhile, the U.S. Dollar Index is down less than -0.1% to $103.75.
Macy's rings up better-than-expected Q4 results as it tries to stave off takeover bid (M)
As department store owner and operator Macy's (M) tries to make the case to shareholders that its turnaround plan is gaining traction and that accepting a deal to go private is not the best course of action, the company scored some major points today by crushing Q4 EPS estimates. To further make his case, recently appointed CEO Tony Spring announced a new restructuring plan that's expected to monetize $600-$750 mln of assets through 2026 with annual run rate savings reaching approximately $235 mln by 2026.
- For a quick recap, on December 11, 2023, the Wall Street Journal reported that Arkhouse Management and Brigade Capital Management made a pitch to take Macy's private for $21/share. About a month later, Macy's formally rejected the offer, sparking a proxy fight that culminated in Arkhouse nominating nine directors to Macy's board.
- Meanwhile, Macy's is also in the midst of a CEO transition as this drama unfolds. On February 4, Tony Spring, who previously served as Bloomingdale's CEO, took the reins from CEO Jeff Gennette. With the company's future at stake, Gennette, who has been a staple at Macy's for decades, is undoubtedly providing support to Spring, but this is still an intense and chaotic way to start a tenure as CEO.
- Mr. Spring and his executive team made a pitch of their own today, pointing to the company's improved Q4 results as evidence that it can beat the odds and achieve solid results in a retail environment that has largely passed department stores by.
- For instance, despite operating in a highly competitive retail environment that's beset by soft consumer spending trends, merchandise margin improved by 260 bps yr/yr. Macy's ability to expand margins is a testament to its strong product assortment and inventory management, enabling it to reduce markdown activity.
- Although overall comparable sales were down 5.4% on an owned basis, Bloomingdale's and Bluemercury -- Macy's luxury brands -- performed better, benefitting from a more affluent customer base. Comps for Bloomingdales decreased by just 1.5%, while Bluemercury saw a 2.3% increase in comps. Expanding Bloomingdale's and Bluemercury's footprint is another key component of Macy's new "A Bold New Chapter" strategy that it announced this morning. Through 2026, the company plans to add 45 new locations for those two banners.
- Closing underperforming stores and using the savings from those closures to launch new small-format Macy's stores is really the headline from the plan. Over the long-term, Macy's is aiming to shutter 150 locations (approximately 50 by the end of FY25), while opening thirty smaller stores over the next two years. Currently, Macy's only operates 12 of these small-format stores, but they have been outperforming the traditional larger stores.
Macy's views FY25 (ending January) as a transition year with its transformation plan beginning to pay dividends in FY26. At that time, the company expects to deliver low single-digit comp growth and mid-single-digit EBITDA growth. Now, Macy's must convince its shareholders that these goals are not only achievable, but are well within its reach, in order to stave off this takeover attempt. On a final note, Macy's better-than-expected Q4 report may persuade Arkhouse and Brigade Capital to up the ante and increase its bid -- something that Arkhouse previously said that it would consider.
Unity Software begins phase two of its company-wide reset; projects accelerating growth in 2H24 (U)
Unity Software (U -8%) is ready to start anew in FY24 following extensive turbulence, from a CEO shake-up to mass layoffs. The software development provider, enabling developers to create video games, animation, and simulations, started a two-phase company reset late last year after a pricing change implemented by former CEO John Riccitiello sparked intense backlash among Unity's customers. Mr. Riccitiello implemented a new fee based on installs instead of an annual fee, disincentivizing developers from growing the popularity of their games.
However, even after this abrupt pricing change, which prompted Mr. Riccitiello to step down, Unity still grew its core subscription business, excluding China, by 18% yr/yr in Q4. This robust growth underscored Unity's competitive edge in video game development software. The company is looking to lean on what it does best as a company during phase two of its reset. Management noted that the second phase is about reigniting revenue growth, which it anticipates will accelerate during the back half of FY24, maintaining attractive levels after that while improving profitability.
- Profitability will be a key gauge of how well Unity's turnaround progresses. In Q4, Unity registered another net loss; it has yet to deliver a profitable quarter since going public in 2020. However, as part of its broader turnaround plan, Unity has reset its cost structure, reducing its workforce by 25%. As a result, the company projects exiting FY24 with 25% adjusted EBITDA margins, up 9 pts from the 16% delivered in Q4 when excluding its Weta FX license agreement, which was already an 11 pt improvement from 4Q22.
- In connection with its reset, Unity announced that its portfolio would be realigned with its core businesses: Engine, Cloud, and Monetization. This new unit, dubbed "Strategic Portfolio," will help Unity narrow investments in new businesses to those aligned with its renewed focus. It also is exiting businesses that do not meet its core focus.
- Improving its Grow segment's performance is another strategic pillar underlying Unity's expectations of returning to accelerated growth this year. Grow allows customers to grow their user base and monetize their content. Interim CEO James Whitehurst remarked that it is currently focused on user acquisition through stronger models, which he believes will accelerate growth.
- Looking ahead to 2024, Unity only issued guidance for its new Strategic Portfolio group, projecting revs of $415-420 mln in Q1 and $1.76-1.80 bln for the year.
Investors are not expressing much confidence in a swift turnaround for Unity today, dragging shares back to late 2023 lows. Last quarter, we mentioned that shares may start to rebound once Unity presents information regarding its portfolio review. We think that Unity's actions are ultimately the right steps toward reigniting growth. Unity showcased its software's resilience by still growing its core subscription business by a healthy margin despite backlash over a new fee schedule. By trimming underperforming businesses and focusing on what it does best, Unity may finally get out of its funk.
Lowe's can't repair soft spending trends, but is executing well in tough environment (LOW)
A more cautious, value-oriented consumer that's shying away from larger-scale home improvement projects, combined with extreme weather across most of the U.S. in January, took a toll on Lowe's (LOW) Q4 results as comparable sales and total revenue fell by 6.2% and 17.1%, respectively. On paper, that total sales decline looks pretty awful, but the yr/yr comparison was negatively skewed by the divestiture of LOW's Canadian retail business last February, and the inclusion of a 53rd week in last year's results.
- In the wake of Home Depot's (HD) muted Q4 results from last week, market participants were well prepared for a soft comp number from LOW. Commentary from LOW CEO Marvin Ellison regarding sluggish demand for big-ticket items and pricier projects among DIY customers also echoed HD's remarks.
- What was a bit more uncertain was whether LOW would still be able to exceed EPS expectations, despite facing these stiffening headwinds. Thanks to LOW's strong execution and expense management, the company did just that, beating EPS expectations for the thirteenth consecutive quarter. As a percentage of revenue, SG&A expenses declined to 20.95% from 22.90% a year ago, while gross margin also remained firm at 32.4%.
- A more resilient Pro business also helped to mitigate a weak DIY business. Pro comps were flat qtr/qtr and customers surveyed by LOW said that their backlogs were roughly in line with last year. Growing the Pro business, which currently accounts for about 25-30% of LOW's total revenue, remains a core component of the growth strategy. More specifically, LOW is aiming to grow Pro at 2x the market rate.
- LOW is anticipating that conditions will remain challenging for DIY in FY25 -- as reflected in its downside EPS and revenue guidance -- but the company isn't sitting idle, waiting for the tables to turn in its favor. Instead, LOW is launching a new customer loyalty program in March that's designed specifically for the DIY customer, which is the first of its kind in the home improvement retail market. The company believes that this will drive stronger traffic and return visits as the spring season gets underway.
Overall, it was another rough quarter for LOW, but that was fully anticipated. Therefore, the focus is centering on LOW's strong execution, the launch of its new customer loyalty program, and the possibility of an upswing in demand later this year as lower interest rates fuel a stronger housing market.
Trex lays out a solid forecast for 2024, consumers are improving their outdoor spaces (TREX)
Trex (TREX) reported its Q4 report last night. The numbers for this supplier of wood-alternative decking and railing did not blow us away with modest beats on EPS and revs. Investors tend to not put a lot of importance on Trex's Q4 numbers because it is a seasonally slow period and the lowest revenue quarter each year. Few people are building new decks in the fall/winter. What investors are focusing on is Trex's 2024 outlook, which is quite good.
- Quickly on Q4, growth was fueled by increased volume and the absence of the residual channel inventory destocking seen in the prior year period. Results also reflected strong demand for Trex products heading into 2024. Trex noted that channel sell-through remained at mid-single-digit levels in Q4 and channel inventories ended the year at historically low levels. Gross margin at 36.1% was flat yr/yr but above internal expectations.
- Trex issued huge upside revenue guidance for Q1 at $360-370 mln, inclusive of $60-80 mln from its early-buy program. Analysts may not have realized that Trex shifted its early-buy program from December to this year's Q1.
- In terms of full year 2024, Trex sounded pretty positive. Trex expects a strong year with double-digit revenue and EBITDA growth based on several factors. First, 2024 will benefit from the early-buy program shifting into Q1. Second, Trex expects mid-single digit underlying demand growth despite its expectations of the larger Repair & Remodel market being flat to down low single digits in 2024. Third, channel stocking behaviors are normalizing with yearend decking inventories down 15% from the prior year lows.
- Trex also sounds positive about its Trex Signature and Trex Transcend Lineage products, two recently launched lines targeting the higher-end consumer. Lineage offers a proprietary heat mitigation technology and a more refined, clean look. Lineage has quickly gained traction in both the pro channel and special order category at its Home Center partners. Trex is planning a national rollout for Signature decking, which is competing well at the high end of the market.
Overall, this was a good report for Trex. The focus was not so much on the Q4 results, but more on the 2024 outlook which was quite positive despite some macro pressures. With inflation, higher rates and with consumers cutting back on discretionary purchases, we think investors are pleased with Trex's double-digit revenue growth forecast and its mid-single digit underlying demand forecast.
Many homeowners are staying put and not wanting to relinquish their low mortgage rates. So instead of buying a new home, many consumers are instead improving their outdoor space while adding value to their home. On a final note, Trex guided to 2024 adjusted EBITDA margin of 30.0-30.5%, so this is a good margins business.
Workday clocks out today following reiterated FY25 subscription revenue guidance (WDAY)
Workday (WDAY -2%) clocks out today despite topping earnings estimates in Q4 (Jan) and growing revs in-line with consensus. The troubling metric from the ERP and HCM software developer's Q4 report was its reaffirmed FY25 subscription revenue guidance, especially after shares reached all-time highs yesterday. With numerous dimensions fueling upbeat numbers, investors are a bit let down by WDAY's conservative guidance. Still, investors are keeping shares at levels from just two weeks ago, underscoring general positivity over WDAY's ability to dodge macroeconomic pressures, including suppressed enterprise spending which clipped peers' recent outlooks, such as Paycom Software (PAYC) and Paylocity (PCTY).
- WDAY's top-line growth was solid, climbing by 16.8% yr/yr to $1.92 bln, helping fuel a 58.6% expansion in adjusted EPS to $1.57. Non-GAAP operating margins surged by over 500 bps yr/yr to 24%, supported by buoyant revenue growth and ongoing cost discipline, such as moderating hiring. It is also worth mentioning that WDAY's platform is highly scalable, benefiting from new customer wins and existing customer upsells.
- Meanwhile, subscription revenue jumped 22% yr/yr to $1.50 bln, ending the year with a subscription backlog of $16.45 bln, a 28% increase.
- Several factors are aiding WDAY's impressive ability to deliver outperformance despite a challenging economic landscape. Generative AI is a significant component. WDAY has AI tools, such as Workday Skills Cloud, which leverages AI to gain insights into organizations' skills. Also, alongside its quarterly report, WDAY announced its planned acquisition of HiredScore, a provider of AI-powered talent acquisition services.
- International markets are also keeping WDAY's quarterly financials sound. In Q4, international revenue grew 21% yr/yr to $478 mln, representing roughly a quarter of WDAY's overall sales. Management reiterated that international comprises half the company's addressable opportunity and is working diligently to capitalize on it. Early signs of success have already emerged via healthy new average contract value (ACV) growth in key EMEA markets and strong ACV growth in Japan.
- Organizations also depend on WDAY's products to retain talent and drive productivity enhancements. By helping businesses streamline operations, WDAY showcases how its products are mission-critical, keeping switching costs elevated and forming an economic moat.
- Nevertheless, investors are disappointed by WDAY's FY25 subscription revenue forecast of $7.725-7.775 bln, unchanged from last quarter despite upbeat numbers in Q4.
With shares climbing over +50% since October, WDAY needed to outperform meaningfully in Q4. While it did just that in many respects, its reiterated guidance is proving insufficient to keep shares trending higher today. Still, we do not view today's slight pullback as indicative of weak performance or structural cracks. In fact, WDAY's Q4 report again demonstrated its ability to outperform regardless of the economic environment, keeping its position at the top of its class.
The Big Picture
Last Updated: 23-Feb-24 15:22 ET | Archive
Great results drive good earnings reporting period
March is right around the corner, which means spring will soon be in the air. It also means the marathon fourth quarter earnings reporting period will soon be over.
In our preview in early January, we pointed out that this earnings season gets dragged out because it also includes fiscal year-end reporting.
So, how has it gone? Things started slow -- and a bit disappointing -- but picked up steam once the mega-cap stocks tossed their hat into the reporting ring.
Swing Factor
Tesla (TSLA) was the first of the mega-cap stocks to report results. It disappointed and drew a rebuke from several corners that it should no longer be considered part of the so-called Magnificent 7, mostly because its stock had suffered a material decline to begin the year amid reports indicating EV demand growth had slowed at a time of increasing competition.
Tesla reported after the close on January 24. When that week concluded, the blended fourth quarter earnings growth rate (a combination of actual results and estimates for companies that have yet to report) stood at -1.4% versus 1.5% at the end of the fourth quarter, according to FactSet.
When the next week concluded on February 2, the blended earnings growth rate was 1.6%. The swing from -1.4% to 1.6% happened over the course of a week in which Microsoft (MSFT), Alphabet (GOOG), Apple (AAPL), Amazon.com (AMZN), and Meta Platforms (META) all reported their results and exceeded consensus earnings estimates.
A lot of other companies reported better-than-expected results in the same week, but it was the Magnificent 5 that truly moved the earnings growth needle -- a needle that kept moving after their big week.
At the end of last week (February 16), the blended earnings growth rate had doubled to 3.2%, but it didn't stop or revert there. According to FactSet, it has bumped up to 3.8% for the week ending February 23, which featured the blowout report from the Magnificent 1, NVIDIA (NVDA).
We have now heard earnings results from 90% of the S&P 500, so it is safe to say that the fourth quarter reporting period was better than expected, but not a blockbuster reporting period in aggregate.
Good, not Great
It is typical for the final earnings growth rate to be two to three percentage points above the estimated growth rate. When the fourth quarter ended, the estimated growth rate was 1.5% and here we are now at 3.8%.
Accordingly, we'll give this reporting period in aggregate a 'B' -- good, but not great.
The same holds true for revenues, which are up 4.2%, versus an estimate of 3.1% at the end of the fourth quarter, a five-year average revenue growth rate of 6.9%, and a 10-year average growth rate of 5.0%, according to FactSet.
Some might say that a below-average result should warrant a grade like a C-, but we'll allow for some grade inflation (no pun intended) given the more challenging revenue growth comparisons. FactSet notes that the fourth quarter is the 13th consecutive quarter of revenue growth for the S&P 500.
The first quarter should be the 14th consecutive quarter, too, with the blended growth rate currently projected to be 3.6%. That is identical to the projected earnings growth rate. Any growth is better than no growth when it comes to earnings, but it should be noted that the projected growth rate was 5.6% at the time of our fourth quarter earnings preview in early January.
That's called a downward revision, but it will be discounted (and has been discounted), because the economic data have remained conducive for a positive earnings growth environment. Moreover, it is understood that estimates tend to get marked down as the quarter progresses, only to see companies hurdle the lowered bar by at least two or three percentage points when the reporting is done (which would take you back at least to 5.6% if things remained where they are today).
Earnings Power
Market participants are also aware that the Magnificent 6 aren't on track to report modest earnings growth. Apple is the exception as analysts are projecting its earnings per share to be flat year-over-year in the March quarter. The remaining five stocks are all projected to deliver either double-digit year-over-year EPS growth or triple-digit growth in the cases of Amazon.com and NVIDIA.
Collectively, the average year-over-year EPS growth rate for the Magnificent 6 is 117.7%! Take Apple out and it jumps to 141.2%! Take NVIDIA out and it is still a robust 60.8%.
The point being is that these stocks continue to find favor because of their tremendous earnings power, and if they are in favor, the market-cap weighted S&P 500 won't fall way out of favor unless something unexpectedly bad happens.
What It All Means
We're in the closing stretches of the fourth quarter earnings reporting period, which was a test for the bull market in terms of the results that were reported and the guidance that was provided.
The stock market passed the test with a good grade, having been fortunate enough to see that the earnings results and guidance from most of the Magnificent Bunch remained great.
That was key for a market that has a concentration in those names, and it is harbinger of the opportunity and risk that awaits with each earnings reporting period.
-- Patrick J. O'Hare, Briefing.com
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