Market Snapshot
| Dow | 43325.80 | +28.77 | (0.07%) | | Nasdaq | 20058.85 | -10.77 | (-0.05%) | | SP 500 | 6037.29 | -2.45 | (-0.04%) | | 10-yr Note | +1/32 | 4.58 |
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| | NYSE | Adv 1647 | Dec 1090 | Vol 668 mln | | Nasdaq | Adv 2941 | Dec 1390 | Vol 6.4 bln |
Industry Watch
| Strong: Financials, Health Care, Real Estate, Information Technology |
| | Weak: Consumer Discretionary, Communication Services, Utilities, Materials, Energy |
Moving the Market
-- Losses in mega cap stocks weighing down broader equity market
-- Outperformance of small caps
-- Drop in yields acting as support for the stock market
-- Below-average participation after Christmas Day
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Closing Summary
26-Dec-24 16:30 ET
Dow +28.77 at 43325.80, Nasdaq -10.77 at 20058.85, S&P -2.45 at 6037.29
[BRIEFING.COM] It was a somewhat lackluster session. The major indices mostly traded around their prior closing levels. The Russell 2000 outperformed other indices, settling 0.9% higher, reflecting some speculative buying interest in a thinly-traded market after the holiday break.
Choppy action in some mega cap names contributed to the mixed moves in the three major indices. The Vanguard Mega Cap Growth ETF (MGK) traded up as much as 0.1% at its session high and as down as much as 0.7% at its low.
The price action in the S&P 500 sectors was muted and none of the sectors moved more than 0.6% in either direction. The financial (+0.2%) and health care (+0.2%) sectors were the top performers and the consumer discretionary sector logged the largest decline, dropping 0.6%.
Market rates were already elevated and selling picked up in response to the better-than-expected initial jobless claims report. Weekly initial jobless claims for the week ending December 21 checked in at a lower than expected 219,000 (Briefing.com consensus 232,000) while continuing jobless claims for the week ending December 14 hit their highest (1.910 million) since November 13, 2021.
Treasuries ultimately settled with gains, though, after the $44 billion 7-yr note auction at 1:00 p.m. ET was met with strong dollar demand and interest from indirect bidders. The 10-yr yield hit 4.64% shortly after the jobs data, but settled one basis point lower than Tuesday at 4.58%.
- Nasdaq Composite: +33.4% YTD
- S&P 500: +26.6% YTD
- Dow Jones Industrial Average: +15.0% YTD
- S&P Midcap 400: +13.9% YTD
- Russell 2000: +12.5% YTD
Reviewing today's economic data:
- Weekly Initial Claims 219K (Briefing.com consensus 232K); Prior 220K, Weekly Continuing Claims 1.910 mln; Prior was revised to 1.864 mln from 1.874 mln
- The key takeaway from the report is that layoff activity is low; however, if one loses their job, it is becoming more challenging to find a new position.
Looking ahead to Friday, market participants receive the following economic data:
- 08:30 ET: November Adv. Intl. Trade in Goods (prior -$99.1B), Adv. Retail Inventories (prior 0.1%), and Adv. Wholesale Inventories (0.2%)
- 10:30 ET: EIA Natural Gas Inventories (prior -125 bcf)
- 13:00 ET: EIA Crude oil Inventories (prior -0.934M)
Treasuries settle with gains
26-Dec-24 15:35 ET
Dow +27.62 at 43324.65, Nasdaq +26.98 at 20096.60, S&P +2.98 at 6042.72
[BRIEFING.COM] There hasn't been much up or down action at the index level with about 25 minutes left in the session.
Looking ahead to Friday, market participants receive the following economic data:
- 08:30 ET: November Adv. Intl. Trade in Goods (prior -$99.1B), Adv. Retail Inventories (prior 0.1%), and Adv. Wholesale Inventories (0.2%)
- 10:30 ET: EIA Natural Gas Inventories (prior -125 bcf)
- 13:00 ET: EIA Crude oil Inventories (prior -0.934M)
Treasuries settled with gains after the $44 billion 7-yr note auction at 1:00 p.m. ET was met with strong dollar demand and interest from indirect bidders. The 2-yr yield settled one basis point lower at 4.33%.
Mega caps improve, boosting indices
26-Dec-24 15:05 ET
Dow +33.83 at 43330.86, Nasdaq +28.64 at 20098.26, S&P +4.13 at 6043.87
[BRIEFING.COM] The major indices moved toward session highs over the last half hour.
Some mega cap names turned positive or extended gains as the market moved up. The Vanguard Mega Cap Growth ETF (MGK) shows a 0.1% gain after trading lower through most of the session, trading down as much as 0.7%.
Treasury yields remain near intraday lows. The 10-yr yield is down one basis point to 4.58% and the 2-yr yield is down one basis point to 4.33%.
FICO, Axon among top S&P 500 laggards on Thursday
26-Dec-24 14:30 ET
Dow -3.27 at 43293.76, Nasdaq -10.84 at 20058.78, S&P -4.36 at 6035.38
[BRIEFING.COM] The S&P 500 (-0.07%) now sits at the bottom of the major averages, down a little more than four points.
Briefly, S&P 500 constituents Fair Isaac (FICO 2060.85, -44.14, -2.10%), Axon (AXON 622.70, -8.55, -1.35%), and Williams Cos (WMB 53.75, -0.85, -1.56%) pepper the bottom of the standings.
Meanwhile, Walgreens Boots Alliance (WBA 9.55, +0.36, +3.92%) is today's top gain getter; shares are attempting to reverse the extended period of losses which have the stock -43% since the start of June.
Gold ends higher on Thursday
26-Dec-24 14:00 ET
Dow -0.28 at 43296.75, Nasdaq -12.12 at 20057.50, S&P -3.47 at 6036.27
[BRIEFING.COM] The tech-heavy Nasdaq Composite is tied for today's worst-performing major average with the S&P 500, down -0.06% apiece.
Gold futures settled $18.30 higher (+0.7%) to $2,653.80/oz, holding solid gains amid soft trading action the day after the holiday break.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $108.11.
MillerKnoll earnings last week showed that the office furniture space needs time to recover (MLKN)
MillerKnoll (MLKN) has been weak since reporting Q2 (Nov) earnings last week. This report, along with weak results from peer Steelcase (SCS), have dampened our hopes of a near term recovery in the office furniture space. There has been a push by employers to get workers back into the office, but these reports signal that the near term outlook appears cloudy.
- MillerKnoll reported upside results for Q2. Revenue rose just 2.2% yr/yr to $970.4 mln, but that was better than expected. The main problem was pretty large downside adjusted EPS guidance for Q3 (Feb) although the revenue outlook was in-line. MLKN also lowered FY25 adjusted EPS guidance to $2.11-2.17. While orders are trending nicely ahead of last year, MLKN said they have recovered at a slower pace than expected at this point in the year.
- On the positive side, new product launches are performing above expectations and MLKN is seeing a very positive response to its promotions. Its Americas Contract segment continues to be a key growth driver with Q2 sales up 6.2% yr/yr organically to $504 mln. While new AC segment orders of $457 mln were lower than expected, they were up 4.9% on an organic basis. Order growth trends improved as the quarter progressed.
- Within the International and Specialty segment, sales grew 2.1% to $246 mln. MLKN continues to see strong order growth in the Middle East and parts of Asia. MLKN is seeing excitement build for its brands internationally. It recently opened its MillerKnoll flagship in London and it opened a new fulfillment center in Belgium. Turning to its Retail segment, sales declined 5.3% and -4% on an organic basis to $220 mln.
- MLKN also said it's paying very close attention to tariff proposals. It noted that it has managed through similar tariff policy changes in the past and is looking to mitigate if needed. This could include identifying alternative sources of supply, options for advanced purchasing and possible future price adjustments. On the other hand, the possible extension of the 2017 tax cuts could have a positive impact and in particular the reinstatement of bonus depreciation.
Q2 marked the second consecutive quarter where the stock has gapped lower on earnings. MillerKnoll concedes that macroeconomic improvement is progressing more slowly than expected, however, it is encouraged by many trends and is building momentum for 2HFY25. With that said, rates have been creeping back up in recent weeks, that could be a headwind heading into calendar 2025. It is likely just a matter of time before this industry turns around but it will take some time.
SkyWater Tech is a play on the trend toward moving chip manufacturing back into the US (SKYT)
SkyWater Technology (SKYT) has been making waves in recent weeks, including a big jump last week. Since it's not well known and it's a slow news day, we wanted to dive in a bit with SkyWater today. It is a technology foundry offering both advanced semiconductor process technology development as well as wafer manufacturing services. SkyWater is a pure-play semiconductor contract manufacturer, otherwise known as a foundry.
- What's unusual is that SkyWater is based in the US whereas most foundries operate in Asia. Given all the supply chain issues during the pandemic, there has been a big push to reshore chip production back in the US. The goal is to be less reliant on Asian foundries, not just on concerns of another pandemic, but also given the threat of tariffs, it makes sense to bring manufacturing back to the US.
- A big development in this area was the 2022 passage of the The CHIPS and Science Act, a federal law that authorizes roughly $280 bln to boost US production. It also includes 25% investment tax credits for manufacturing equipment. What makes SkyWater interesting is that it was created back in 2017 when it was spun out of Cypress Semi. This was before the CHIPS Act, and before it was cool to make chips in the US.
- SKYT has built a very strong Advanced Technology Services business. Think of this as a monetized R&D capability that allows SKYT to work with customers very early in the product development stage with the assurance that once their products move into production, SKYT can also make them in volume. SKYT does both embedded R&D as well as high-volume manufacturing in the same manufacturing facility. SkyWater serves the growing markets of aerospace & defense (A&D), automotive, biomedical, industrial and quantum computing.
- The stock has been making a strong move since it announced in early December that it signed a preliminary memorandum of terms (PMT) valued at up to $16 mln with the CHIPS for America program. This proposed funding would provide federal incentives to enhance production capabilities at SkyWater's Minnesota facility. These incentives will complement SkyWater's existing plans for customer-funded CapEx co-investments totaling $320 mln through 2026.
Looking ahead to 2025, SKYT is encouraged by a robust pipeline of secure aerospace & defense (A&D) demand, growing momentum across multiple commercial programs and the initial ramp of its advanced packaging business. Growth in its ATS segment is expected to be driven by strong continued momentum across various A&D programs and new well-funded commercial initiatives. SKYT expects these advancements to be bolstered by substantial new tooling capabilities funded by customers. Also, SKYT plans to accelerate its advanced packaging ATS development as it ramps its new fan-out platform.
Xometry making new highs since surprise profit in Q3; supply chain jitters fueling growth (XMTR)
Xometry (XMTR +5%) caught our attention this morning. There is not any news out, but the stock has been showing good momentum since its Q3 report in early November. The stock is trading at a new 52-week high today, so we wanted to take closer look to see what it driving the stock higher.
- This operator of an AI-powered online marketplace connecting buyers with suppliers of manufacturing services sees manufacturing as a massive, highly fragmented, and regionalized industry in need of efficiency. Xometry believes the industry is poised for increased digitization. Also, small- to medium-sized manufacturers face barriers to entry as they have to compete with larger manufacturers. Xometry sees an opportunity to help these smaller companies with their materials, financing and advertising.
- Xometry made its IPO debut pretty recently, in June 2021. Since going public, it has grown its revenue and gross margin rapidly. It has also gotten closer and closer to being adjusted EBITDA positive, which the company expects to accomplish in Q4. Annual revenue in recent years has grown impressively. Analysts expect 2024 revenue to come in around $543 mln then grow to $647 mln in 2025.
- The company has expanded its networks of both buyers and suppliers. It has also grown gross margin for its marketplace segment. When Xometry went public, gross margin was about 23.5% for marketplace and that increased to 33.6% in Q3. As such, even as it has grown revenue strongly, at very significant rates, the gross profit has actually grown even faster.
- Xometry is increasingly embedded in its customer supply chains, digitizing inefficient and cumbersome processes. Also, international growth has been a key catalyst. In Q3, international revenue grew 55% yr/yr, driven by strong growth in Europe. It is now approaching a $100 mln annual run rate vs $2 mln in 2020. Currently, 19% of total marketplace revenue is international and Xometry believes it can get that up to 30-40%, which is consistent with many other global online marketplaces.
- What really stands out is that Xometry has grown strongly despite a weak industrial macro picture. ISM data has been in contraction for 23 of the past 24 months. Despite that, Xometry posted 19% yr/yr revenue growth in Q3 to $141.7 mln. The company achieved this because it believes it is clearly gaining market share. Another factor is that awareness is still relatively small. However, that is changing as demonstrated by its customer growth.
- Another tailwind has been concerns about supply chains. With tariffs and geopolitical tensions, many customers have concerns about supply chains, particularly in Asia. Xometry helps by being in 16 localized marketplaces, including the US, Europe, Asia. If customers are looking to ensure that they can deliver their product to their end customers, Xometry Marketplace is a good way to protect their supply chain at no cost. Xometry gives them that redundancy and security that they need.
Overall, Xometry appears to be hitting more radar screens since its Q3 report. Analysts had been expecting a loss, but the company surprised the market with its first profitable quarter as a public company. That Xometry has been able to grow nicely despite a contracting industrial market is pretty impressive. And the potential upheaval of supply chains caused by tariffs should fuel more interest from customers.
Starbucks' recent declines slowing down as today's strike is expected to have limited impact (SBUX)
Union-related issues continue to brew at Starbucks (SBUX +1%), prompting a roughly 10% correction since last week. The Starbucks Workers Union, which was formed in late 2021, has over 11,000 organized workers across 535 company-owned stores in the U.S. However, by comparison, SBUX employs more than 200,000 people and operates over 10,000 stores in the U.S. Last week, the union stated that 98% of unionized workers voted to authorize a strike. The dates were set for between December 20 and today and were expected to affect over 300 stores nationwide by Christmas Eve.
Last night, SBUX provided an update on the strike, noting that only a small number of stores, around 60, were temporarily closed due to the union's actions. Management added that the strike could reach additional stores today. However, the company noted that 97-99% of its stores will continue to operate normally. As such, the strike is expected to have a limited impact on SBUX's overall operations.
- SBUX has not expressed much concern over the 4% of its U.S. stores where its employees have chosen to be represented by a union. The striking does add another headache that the company and its recently appointed CEO, Brian Niccol, must work through. However, we view union-related setbacks as mostly noise.
- Still, the noise coincides with macroeconomic headwinds that have kept a tight lid on recent growth. In Q4 (Sep), SBUX's North America and International comps contracted by 6% and 9%, respectively, while China comps (SBUX's second-largest market) fell by 14%. Mr. Niccol, who joined the company in early September, conceded that results were underwhelming, reinforcing his view that changes are needed, from menu simplification, removing excess consumer costs, and returning abandoned perks.
- SBUX's "Back to Starbucks" plan aims to take on these much-needed changes, ultimately targeting a return to sustainable growth domestically and abroad. SBUX's strategy involves meaningful investments in equipment, renovation, and marketing, which could weigh on the company's near-term bottom-line performance. However, investors remain excited over Mr. Niccol carrying over his success at Chipotle and Taco Bell. Shares remain over +10% higher since the announcement of his appointment as CEO.
A strike by unionized workers across a minuscule percentage of SBUX's total footprint in the U.S. is not expected to weigh materially on the company's operations. More stores could vote to unionize in the future. However, we view the problem as relatively minor. Instead, SBUX is up against a more significant hurdle: reenergizing demand. It is still early into Mr. Niccol's turnaround plan, so Q4 numbers provide more of a baseline from which SBUX should improve rather than signal a future trend. Therefore, Q1 (Dec) results in the coming months should offer more clues as to how "Back to Starbucks" is shaking out.
Boston Beer Co lowers its FY24 GAAP EPS outlook following production contract amendment (SAM)
Boston Beer Co (SAM -3%) slips after lowering its FY24 GAAP EPS outlook on Friday after the close following its announcement of restating an existing production agreement with Rauch North America. The agreement included a commitment to minimum capacity availability by Rauch, with SAM obligated to meet annual minimum volume commitments. If it did not, it was subject to contractual shortfall fees.
Under the amendment, SAM agreed to pay $26 mln in cash to better match SAM's future capacity requirements, allowing heightened production flexibility and more advantageous termination rights. This payment is expected to clip $1.70 in after-tax GAAP EPS in Q4, resulting in a lowered GAAP EPS guidance for the year to $3.80-$5.80 from $5.50-$7.50. However, SAM still reiterated its FY24 adjusted EPS and depletions and shipments forecasts.
- Heading into FY24, SAM anticipated falling short of its future annual volume commitments at various third-party production facilities, resulting in expected shortfall fees. On Friday, SAM reiterated its expectation that these fees will hurt gross margins by 65-75 bps in FY24. When adding in production and prepayment amortization, SAM sees a 160-180 bp impact on margins.
- Shortfall fees do not always mean that volumes are missing internal goals. Instead, it can mean that SAM's regional mix changed. It also could be due to SAM's expansion in international markets. This shows up in SAM reiterating its FY24 depletions and shipments outlook for the year, continuing to project a low single-digit percentage decline. This outlook was reduced last quarter, taking the possibility of flat depletions and shipments growth off the table, reflecting lingering challenges associated with SAM's Truly Hard Seltzer brand.
- Truly Hard Seltzer business endured an 11% volume decline in measured channels in Q3. SAM continues testing various strategies to reignite Truly demand, such as being more discerning over flavors. At the same time, SAM's once-resilient Twisted Tea brand encountered softening demand last quarter. While SAM has seen positive signals from the early rollout of its American Light beer across new markets, overall depletion trends were not shaping up favorably exiting Q3, resulting in its lowered guidance.
SAM commented in late October that as its contractual terms expire, it will reassess its capacity needs and commitments with production partners. Shortfall fees tend to weigh considerably on Q4 margins. Reducing these headwinds can help preserve the annual margin drop-off SAM has experienced in recent years. Nevertheless, other headwinds remain, from a saturated hard seltzer market to slowing demand for its typically resilient Twisted Tea banner. As we mentioned following Q3 results in October, SAM may struggle over the near term until a sustained turnaround within its Truly Hard Seltzer business emerges.
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