Market Snapshot
| Dow | 40755.75 | -219.22 | (-0.54%) | | Nasdaq | 17127.64 | +43.36 | (0.25%) | | SP 500 | 5503.41 | -16.66 | (-0.30%) | | 10-yr Note | +24/32 | 3.73 |
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| | NYSE | Adv 1210 | Dec 1526 | Vol 829 mln | | Nasdaq | Adv 1832 | Dec 2366 | Vol 5.0 bln |
Industry Watch
| Strong: Consumer Discretionary, Communication Services, Information Technology |
| | Weak: Health Care, Industrials, Financials, Materials, Energy, Consumer Staples |
Moving the Market
-- Wait-and-see in front of August Employment Situation report ahead of Friday's open
-- Digesting this morning's slate of economic data
-- Early gains in semiconductor shares dissipated, leading market lower
-- Drop in yields following data reflecting ongoing growth concerns
| Closing Summary
05-Sep-24 16:25 ET
Dow -219.22 at 40755.75, Nasdaq +43.36 at 17127.64, S&P -16.66 at 5503.41
[BRIEFING.COM] The market had a mixed showing again today. The Nasdaq Composite (+0.3%) settled slightly higher than yesterday, boosted by gains in some mega cap constituents. The S&P 500 settled 0.3% lower than yesterday, below its 50-day moving average (5,506).
Mixed action persisted through the entire session due to a lack of conviction in front of the August Employment Situation Report tomorrow at 8:30 ET. The market's focus of late has been on labor market conditions, but this morning's data didn't garner outsized responses from equities or bonds.
The ADP Employment Change Report for August was weaker than expected, the weekly initial jobless claims report was better than expected, the revised Q2 productivity report had the right mix of an upward revision to productivity and a downward revision to unit labor costs, and the ISM Services PMI for August was better than expected but little changed from July.
The 10-yr note yield settled four basis points lower at 3.73% and the 2-yr note yield settled two basis points lower at 3.75%.
Today's lackluster action was also due to the understanding that the market has experienced quite a bit of consolidation this week. The S&P 500 is 2.6% lower than Friday's close, the Nasdaq Composite sits 3.3% lower than last Friday, and the Russell 2000 is down 3.9% from last week.
Eight of the 11 S&P 500 sectors settled with declines led by health care (-1.4%), industrials (-1.2%), and financials (-1.0%). The consumer discretionary (+1.4%), communication services (+0.5%), and information technology (+0.1%) sectors were alone in positive territory at the close, reflecting mega cap leadership.
Tesla (TSLA 230.17, +10.76, +4.9%) was a winning standout from the space after a Bloomberg report that it could introduce full self-driving technology in China and Europe, pending necessary approvals, in the first quarter of 2025.
- S&P 500: +15.4% YTD
- Nasdaq Composite: +14.1% YTD
- Dow Jones Industrial Average: +8.1% YTD
- S&P Midcap 400: +7.2% YTD
- Russell 2000: +5.2% YTD
Reviewing today's economic data:
- August ADP Employment Change 99K (Briefing.com consensus 150K); Prior was revised to 111K from 122K
- Weekly Initial Claims 227K (Briefing.com consensus 236K); Prior was revised to 232K from 231K, Weekly Continuing Claims 1.838 mln; Prior was revised to 1.860 mln from 1.868 mln
- The key takeaway from the report is that layoff activity remains relatively tame; however, so does hiring activity, evidenced by the elevated stickiness of continuing jobless claims.
- Q2 Productivity-Rev. 2.5% (Briefing.com consensus 2.3%); Prior 2.3%,Q2 Unit Labor Costs-Rev. 0.4% (Briefing.com consensus 0.9%); Prior 0.9%
- The key takeaway from the report was the friendly inflation view embedded in the softening unit labor costs. They were up just 0.3% over the last four quarters, which is the lowest rate since the fourth quarter of 2013.
- August S&P Global US Services PMI - Final 55.7; Prior 55.0
- August ISM Non-Manufacturing Index 51.5% (Briefing.com consensus 51.0%); Prior 51.4%
- The key takeaway from the report is that overall activity in the largest sector of the U.S. economy remains in an expansion mode, which is what the market, worried about a possible hard landing, wants to see. Slow to moderate growth, the report said, was noted across many industries.
The headline event tomorrow is the August Employment Situation report at 8:30 ET.
Stocks hold steady in front of the close
05-Sep-24 15:35 ET
Dow -170.53 at 40804.44, Nasdaq +66.68 at 17150.96, S&P -9.58 at 5510.49
[BRIEFING.COM] The major indices are holding steady in front of the close.
The 10-yr note yield settled four basis points lower at 3.73% and the 2-yr note yield settled two basis points lower at 3.75%.
The headline event tomorrow is the August Employment Situation report at 8:30 ET.
S&P 500 sits near 50-day moving average
05-Sep-24 15:05 ET
Dow -187.34 at 40787.63, Nasdaq +48.98 at 17133.26, S&P -12.76 at 5507.31
[BRIEFING.COM] Things are little changed at the index level in recent action. The S&P 500 trades near its 50-day moving average, down 0.2% from yesterday.
Small and mid cap stocks show muted losses also. The Russell 2000 sports a 0.2% decline and the S&P Mid Cap 400 trades 0.4% lower.
Broadcom (AVGO), DocuSign (DOCU), UiPath (PATH), Samsara (IOT), Braze (BRZE), and others report earnings after the close.
McKesson down in S&P 500 after weak guidance, Copart slips on EPS miss
05-Sep-24 14:30 ET
Dow -177.31 at 40797.66, Nasdaq +60.76 at 17145.04, S&P -10.61 at 5509.46
[BRIEFING.COM] The S&P 500 (-0.19%) is in second place on Thursday afternoon, moving mostly sideways over the prior half hour.
Elsewhere, S&P 500 constituents McKesson (MCK 514.09, -57.19, -10.01%), Zimmer Biomet (ZBH 105.00, -9.48, -8.28%), and Copart (CPRT 49.45, -3.60, -6.79%) dot the bottom of the standings. MCK slides after guiding Q2 EPS down at a conference today, ZBH issued a sales warning, and CPRT missed Q4 EPS expectations in last night's report.
Meanwhile, New York-based fintech firm MarketAxess (MKTX 257.59, +15.73, +6.50%) is outperforming after announcing August 2024 volume metrics this morning.
Gold higher amid weaker ADP report
05-Sep-24 14:00 ET
Dow -188.46 at 40786.51, Nasdaq +67.98 at 17152.26, S&P -10.11 at 5509.96
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+0.40%) has climbed to afternoon highs, now up about 68 points.
Gold futures settled $17.10 higher (+0.7%) to $2,543.10/oz, stronger as the market gauged how big the Fed's potential rate cut could be this month after the weaker than expected ADP Employment report out this morning.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $101.12.
Shoe Carnival jumps after a strong back-to-school season lifts Q2 numbers (SCVL)
Shoe Carnival (SCVL +7%) jumps higher today after registering solid numbers in Q2 (Jul), including decent-sized beats on its top and bottom lines. While the shoe retailer's comp growth remained negative, sliding by -2.1%, it substantially improved over the -9.4% decline last quarter, reflecting upward momentum and a healthy back-to-school season.
- Like recent quarterly numbers from counterpart Boot Barn Holdings (BOOT), SCVL registered upbeat headline results in Q2, delivering adjusted EPS of $0.83 on revenue growth of 12.9% yr/yr to $332.7 mln, nearly double the growth rate posted in Q1 (Apr). While comparable store sales growth was negative in Q2, comps turned positive during the back-to-school season, which begins around the end of July and lasts until around the Labor Day weekend.
- SCVL chalked up a shift in its marketing campaign to its buoyant comp growth during the back-to-school season. Management noted that this year marked the first season where it fully pivoted from a traditional marketing campaign that relied on TV to a digital-first approach it had tested throughout the past year. By shifting to digital channels, SCVL commanded greater flexibility, allowing it to amp up messaging in real-time without spending additional marketing dollars.
- The tailwind produced by a healthy back-to-school season is seeping into Q3 (Oct). During August, SCVL achieved low-single-digit comp growth, fueled by a mid-to-high-single-digit jump in children's and athletics categories. Comps were positive across SCVL's Carnival and Station banners. As a result, SCVL hiked the low end of its FY25 (Jan) forecasts. The company now targets adjusted EPS of $2.60-2.75 from $2.55-2.75, revenue of $1.23-1.25 bln from $1.21-1.25, and comps of down 1.5% to up 1%, compared to down 3% to up 1%.
- CEO Mark Worden cautioned that the likely scenario would be achieving the lower side of its updated FY25 estimates. However, if the company continued setting records during the upcoming holiday shopping season, then it noted that the high end of its guidance ranges would be possible.
SCVL's Q2 performance may have placed the company back on the right foot after dampened discretionary spending curbed past quarterly numbers. However, even though raising its worst-case outcome for the year was encouraging, Mr. Worden's comments reflect cautious optimism, similar to the tone expressed by BOOT last month. Inflationary headwinds can generate volatility month-to-month, keeping near-term uncertainty elevated. Therefore, given current price levels, we urge caution over the near term, especially since the stock can experience considerable swings given its relatively high short interest of over 10%.
Verizon makes big bet on broadband with buyout of Frontier, but deal adds balance sheet risk (VZ)
Yesterday afternoon, the Wall Street Journal broke a story that telecom giant Verizon (VZ) was nearing a deal to acquire Frontier Communications Parent (FYBR), sending shares of FYBR rocketing higher by 38%. That report was confirmed this morning when the two companies announced a deal valued at $20 bln with VZ agreeing to pay $38.50/share in an all-cash transaction. Shares of FYBR are trading materially below that buy out price, though, reflecting the uncertainties of the deal closing, due to either shareholder or regulatory approvals.
- As is typical for the company making the acquisition, shares of VZ have dipped lower by nearly 4% since the WSJ published its story yesterday. In this particular case, the drop isn't related to dilution issues since VZ is financing the acquisition with cash. Rather, we believe the concern mainly revolves around VZ's use of capital and its high debt balance. As of June 30, 2024, the company's total debt balance totaled $146.8 bln and that figure stands to increase should this deal go through.
- After emerging from bankruptcy in 2020, FYBR's financial health is still far from pristine as its total debt surpassed $11.0 bln at the end of 2023 and as its free cash flow has languished in negative territory over the past three years. If VZ completes this transaction, FYBR's debt would be tacked onto its balance sheet, putting more strain on its ability to pay interest, cover its dividend, and reinvest in the business.
- It's probably not a coincidence that VZ also announced a small dividend increase after the close yesterday, raising it to $0.6775/share from $0.665/share. VZ seems to be signaling that its dividend is safe, even as it prepares to shell out $20 bln for FYBR and potentially take on more debt.
- From a strategic standpoint, we believe the acquisition is a good fit because it would significantly expand VZ's fiber broadband business at a time when the wireless equipment business in slowing. In Q2, VZ saw a 13% decrease in wireless upgrades, reflecting sluggish smartphone demand within a persistently soft discretionary spending backdrop. On the flip side, total broadband net additions reached 391,000 in Q2, marking the eighth consecutive quarter with more than 375,000 net additions.
- Similarly, FYBR's fiber broadband business was strong in Q2 as the company added a record 92,000 fiber broadband customers, good for an 18.6% yr/yr increase. Looking ahead, the high-speed internet business should continue to thrive amid soaring data usage, especially with the emergence of AI technologies. Overall, a combined VZ/FYBR would boast approximately 9.1 mln consumer fiber subscribers, making the combined company the largest pure-play fiber internet provider in the U.S.
- Financially, the deal has some attractive qualities as well, including the expectation that it will be accretive to adjusted EBITDA and revenue growth rates upon closing. Additionally, VZ expects to realize at least $500 mln in run-rate cost synergies by year three, due to benefits related to increased scale and distribution.
The main takeaway is that an acquisition of FYBR would catapult VZ into a leading broadband company, providing it with a competitive edge over rivals AT&T (T) and T-Mobile (TMUS). Investing in its fiber footprint at a time when data usage is set to increase substantially as AI technologies launch looks like a sound strategy, but it would come at the cost of leveraging its balance sheet even more as it takes on FYBR's debt.
Hewlett Packard Ent heads lower following earnings; JNPR deal remains on track to close soon (HPE)
Hewlett Packard Enterprise (HPE -7%) is heading lower following its Q3 (Jul) results last night. HPE reported solid but not huge EPS upside. What stood out more was the strong revenue upside, as revenue rose 10.1% yr/yr to $7.71 bln. This was HPE's first double-digit revenue growth quarter since Q1 of last fiscal year and HPE grew revenue sequentially in each segment. The Q4 (Oct) guidance was in-line although the mid-point of revs was above consensus.
- HPE says its impressive growth benefitted from a notable acceleration of AI systems revenue conversion. The co described Q3 as demonstrating HPE's ability to deliver results despite a dynamic macro environment. HPE concedes that some customers remain cautious and are prioritizing mission-critical projects. However, HPE is encouraged by the recovery in enterprise demand in North America followed by modest improvement across other geographies.
- The overall demand environment this quarter has improved. HPE saw sequential and yr/yr order growth but with some geographic variation. Demand was strong in North America, Asia Pacific, Japan, and India, while Europe and the Middle East lagged. HPE is aggressively going after opportunities presented by better market conditions.
- HPE believes it's well-positioned for the AI opportunity. This quarter, it grew AI systems revenue approximately 40% sequentially as it continues to win deals with both model builders and sovereigns. It's also well-positioned to address enterprise AI demand. HPE is encouraged by the early and strong customer response to its Private Cloud AI offering which it expects to drive AI adoption in the enterprise.
- In traditional servers, HPE is seeing signs of a recovery as both demand and revenue increased sequentially. Finally, HPE said results were solid in networking, it's seeing improving sequential demand in WLAN, data center networking and switching along with continued growth in security and services. All of this keeps it optimistic heading into Q4.
- In terms of its pending acquisition of Juniper Networks (JNPR), HPE remains excited to significantly expand its networking business. HPE explains that the acquisition of this high-margin business will accelerate its edge-to-cloud vision with a full networking IP stack from silicon to infrastructure, to the OS, to security to software. The deal remains on track to close in late calendar 2024 or early calendar 2025.
Overall, there were some notable positives from this report, namely the upside EPS/revs and solid guidance. However, HPE also talked about some weakness/caution among some clients and some geographies. It also talked about a competitive AI server market. Also, during the Q&A, analysts asked a number of questions about AI server margins, which are lower than traditional servers. AI now accounts for 30% of server revenue vs 10% a year ago, so there seemed to be some concern there.
Casey's General's mild Q1 inside comps shrugged off as August trends signal quick recovery (CASY)
Casey's General (CASY +5%) stalls out in Q1 (Jul), falling a hair shy of top-line estimates in the quarter as inside same-store sales growth comes up relatively light stacked against the company's FY25 (Jan) forecast. The gas station and convenience store chain, predominantly situated across the Midwest, was coming off a string of impressive quarterly reports, consistently topping earnings and sales estimates on healthy inside comp growth. Against this backdrop, Q1 numbers were underwhelming, initially resulting in modest selling pressure. However, when peeking under the hood, investors uncovered several positives, ultimately fueling today's push higher.
- While lighter than previous quarters, CASY still registered double-digit earnings upside in Q1. Inside margins of 41.7% hovered mildly above CASY's FY25 prediction of 41.2%. Meanwhile, fuel margins ticked 4.2 cents higher sequentially to 40.7 cents per gallon, slightly above the average in FY24 of 39.5 cents per gallon.
- Revenue grew by 5.9% to $4.1 bln. Same-store fuel gallons edged +0.7% higher, landing near the high end of the company's negative 1% to positive 1% outlook for the year. However, inside comps were on the weaker side at +2.3%, which tracked below CASY's FY25 forecast of +3.0-5.0%.
- During its Q4 (Apr) conference call in June, management mentioned that inside comps were trending in-line with its annual guidance. However, traffic started dropping off shortly thereafter. Discretionary spending remains volatile, primarily among lower-income consumers, shifting habits. Additionally, CASY pointed to lower lottery transactions due to fewer $1.0 bln jackpots as another underlying cause of lower foot traffic.
- Furthermore, CASY was lapping a one-time benefit related to an adjustment surrounding its rewards program, resulting in a roughly 140 bp hit to comp growth. However, this was known ahead of Q1 numbers.
- Looking ahead, CASY is leaving its FY25 inside comps, fuel comps, and inside margin targets unchanged. The company will not update these projections until it closes its $1.145 bln purchase of Fikes Wholesale, announced in July. However, as is typical, management provided color on how the first month of the subsequent quarter is tracking, commenting that August inside and fuel comps were within the range of its annual outlook, underpinning a possibly brief interruption in inside sales demand that unfolded during Q1.
CASY may not have gotten out to as hot a start to its fiscal year as in previous years, throttled by lower-income consumers, which comprise a third of its overall traffic, reducing their average basket sizes, as well as less compelling lottery jackpots. Still, the company's Q1 report showcased steady growth in important categories, such as prepared foods and dispensed beverages. Meanwhile, fuel comps remained robust despite moderating travel demand, reflecting the strategic placement of CASY's locations, as households in the Midwest tend to drive longer distances for work and school. As such, we continue to like CASY for the long term.
Hormel Foods gaps lower after previous headwinds prove more severe than initially expected (HRL)
Hormel Foods' (HRL -6%) Q3 (Jul) performance failed to bring home the bacon as unfavorable commodity markets and production disruptions clipped results in the quarter and weighed on FY24 (Oct) guidance. While HRL previously warned of these issues, spurring a significant sell-off last quarter, the headwinds proved worse than the market anticipated, largely because of the extent to which they are seeping into Q4 and the lack of clarity on when they will ease. As such, shares are slipping toward 52-week lows today.
- What is going on with production? An unplanned interruption erupted at HRL's Planters Peanuts facility in Virginia after uncovering a food safety issue in April. While management mentioned last quarter that the food safety problem had already been resolved, they warned it would still hinder Q3 results, albeit to a minor degree -- roughly a $0.03 EPS impact. However, ramping production is not an overnight process. HRL expects the disruption to be primarily resolved by next quarter, underpinning how extensive a production halt can be.
- Why are commodity markets producing such a negative impact? HRL's issue lies within the whole turkey bird commodity market. Approximately three-quarters of its 2.2% drop in revs in Q2 to $2.9 bln -- missing analyst estimates -- was related to lower prices of turkeys. Lower prices often indicate lower demand. Meanwhile, HRL is enjoying robust demand for SPAM, which delivered its second straight quarter of double-digit revenue growth internationally. This dynamic possibly illustrates an inflationary environment shifting consumer tastes.
- HRL's prior remarks compounded the frustration today. The company cautioned in May that the most likely scenario surrounding its headwinds would be hitting the low end of its former FY24 net sales guidance of $12.2-12.5 bln. However, HRL lowered its FY24 revenue outlook today by $400 mln, considerably higher than the size of its Q3 top-line miss, to $11.8-12.1 bln.
There were still several highlights from Q3, including consistently sound results within HRL's Foodservice segment, which posted a 2% jump in volumes and 7% sales growth yr/yr, and recovery dynamics unfolding across parts of the company's International segment. Within Foodservice, HRL grew sales above its peer group. In International, HRL noticed a few encouraging trends as it recovers from a challenging environment last year, including rebounding characteristics in China, which is off to a solid start to Q4. Meanwhile, HRL's investments in the Philippines and Indonesia are producing meaningful benefits.
Nevertheless, investors are discouraged by the extent of HRL's production woes and the persistent softness in turkey prices. On the plus side, production continues to ramp and should be fully up and running by the end of Q4. However, the commodity component, being out of HRL's control, remains fluid and could linger into FY25. With so many moving parts affecting HRL, it may be better to deploy a wait-and-see approach.
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