Market Snapshot
Dow | 42156.97 | -173.18 | (-0.41%) | Nasdaq | 17910.34 | -278.81 | (-1.53%) | SP 500 | 5708.75 | -53.73 | (-0.93%) | 10-yr Note | +26/32 | 3.74 |
|
| NYSE | Adv 1149 | Dec 1566 | Vol 972 mln | Nasdaq | Adv 1288 | Dec 2944 | Vol 5.9 bln |
Industry Watch
Strong: Energy, Utilities, Communication Services |
| Weak: Information Technology, Consumer Discretionary, Financials, Industrials, Real Estate |
Moving the Market
-- Expectations for consolidation after solid run in Q3
-- Growing geopolitical angst after report suggested Iran launched a missile attack against Israel, but some relief that Iranian attacks were largely unsuccessful
-- Growth/inflation concerns stirred by start of East Coast and Gulf Coast dockworkers strike
-- Losses in Apple (AAPL) after Barclays suggested iPhone 16 demand is sluggish
|
Closing Summary 01-Oct-24 16:30 ET
Dow -173.18 at 42156.97, Nasdaq -278.81 at 17910.34, S&P -53.73 at 5708.75 [BRIEFING.COM] The stock market started the fourth quarter on a weak note. There are growing expectations for consolidation activity after a stellar third quarter and today's headlines provided fuel.
Initial reports indicated that the White House was concerned about a potential Iranian strike on Israel. This concern materialized, but subsequent reports suggested that most of Iran's missiles were destroyed by Israel's defense system.
The price action in equities, bonds, and commodities reflected uncertainty around the situation in the Middle East, but also reflected some relief that today's attacks by Iran were largely unsuccessful.
The major indices moved lower across the board, but closed above their worst levels of the session; Treasuries experienced some safe-haven buying, but opening gains dissipated somewhat by the close; and oil prices settled sharply higher, but pulled back from session highs by the close.
The market-cap weighted S&P 500 declined 0.9% after being down as much as 1.8%. The equal-weighted S&P 500 settled 0.5% lower after trading down as much as 1.1%. The 10-yr note yield, which dropped to 3.70% after the open, settled six basis points lower than Monday at 3.74%. WTI crude oil futures traded above $71.00/bbl at their highs, but settled at $69.74/bbl.
Other contributing factors in today's downbeat session included growth concerns that were stirred by the start of the East Coast and Gulf Coast dockworkers strike, along with another contraction reading (sub-50.0%) for the ISM Manufacturing PMI in September.
A sizable decline in shares of Apple (AAPL 226.21, -6.79, -2.9%) after Barclays suggested iPhone 16 demand is sluggish also clipped index performance. This price action weighed down the S&P 500 information technology sector (-2.7%), along with declines in Microsoft (MSFT 420.69, -9.61, -2.2%) and NVIDIA (NVDA 117.00, -4.44, -3.7%).
- S&P 500: +19.7% YTD (+5.5% for 11.9% YTD
- Nasdaq Composite: +19.3% YTD
- S&P Midcap 400: +11.3% YTD
- Russell 2000: +8.4% YTD
Reviewing today's economic data:
- The S&P Global US Manufacturing PMI fell to 47.3 in the final September reading from 47.9 in the preliminary reading.
- JOLTS - Job Openings totaled 8.04 million in August, up from 7.711 million in July (revised from 7.673 million).
- The September ISM Manufacturing Index checked in at 47.2% (Briefing.com consensus 47.7%), unchanged from August. The dividing line between expansion and contraction is 50.0%, so the September reading suggests the pace of contraction in the manufacturing sector was the same as the prior month. This was the sixth straight month (and 22nd out of 23) that economic activity in the manufacturing sector contracted.
- The key takeaway from the report is that it has reinforced the understanding that conditions in the U.S. manufacturing sector are weak, reflected further in the weakening employment index.
- Total construction spending declined 0.1% month-over-month in August (Briefing.com consensus 0.1%) following a downwardly revised 0.5% decline (from -0.3%) in July. Total private construction was down 0.2% month-over-month while total public construction was up 0.3% month-over-month. On a year-over-year basis, total construction spending was up 4.1%.
- The key takeaway from the report is that new single-family construction weakened further despite sliding interest rates.
Treasuries move off intraday low yields 01-Oct-24 15:40 ET
Dow -117.65 at 42212.50, Nasdaq -275.56 at 17913.59, S&P -49.72 at 5712.76 [BRIEFING.COM] The stock market turned slightly lower recently, but remains above session lows.
The Treasury market, along with the equity market, turned around somewhat after reports that most of Iran's missiles were destroyed by Israel's defense system. The 10-yr note yield, which dropped to 3.70% earlier, settled six basis points lower than Monday at 3.74% and the 2-yr yield, which hit 3.57% earlier, settled three basis points lower at 3.62%.
Oil prices also turned around somewhat, but still settled sharply higher. WTI crude oil futures traded above $71.00/bbl at their highs, but settled at $69.74/bbl.
META, GOOG propel communication services sector higher 01-Oct-24 15:00 ET
Dow -51.02 at 42279.13, Nasdaq -218.56 at 17970.59, S&P -37.17 at 5725.31 [BRIEFING.COM] The Dow Jones Industrial Average is down less than 40 points and the S&P 500 trades 0.7% lower after recovering off session lows.
The index level improvement coincided with reports from Israel that its Iron Dome missile defense system managed to destroy most of the strikes.
Also, some mega cap names extended gains, providing a measure of support to the broader market. Meta Platforms (META 578.67, +6.28, +1.1%) and Alphabet (GOOG 169.03, +1.84, +1.1%) are influential winners in the space, propelling the S&P 500 communication services sector to trade 0.7% higher.
CDW, HP lower in S&P 500 after Citi downgrades 01-Oct-24 14:30 ET
Dow -36.56 at 42293.59, Nasdaq -220.75 at 17968.40, S&P -36.84 at 5725.64 [BRIEFING.COM] The S&P 500 (-0.64%) is near afternoon highs currently down about 37 points.
Elsewhere, S&P 500 constituents Humana (HUM 297.99, -18.75, -5.92%), CDW (CDW 217.36, -8.94, -3.95%), and HP Inc. (HPQ 34.59, -1.28, -3.57%) pepper the bottom of the average. CDW and HPQ are lower after Citigroup downgraded both stocks to Neutral from Buy.
Meanwhile, Paychex (PAYX 140.87, +6.68, +4.98%) is atop the standings following earnings.
Gold higher amid geopolitical conflicts 01-Oct-24 14:00 ET
Dow -166.59 at 42163.56, Nasdaq -293.44 at 17895.71, S&P -54.52 at 5707.96 [BRIEFING.COM] The tech-heavy Nasdaq Composite (-1.61%) is today's worst-performing major average.
Gold futures settled $30.90 higher (+1.2%) to $2,690.30/oz, gains aided in part by the escalation of the conflict between Israel and Iran.
Meanwhile, the U.S. Dollar Index is up about +0.5% to $101.29.
ZEEKR Intelligent Technology driving higher as EV deliveries remained strong in September (ZK) The EV market in China is fiercely competitive and has been embroiled in an escalating price war for many months, but demand has been strong amid a challenging macroeconomic backdrop, as illustrated by this morning's batch of September sales reports. One of the clear standout performances in September came from ZEEKR Intelligent Technology (ZK), the Chinese premium EV maker that went public on May 10 of this year.
Following a 46% yr/yr increase in August, ZK's deliveries soared by 77% in September to 21,333 vehicles, pushing the company's cumulative deliveries to 339,506. Meanwhile, NIO (NIO), which also manufactures higher end EVs, such as the EL7 SUV, saw deliveries jump by 35% in September, while BYD Company (BYDDY) achieved a new milestone as quarterly deliveries surpassed the one million mark.
- In addition to the aggressive price cuts from EV makers, the roll out of more government subsidies has provided a jolt to demand. This past July, the PRC government doubled the trade-in subsidy for passenger cars to a maximum of 20,000 yuan.
- Furthermore, consumers have had more options to choose from as auto dealers build inventories ahead of the busy September and October months, and as EV makers continue to launch new, more affordable models to compete with Tesla (TSLA).
- On that note, XPeng (XPEV), which registered a 39% increase in deliveries for September, released its Mona M03 model this week with a base price that's under $17,000. This was preceded by NIO launching its own lower-priced brand called Onvo in May, which has a crossover vehicle called Onvo L60 that's priced about $4,000 less than TSLA's Model Y -- currently, the best-selling EV in China. In September, NIO delivered 832 L60 vehicles.
- ZK, however, is driving in the opposite direction, adding a new luxury vehicle to its lineup. On August 30, the company launched its mid-to-large SUV, the ZEEKR 7X, with deliveries beginning at the end of September. Next month, we should get a feel for how strong the market reception is when the company issues its October deliveries report.
The main takeaway is that, unlike the U.S., the EV market in China is gaining momentum as prices come down, as new models are launched, and as the government ramps up its subsidy program. Higher tariffs on Chinese EVs in the EU represent another potential speedbump, but up-and-coming EV makers such as ZK, NIO, and XPEV have so far defied the odds, emerging as legitimate competitive threats to TSLA and BYD.
McCormick continues to face crosscurrents in Q3, keeping a lid on revenue growth (MKC)
Investors are beginning to pepper McCormick (MKC) with buy orders today after the spices and seasoning mixes supplier exceeded bottom-line estimates in Q3 (Aug) by double-digits for the second straight quarter and increased its FY24 (Nov) outlook slightly. Right out of the gate today, the market's reaction was bland, reflecting mixed feelings toward the divergence between at-home and away-from-home consumption.
MKC's two segments, Consumer and Flavor Solutions, are split nearly equally, with just over half of its annual revs stemming from the retail consumer side and the rest from food service. While grocery price inflation is easing, dining-out prices continue to creep higher, spurring more individuals to consider cooking at home. This double-edged sword generates a give-and-take dynamic, keeping a lid on MKC's revenue growth.
- Sales were nearly flat yr/yr, inching 0.3% lower to $1.68 bln. However, volumes ticked 1% higher, a long-awaited milestone following many periods of negative growth, aided by relative strength in Consumer. Volume gains were relatively equal across each of MKC's regions outside of China, which tempered overall performance slightly. Management mentioned that the environment in China will likely remain challenged for the remainder of the year, a factor behind its still somewhat cautious FY24 outlook.
- MKC expanded its bottom line by over 27% yr/yr to $0.83, on a healthy 170 bps improvement in gross margins yr/yr, illuminating a decent job hiking prices without significantly disrupting volumes.
- In Flavor Solutions, sales slid by 1% yr/yr. The EMEA and APAC regions dragged down overall sales in this segment, posting an 8% and 1% drop, respectively. However, silver linings were present. The Americas enjoyed a 2% sales bump in the quarter and helped prop up consolidated volumes, which improved sequentially.
- MKC warned that consumers remain challenged, exhibiting value-seeking behavior and reducing their grocery store basket sizes. Meanwhile, food service traffic remains sluggish, especially in the quick-service restaurant space, a sour development for MCD, WEN, QSR, JACK, SHAK, and YUM, all of which are reporting earnings over the next month.
- As a result, MKC's raised FY24 guidance still contained an ounce of caution, projecting adjusted EPS of $2.85-2.90 from $2.80-2.85 and revenue growth of negative 1% to positive 1% from negative 2% to flat. Still, MKC was encouraged by the rise in food-at-home trends, particularly amongst the younger generations, as they replicate gourmet restaurant items. The company also continued to outstrip private label volumes in the quarter, showcasing its competitive advantages.
Crosscurrents are impacting MKC's quarterly results and may continue to do so until inflation rates wind down toward historical norms. However, in the meantime, MKC is capitalizing on the acceleration of at-home cooking while maintaining its competitive advantages over private-label alternatives.
United Natural Foods soaring as turnaround plan gains steam heading into its FY25 (UNFI) Food distributor United Natural Foods (UNFI) has struggled through a couple of tough years, as reflected by the stock's 56% plunge since the beginning of 2023, but the company's turnaround efforts are beginning to bear fruit. Bolstered by the benefits of its efficiency initiatives, significantly reduced shrink, and improving volume trends, UNFI comfortably surpassed top and bottom-line estimates for Q4, while achieving its strongest revenue growth since 2Q21 at +10.0%.
- A potent headwind facing UNFI is the consumer trend towards bargain and value shopping, including purchasing food items in bulk, which has greatly benefited Costco (COST) and Walmart's (WMT) Sam's Club. UNFI's largest customer, Amazon's (AMZN) Whole Foods Market, operates on the other end of the spectrum, offering premium and organic products at higher price points.
- In each of the past three quarters, UNFI's revenue growth has hovered around the flat mark, so it was encouraging to see the sharp acceleration in growth this quarter, which the company attributes to new business increases within its existing customer base.
- Thanks to the company's cost saving initiatives, particularly through G&A expense rationalization, operating expenses as a percentage of sales dipped by 30 bps yr/yr to 13.2%. Along with the 10% increase in net sales, UNFI's solid cost containment efforts enabled EPS to improve to $0.01 compared to $(0.25) in the year earlier period, and adjusted EBITDA to increase by 54% yr/yr to $143 mln.
- Perhaps more so than the actual Q4 results, the stock's strength today is tied to the rising optimism surrounding UNFI's three-year business plan that's designed to expand margins and free cash flow. A key component of that plan revolves around optimizing and consolidating its distribution centers. On that note, UNFI consolidated its Billings and Bismark distribution centers into other facilities this quarter.
- Relatedly, the company is focusing on reducing the capital intensity of its business through its network optimization strategy. Last quarter, UNFI cut its FY25 capex guidance to approximately $300 mln from its prior forecast of $370 mln -- a target that it reiterated in this morning's Q4 earnings report. This decrease in capex spending will allow UNFI to pay down debt and invest in higher-margin parts of the business, such as services.
- Over the next few years, the company also believes it has the opportunity to further improve its cost structure by implementing supply chain efficiencies and reducing transportation costs and shrink. In FY24, UNFI removed over $150 mln in costs and it anticipates a similar level of cost reductions as it implements its three-year plan.
The main takeaway is that while UNFI is still contending with a difficult business climate as traditional grocers cede market share to retailers like COST or WMT, the company is executing at a much higher level now as it moves ahead with its three-year plan.
Paychex's Q1 report checks out, sends shares to 52-week highs; headwinds continuing to ease (PAYX)
It was business as usual for Paychex (PAYX +3%) in Q1 (Aug), delivering another narrow earnings beat on in-line revenue growth. The payroll services and human capital management firm has a rich history of similar headline numbers each quarter. Since this builds in a certain expectation, other variables often influence subsequent price action. Guidance plays a dominant role, especially in today's uncertain environment, clouded by the usual headwinds of inflation and high interest rates. However, operating on the labor side of the market, a tight jobs market has also created hurdles for PAYX. Therefore, when stacked against this backdrop, PAYX reiterating its initial FY25 (May) guidance was sufficient to propel its stock to new one-year highs today. Today's job openings data coming in ahead of expectations also produced a tailwind.
- PAYX's 1.8% adjusted EPS growth yr/yr to $1.16 and 2.5% revenue growth to $1.32 bln underperformed the company's FY25 growth targets of +5.0-7.0% and +4.0-5.5%, respectively. However, management alerted investors last quarter that Q1 would lag due to two main headwinds.
- The first was a lower contribution from PAYX's Employee Retention Tax Credit (ERTC) service. The second was timing; PAYX experienced one less processing day in Q1 than in the year-ago period. The headwinds slashed over 400 bps off PAYX's top line in the quarter, with the impact seeping into its bottom line.
- PAYX's Management Solutions segment inched just 1% higher yr/yr to $961.7 mln, reflecting the ERTC headwind. However, the number of clients served still expanded in the quarter. Meanwhile, Professional Employer Organization and Insurance Solutions shined, jumping 7% to $319.3 mln due to worksite employee growth.
- Over the immediate term, PAYX is projecting accelerating revenue growth of +4-5% in Q2 (Nov) as the headwind from the expiration of the ERTC program eases. While PAYX anticipates moderate growth across its core small and medium-sized business (SMB) landscape, it continues to notice businesses looking for ways to drive efficiency, giving PAYX prime growth opportunities. PAYX is also actively implementing generative AI to differentiate its tools from competitors and drive additional efficiency gains for clients.
- Alongside guidance, PAYX's comments can also sway investor sentiment. CEO John Gibson remarked that the labor market is gradually returning to pre-pandemic levels while wage inflation is moderating. These are positive developments, particularly for SMBs, which are more sensitive to economic trends than larger enterprises. It was also an encouraging comment, given that PAYX noticed soft close rates and decision-making delays across the business landscape last quarter.
PAYX's Q1 report was sound, putting up consistent numbers despite lingering headwinds. With these challenges continuing to moderate while payrolls, HR functions, and various regulations grow more complex, SMBs will likely keep outsourcing these aspects of their business, putting PAYX in a firm position to maintain steady growth over the long term.
Carnival cruising lower despite topping Q3 estimates as Q4 outlook creates some waves (CCL) Cruise line operator Carnival (CCL) experienced another wave of demand in Q3, enabling it to exceed EPS and revenue estimates while delivering record results across a variety of metrics, but the stock is still drifting lower as investors lock in prior gains. Along with rivals Norwegian Cruise Line (NCLH) and Royal Caribbean (RCL), the company has been benefitting from robust and resilient demand for cruises, creating lofty expectations that drove shares higher by 25% since mid-August.
Coming off an impressive beat-and-raise performance in Q2 in which CCL touted broad-based strength in both its European and North American brands, the company upped the ante in Q3, achieving new quarterly records for operating income ($2.2 bln, +34% yr/yr), adjusted EBITDA ($2.8 bln, +25% yr/yr), and revenue ($7.9 bln, +15.2%). The problem, though, is that the market was already anticipating the strong Q3 results, putting the spotlight on CCL's guidance.
- While the company did increase its FY24 EPS guidance to $1.33 from its previous forecast of $1.18, partly to reflect its outperformance in Q3, its Q4 EPS guidance of $0.05 slightly missed the mark. Additionally, its Q4 Net Yield guidance of approximately 5.0% represents a drop-off from the +8.7% CCL registered this quarter.
- Net Yield is a key demand metric in the cruise line industry that strips out direct costs such as air transportation and travel agent commissions from the revenue line.
- At the same time, CCL is anticipating expenses to increase materially in Q4, forecasting adjusted cruise costs (excluding fuel per available lower berth day) of +8.0% yr/yr (constant currency), up from +3.5% in Q3.
In the big picture, these are relatively minor issues that do little to negatively alter the bullish narrative for CCL.
- On that note, the momentum behind CCL's business is showing no signs of slowing as nearly half of 2025 is already booked and with remaining inventory running at lower levels compared to a year earlier. This combination of healthy demand and leaner inventory is fueling record ticket pricing.
- Additionally, the 2026 season is off to a remarkable start with CCL generating record booking volumes over the last three months.
Overall, there was plenty to like with CCL's Q3 earnings report, which showed that consumers are still willing to spend on experiences like cruises. However, with the stock sailing sharply higher over the past several weeks, CCL's Q4 guidance provided enough of a reason for investors to take some gains off the table. |