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- Internal | February 20th, 2024
Internal | February 20th, 2024
[ good morning ]
Here’s everything you need to know today
With no meaty economic data on the horizon, markets are struggling to find direction as a new crop of earnings hits.
The market has been running fairly hot even when our rate environment remains unclear—so we’re honestly happy to see a little bit of pullback in early trading. We’re not calling for a full-on correction or anything, but some cooler price action can help us avoid a ‘melt-up’ that leads to a sharper drop towards the middle of the year.
Once again, a lot of the positive price action hitting the market today simply comes from big names beating less-than-stellar expectations. Retail names may have been a little too conservative about their prospects before the holiday season and investors are happy to reward big wins and bigger moves from the players who were able to adapt and survive.
So, let’s explore some of the biggest headlines moving the price action today as traders pack the market during a holiday-shortened week.
Markets at a Glance
*Market data based on standard trading hours and calculated close to close
[ credit ]
Capital One to Buy Discover in Massive Credit Merger
Finance just keeps consolidating
BREAKING NEWS
The financial industry came out of President’s Day weekend with a major shakeup: Capital One is buying Discover Financial in a massive all-stock deal.
WHAT HAPPENED
Capital One is effectively merging with Discover in a 100% stock deal valued at $35 billion. When the dust settles, this transaction will create an entirely new financial company with a new ownership structure. Capital One shareholders will own 60% of that company while folks with Discover stock will own 40%.
SYMBIOSIS
While folks mostly recognize Capital One as a credit company—they’re actually a bank holding company that issues Visa and Mastercard credit cards. Capital One is taking advantage of Discover Financial being historically cheap after missing their Q2 and Q3 profit estimates last year. Discover has a robust payments network that Capital One can use to replace its relationship with Mastercard and Visa.
Capital One also has much larger cash reserves than Discover—which will help their payments network as delinquencies continue to creep up. All things considered, this is a power move that will create a financial entity that will be a top-10 bank in the United States and a strong international payments player.
WHY IT MATTERS
We’re still deep in the ‘consolidation’ phase of this current cycle. The financial sector has seen a lot of acquisitions in the last 12 months and will probably see a good number more.
However, this merger is way more interesting than most given that this is two mid-tier players joining forces to take on the firms at the top.
For now, this deal hurts Visa and Mastercard more than anything since they just lost Capital One as a client. Capital One stock is also suffering because investors are afraid that the bank overpaid here. However, Discover Financial stock just secured the deal of the century and their shares are surging over 13% in early trading.
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Sectors at a Glance
| Sector | Day | Month | Year |
|---|---|---|---|
| Communications | -1.56% | 4.97% | 44.10% |
| Consumer Disc. | -0.59% | 2.14% | 20.70% |
| Consumer Stap. | 0.15% | 2.15% | -0.14% |
| Energy | -0.06% | 6.96% | 1.72% |
| Financials | -0.35% | 4.04% | 9.84% |
| Health Care | 0.32% | 4.33% | 11.13% |
| Industrials | -0.60% | 4.60% | 15.42% |
| Materials | 0.53% | 4.17% | 5.30% |
| Real Estate | -1.03% | -1.24% | -2.66% |
| Technology | -0.92% | 0.71% | 46.84% |
| Utilities | -0.11% | 0.44% | -9.93% |
*Market data based on standard trading hours and calculated close to close
[ e-commerce ]
Walmart Goes All-in on Ads With Vizio Acquisition
The smart TV maker just became a critical part of Walmart’s plan to stand tall against Amazon
BREAKING NEWS
Walmart is slamming the accelerator down on their growth ambitions after a statement earnings call this morning. Sales and profits are strong—so Walmart has confirmed the rumors and bought Vizio, the smart TV manufacturer. Let’s unpack all the details.
WHAT HAPPENED
First up: Walmart managed to crush expectations with a resounding $1.80 adjusted earnings per share (EPS) generated from $173 billion in revenue.
Both figures crushed expectations and defied analyst fears that consumer spending was in decline. That revenue number represents a 5.7% rise from last year.
Profit and revenue growth were lifted by a 30% YoY boost in Walmart’s advertising business. This galvanized Walmart management to move forward with a $2.3 billion cash-and-debt deal to buy Vizio. Vizio is a smart TV manufacturer that is one of the most popular items sold in Walmart stores.
Thanks to a strong price point, Vizio has a massive install base that they’ve leveraged to build an ad network of their own. Vizio’s smart TVs will join Walmart’s ad network and further cement Walmart’s push to compete with Amazon.
RUNNING OUT OF GAS
It’s not all rosy at Walmart though—all these great results overshadowed a Q1 guidance that came in a little more conservative than analysts were expecting. Basically, revenue growth at Walmart is leveling off while earnings will be muted as this Vizio transaction moves toward close. However, Walmart has soothed any concerns coming from that guidance with a massive boost to their dividend payout.
WHY IT MATTERS
With Amazon establishing world-class efficiency via a 3rd party seller network and advertising platform, Walmart has to work fast to keep pace.
This is a strong move on Walmart’s part to take advantage of rapidly rising e-commerce sales on their platform.
After years of lagging, it looks like lockdowns in 2020 helped galvanize a full digital transformation at America’s largest retailer. That transition is just starting to bear fruit—and things are very exciting at Walmart headed into 2024. Even with an expensive acquisition and some guidance concerns, Walmart rose over 5% in early trading.
[ retail ]
Home Depot Beats Diminished Expectations
But the home retailer is still struggling
BREAKING NEWS
Despite a drop in sales volume and smaller projects, The Home Depot managed to top earnings and revenue expectations in their earnings call this morning.
WHAT HAPPENED
Home Depot generated a respectable $2.82 EPS from $34.79 billion in revenue during Q4. However, these figures are still a decline from last year. Sales volume and average transaction sizes are still dropping with more moderation on the horizon.
ROCK AND A HARD PLACE
Even though Home Depot’s prices haven’t risen in the past year, inflation in other sectors has compressed budgets enough to force homeowners to take on smaller projects. Higher borrowing costs have also stopped professional contractors from taking on larger projects, which also pushes Home Depot’s revenue lower. Until a little more pressure is taken off the housing market, retailers like Home Depot will continue to get hammered from multiple angles.
WHY IT MATTERS
Ultimately, this is still a great earnings call for Home Depot given their current circumstances. The company is cutting costs and preserving earnings where they can — while driving growth in others.
Home Depot’s guidance is still fairly muted for the year, but not as bad as some analysts were fearing. Home Depot stock fell around 2% in early trading, giving back most of the 5% gain the name has earned since January.
Extra Moby Snacks
As traders continue to sour on China’s economic outlook—grim projections are starting to put a dent in the commodities market. With new industrial demand fears, Iron ore futures in Singapore dropped over 5% to lows we haven’t seen since November. This had a ripple effect punishing mining stocks worldwide.
GlobalFoundries surged over 6% in early trading after the Biden Administration announced that the chipmaker would be the latest company to receive grants as a part of the CHIPS act. GlobalFoundries is getting $1.5 billion in the form of grants so they can improve operations at chip making factories in New York and Vermont.
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