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Morning Commentary

Rev Up Those Diesel and Electric Trucks

By Charles Payne, CEO & Principal Analyst
2/20/2018 9:45 AM
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It’s been a tale of two markets in the last two weeks, so there is lots of nail-biting coming into this week’s trading.  From a technical point of view, for the Dow Jones Industrial Average, we are right at my key number 25,200. On the upside, I see one big hurdle around 25,500, but through there, we could  see a quick re-test of the all-time high.

Conversely, a move under 25,000 could take us back to 23,850.

A lot of news last week made headlines and got airtime, but there were also developments released last week that give us a better insight into the state of the underpinnings of the economy.  Two of my favorites point to strength and momentum that emerged in the middle of 2017 continuing into 2018.

Rev Up That Diesel

The economic circulatory system of America is our highways and trucks. It represents the blood that flows through it as 70% of all freight (worth$700 billion) annually travel by truck. It’s no wonder Tesla wants a piece of the action, with its fancy $180,000 rigs being tested by some of the biggest companies in America.

 

Big Wheels Keep On Turning

As a proxy for the health of the economy, truck sales are zooming.  In January, orders topped 47,000, +116% from a year earlier and up 160% from January 2016.

Keep in mind that these new trucks cost an average of $120,000, which means orders for them are never a leap of faith, but instead a reaction to real changes in the economy.

The same thing is happening with earth-moving equipment around the world, including North America.  Coming into 2017, sales continued the long-term trend of year-to-year declines in such equipment, which changed in the middle of last year. Even those semi-trucks have moved the pedal to the metal.

I’m also excited about the state of the American consumer. I think we’ll continue to see more signs of spending beyond discount stores and eating at home.

Today, we’ll get a chance to see if I’m right with earnings from restaurant chains Cracker Barrel (CBRL), Domino’s (DPZ), and DineEquity (DIN).  In addition, the potential market-moving results, however, are from Home Depot (HD) and Walmart (WMT).

It promises to be another exciting week.

Today’s Session

There is xixed results and reactions to two behemoths reporting this morning. Let’s just say, it will feel like the best of times, and the worst of times, respectively.

Home Depot

The Company beat Wall Street consensus on revenue, earnings and margin expansion. Furthermore, management increased its dividend 15.7% to $1.03.

Comp store sales +7.5%

I put a lot of weight on pricing power that doesn't deter transactions/volume, which is what Home Depot did last quarter.  It was just about a perfect quarter.  The stock has a 5.1% weighting in the Dow Jones Industrial Average, trailing only four other companies.  But, the carnage at Walmart is too severe to be offset at the start of trading.

Walmart

The Company beat on revenue, but its earnings per share of $1.33 missed Wall Street consensus by $0.04.  There was good news, including comp store sales +2.6% against estimate of +2.0%, as the company enjoyed its 14th consecutive quarter of sales growth.  The Company, and its share price, have been a juggernaut after a Phoenix-like revival over the past three years.

The source of this recovery, however, has been its growth online. 

This quarter, online only grew at 23% from 50% in the preceding quarter.  This news, coupled with earnings guidance of $4.75 to $5.00 that is only in-line with the street $5.00, is pressuring the stock.  Management is saying online will rebound to 40% growth, but investor skepticism has returned…and so, too, the selling.

The stock will endure its worst down opening in seventeen years.

Overall, the mood has shifted to selling and heightened anxiety.  It’s a natural extension of the last two weeks and something the market must endure for a foundation to the next leg higher.

 


 

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