A Temporary Pause

The Federal Reserve’s Chairman Jerome Powell delivered his testimony to Congress today, providing an outlook for the economy and banking system. Several other central bank members also spoke, creating a lot of headlines. 

Let’s look at some key soundbites so you don’t have to watch the full three-hour video. 👇

First, in light of the recent banking failures, lawmakers asked for more details on the Fed’s plans to revise its supervision and regulatory practices. Powell’s response suggested that community banks are not the focus of the regulatory changes and that the Fed does not want to encourage further consolidation in the industry. Instead, they’re focused on ensuring regional banks and others maintain adequate funding through changes to capital requirements and other balance sheet-focused rules. 🏦

On the economy, Powell admitted that it’s holding up better than anticipated. However, inflation remains too high (and sticky). As a result, he said that most Fed officials think interest rates will need to move up further to bring prices back to their long-term 2% target. He noted that the Fed remains in a tough sport, overachieving on its employment mandate. While it’s politically difficult to say unemployment needs to rise to bring down inflation, that remains the case. But so far, there’s been little response from the labor market, suggesting rates may need to be higher for longer. 🦅

Some lawmakers raised questions about the Fed’s balance sheet size, which more than doubled during the pandemic. Powell reiterated that the Fed is running down its holdings by $1 trillion annually, letting securities roll off as they mature. They do not intend to sell assets. Regarding the Fed needing to borrow marginally more money from the Treasury, Powell noted that the Fed doesn’t consider fiscal goals when managing its balance sheet. 💧

Democratic lawmakers hammered home their concerns about the Fed’s rapid rate increase impact on the economy. Given the upcoming election, they’re concerned about unemployment rising significantly, even if they want inflation to decrease. On the Republican side, concerns over banking regulation and further tightening of credit conditions were the key topics.

Many were surprised at how cordial the discussions were, considering the last Fed Chairs to raise rates significantly received a very different reception from lawmakers. In the meantime, everyone will continue watching inflation and employment data while awaiting the timing of the next hike. 👀

We all love our pets. But today, investors seemingly love medical supplies conglomerate Patterson Companies, which primarily deals with veterinary and dental supplies. The mid-cap company reported stronger-than-expected fourth-quarter results, topping revenue and earnings estimates. 🔺

Adjusted earnings per share of $0.84 on revenues of $1.72 beat the expected $0.84 and $1.66 billion. The company’s cost-reduction efforts and product mix drove adjusted gross margin expansion, and it returned $156.8 million to shareholders in fiscal 2023 through dividends and share buybacks. 🍖

The company’s Dental segment reported $683.5 million in sales. Internal sales rose 8% YoY, broken down as such:

• Internal sales of consumables +0.3% YoY
• Internal sales of consumables (excluding infection control products) +4.4% YoY
• Internal sales of equipment +19.2% YoY
• Internal sales of value-added services +13.4% YoY

Patterson Animal Health sales were $1.03 billion, with internal sales growth of 3.2% YoY:

• Internal sales of consumables +2.4% YoY
• Internal sales of equipment +16.7% YoY
• Internal sales of value-added services +52.6% YoY

Looking ahead, it initiated fiscal 2024 adjusted earnings guidance of $2.45 to $2.55 per share. However, it did not provide a revenue outlook. Executives expect the company’s strong competitive positioning to offset continued inflationary trends and higher interest rates that weigh on costs and demand. 🔮

$PDCO shares rallied 15% on the news as investors appeared optimistic about the future. 👍

We’re on a homebuilder kick, building on our previous coverage from this week and last. With low existing inventory buoying demand for new homes, let’s look at what KB Home had to say about the current environment. 👀

The mid-cap homebuilder reported adjusted earnings per share of $1.94 on revenue of $1.77 billion, alongside other key stats:

• Homes delivered rose 6% YoY to 3,666
• Average selling price declined by 3% to $479,500
• Homebuilding operating income fell 23.5% YoY to $202.1 million
• Adjusted homebuilding operating income margin fell 380 bps YoY to 11.7%
• Selling, general, and administrative expenses as a % of housing revenues rose 20 bps YoY to 9.6%

Executives say the improving demand from February was sustained throughout the second quarter. As a result, the company saw a monthly sequential increase in net orders, resulting in an overall absorption pace of 5.2 net monthly orders. While its backlog has been cut in half YoY, its ending community count expanded by 16%, and its average community count rose by 20%. 🏘️

Overall, the company continues to take a balanced approach in the current environment. It recognizes that the uncertain macroeconomic environment is weighing on aggregate demand and that sticky inflation is keeping pressure on costs. However, it believes its strong balance sheet and mix of new orders, backlog, and land investments should set it up to hit its fiscal ’23 targets. 🎯

Investors are seemingly optimistic, as $KBH shares rose another 1% after hours to fresh all-time highs. It is the latest homebuilder stock to make new highs in the current environment. 📈