3 Dow Stocks to Watch: Johnson & Johnson, Verizon, and IBM

Dow earnings watch: Johnson & Johnson and Verizon report, with IBM on tap

Jan 21, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After the long weekend that capped a losing week for stocks, the major indexes opened mixed this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.16% and down 0.22%, respectively, at 10:15 a.m. EST. This is a heavy day for blue-chip earnings: two Dow components, Johnson & Johnson (NYSE:JNJ) and Verizon (NYSE:VZ), announced their fourth-quarter results this morning, while IBM (NYSE:IBM) will do the same after the market closes.

Johnson & Johnson illustrates a situation that may confound a beginning investor: Excluding special items, the pharmaceuticals company earned $1.24 per share in the fourth quarter, $0.04 ahead of Wall Street's expectations and a 4% year-on-year increase. Revenue rose 5% to $18.36 billion -- also above the consensus estimate. Why, then, is the stock down 2.3% at 10:15 a.m., dragging on the index?

The trouble is that the company announced earnings guidance for 2014 that amounted to a "miss" relative to analysts' expectations. Johnson and Johnson's range of $5.75-$5.85 tops out at the $5.85 consensus estimate. That is the cruel reality of the stock valuation treadmill: Yes, prescription drugs performed well in the fourth quarter and, yes, the medical devices business improved, but those earnings are now "in the bag", while the stock price reflects only the stream of future earnings. On that basis, the stock looks fairly approximately priced to me, at just under 17 times next 12 months' earnings-per-share estimate.

Verizon, meanwhile, announced adjusted earnings per share of $0.66 -- beating the Wall Street estimate by a single penny – on fourth-quarter revenue of $31.1 billion (in line with expectations). The stock, though, is down 1.7% in early trading.

Even as the competition for mobile customers is heating up, Verizon Wireless managed to add 1.6 million new subscribers in the fourth quarter -- more than the 1.5 million average in a Reuter mini-poll of five analysts.

Another positive: Verizon says improving return on invested capital is one of its priorities in 2014. The company is already extremely profitable, with a 2013 EBITDA (earnings before interest, taxes, depreciation, and amortization -- a measure of cash flow) margin of 47% and $22.2 billion in free cash flow (a 45% annual increase).

IBM, the second-heaviest weighted stock in the Dow, will announce its fourth-quarter results at 4:30 p.m. EST. The report will be closely watched as a barometer of corporate investment in technology. Separately, The Financial Times reported this morning that the company may be in talks to sell its low-end server business to Lenovo. IBM has been shopping this business for some time, and a sale would be a logical step in its migration toward higher-margin activities.

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of International Business Machines and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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