How IBM Single-Handedly Sank the Dow Today

Stock markets are broadly up today, but a bad day for IBM ruined any chance of the Dow Jones Industrial Average moving higher.

Jan 22, 2014 at 3:30PM

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

The Dow Jones Industrial Average (DJINDICES:^DJI) was down 0.16% in late trading today despite the broader stock market moving higher. By contrast, the Nasdaq and the S&P 500 are 0.47% and 0.12% higher, respectively, mostly because they're market cap-weighted, unlike the Dow.

Not only does the Dow encompass only 30 companies (unlike the Nasdaq's nearly 2,500), but the stocks are price-weighted, which means a single expensive stock can swing the index one way or the other. Today that stock is IBM (NYSE:IBM), which is down 3.2% and presently has 7.37% of the weight in the index. This single stock is pulling the Dow down by 0.25% all by itself.

What's going on at IBM?
IBM is plummeting on a sizable decline in fourth-quarter revenue. Total revenue dropped 5% year over year to $27.7 billion, which was short of the $28.3 billion estimate from Wall Street. Hardware sales fell 26% to $4.3 billion, so this one business accounted for most of the overall decline in revenue.  

As fellow Fool Anders Bylund pointed out earlier today, the weakness in hardware shouldn't be shocking because IBM has made a concerted effort to slowly rid itself of the low-margin hardware business over more than a decade. What we should be focused on is net income, where IBM reported a 6% increase to $6.2 billion, or $6.13 per share on an adjusted basis. That's well ahead of the $5.99 per share in earnings analysts expected, but that good news is getting little attention today.

For 2014, IBM also expects operating income per share to be above $18, up from $16.28 last year, so earnings growth is picking up. The move into high-margin businesses certainly appears to be paying off on the bottom line even if investors aren't impressed with the top-line growth.  

Investors should be buying companies for bottom-line growth, not just revenue growth. Revenue is really just the first step in making a profit, so IBM is performing very well if you're into profit growth.

The takeaway from IBM today
Headlines may show weakness in IBM's business because revenue is down, but exiting hardware for higher-margin businesses is a long-term strategy, not the calamity it's being made out to be. We should focus more on the growth of net income, which is where IBM is exceeding even Wall Street's expectations.

Meanwhile, the Dow's vulnerability to a single stock is something to be aware of before you start thinking the index is an indicator of how the market as a whole is doing.

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Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. 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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