More than half of the 30 Dow Jones Industrial Average (DJINDICES: ^DJI ) members are trading up today. No fewer than six Dow companies reported earnings last night or this morning; as of lunchtime, two of these six were rising on strong results and a third traded down by about 1% due to a near miss.
But the other three Dow earnings reporters really hurt the index.
American Express (NYSE: AXP ) was down 2.1%, slicing 11 points off the index all by itself. UnitedHealth Group (NYSE: UNH ) one-upped the credit card giant, losing 4% and 20 Dow points. But these were lightweights in the Dow's price-weighted universe. IBM (NYSE: IBM ) is the second-heaviest member of the blue-chip index, steering some 7.4% of the Dow's total value. So when IBM shares drop 3.6%, as they did today, they take a hair-raising 46 Dow points along for the ride.
The three Dow laggards have more in common than you might think. All delivered strong results on either the top or bottom line, meeting or beating analyst projections, and all three missed on the other of these closely watched metrics.
UnitedHealth's story is simple. The health-insurance giant took a hit from the Obamacare rollout, which increased the addressable customer base but cut into profits. Stronger competition in key markets like New York didn't help much, either -- another side effect of the overhauled federal health insurance system. So UnitedHealth missed in terms of earnings even though revenue came in strong.
American Express swung the opposite deal. The credit card issuer and financial services all-rounder said American consumers were hesitant to take on new debt in the first quarter, but credit card balances sure racked up. The product mix led to a mildly positive bottom-line surprise even as revenue fell short of Street estimates.
And then there's IBM.
The Big Blue computing expert is in the middle of a wholesale strategy overhaul, dropping hardware and systems sales in favor of a stronger focus on software and services. CEO Ginni Rometty is building a different legacy than predecessor Sam Palmisano, who she replaced five quarters ago.
Change isn't always easy. This time, it's downright painful. IBM missed the Street's revenue targets on a huge drop in hardware sales, and there's more of that action coming up when IBM closes its sale of Power-based server products to Chinese peer Lenovo.
So IBM delivered earnings in line with analyst estimates but missed the Street's revenue target by $400 million.
Rometty recognizes the short-term pain but insists that it will all pay off by the end of 2014. "In the first quarter, we continued to take actions to transform parts of the business and to shift aggressively to our strategic growth areas including cloud, big data analytics, social, mobile and security," she said in the earnings release.
In prepared remarks for the analyst call, Rometty also promised to deliver relief in short order: "This quarter, as expected, we took a substantial charge to align our resources and skills to the demand profile we see. This charge impacts our results this quarter, but it will pay back within the year."
Of these three Dow stocks suffering a short-term setback today, the one that stands out as an opportunistic investment right now is IBM. I believe that Rometty's software-powered vision is the right strategy for the next several years. She still has to deliver on her big promises, but I see no reason to expect anything else.
Plus, IBM has always been refreshingly transparent about its long-term vision, publishing five-year strategy roadmaps for all to see. Warren Buffett looked at the road map in 2011 and decided to invest $10.5 billion in the company -- which sits way outside Buffett's traditional areas of expertise. With Rometty's rise already on the horizon, he must have seen this temporary pain coming.
If Buffett is all right with IBM's new strategy, and the revamped vision also makes sense in a ground-up analysis, then IBM looks like a bargain right now. And both of these statements are true in my eyes.
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