Cisco Pops, Wal-Mart Fizzles, and the Economy is Rebounding

The Dow Jones Industrial Average has a busy day as investors digest earnings from Cisco and Wal-Mart, along with a host of new economic data.

May 15, 2014 at 1:00PM
Take The Long View

The Dow Jones Industrial Average (DJINDICES:^DJI) dropped 169 points in early afternoon trading Thursday, continuing the retreat from the multiple record highs collected over the past week. Earnings releases and a fresh round of economic data dominated talk on the Street.

Big names post mixed results
Cisco Systems (NASDAQ:CSCO) popped and Wal-Mart (NYSE:WMT) fizzled Thursday in the wake of their respective quarterly earnings releases.

Cisco was up nearly 7% as of 1 p.m. EDT after a $0.03 beat on the earnings estimate from a Thomson Reuters survey. The company earned $0.51 per share on revenue of $11.55 billion, which also exceeded expectation of $11.36 billion. Revenue was actually down on a trend basis, but the decline was not as severe as expected.

The company saw growth across all regions except the Asia-Pacific, Japan, and China. Product revenue represented 76% of total revenue and was down nearly 9% year over year. Services represented the remaining 24% of total revenue, growing 2.6% year over year. 

Like many other industry players, Cisco continues to push into new cloud-based technology services, mobile, and data center management. The reality of this transition is lower revenue in the short term, in hopes of higher-margin growth in the future. Investors recognize Cisco's progress in this area and are rewarding the stock today for the progress in the quarter.

Meanwhile, Wal-Mart posted disappointing results this morning, sending the stock down 2.2%. 

Wal Mart Facade Fool Flickr

Bottom-line earnings came in at $1.11 per share, down from $1.14 a year ago. The big-box megaretailer blamed cold winter weather for the decline, and also noted that its tax rate for the quarter was higher than expected.

Wal-Mart faces tough competition from low-cost brick-and-mortar competitors and e-commerce rivals such as Amazon.com. This is translating into slipping revenue in the U.S., which has declined for five consecutive quarters. International sales were sufficient to negate this decline in the quarter, as total revenue grew by 1%. That said, the trend for Wal-Mart has investors concerned.

Positive economic data not enough to push Dow higher
New data released Thursday morning on the labor market and inflation indicate a likely rebound in the works after the first quarter's disappointing results.

Initial jobless claims dropped by about 24,000 to a seasonally adjusted 297,000 last week, the lowest level of new claims in seven years. This drop is encouraging for the increasingly healthy labor market, and continues the trend of fewer layoffs, more hiring, and a lower unemployment rate.

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts.

Also on Thursday morning, the Labor Department reported a 0.3% rise in the Consumer Price Index, or CPI, last month, driven by increasing food and energy prices. The index rose 0.2% in March. 

Excluding the rise in food and energy prices, core CPI grew by 0.2% in the month, roughly the same as in March.

The increase in CPI is a positive for the economy for two reasons: it eases fears of possible deflation, and it likely indicates an increase in growth in the economy. The country's gross domestic product figure can be seen as a combination of the nation's productive output plus inflation -- and after what's likely to be negative GDP growth in the first quarter, a little inflation is a great sign that the U.S. is back in growth mode today.

Adding it all up for the long term
Taking the long view, today's events paint a positive picture for the economy and markets. Cisco's quarter represents a positive move for the tech industry, demonstrating that the transition to next-generation enterprise services can be accomplished.

The economic data is welcome evidence that the first quarter's disappointing numbers are likely just a short-term hiccup. This is especially good news for Wal-Mart, a company so large that its numbers are often a bellwether of the macroeconomic landscape. Today's decline for the company is likely just a short-term blip, much like the weakness in first-quarter GDP.

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Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Cisco Systems. The Motley Fool owns shares of Amazon.com. 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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