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Dow Jones Rises as IBM Announces Major Spinoff, McDonald's Reports Positive U.S. Sales Growth

By Timothy Green – Oct 8, 2020 at 1:07PM

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IBM will break itself into two, and McDonald's is seeing a strong recovery in its home market.

U.S. jobless claims barely improved at all for the week ended Oct. 3, declining just 9,000 to 840,000. While the U.S. economy is recovering from the pandemic-driven stay-at-home orders put into place earlier this year, job losses remain a big problem.

The not-so-great unemployment news wasn't enough to derail the stock market. The Dow Jones Industrial Average (^DJI 0.45%) was up about 0.2% at 11:25 a.m. EDT, with International Business Machines (IBM -0.26%) the strongest performer. IBM announced a major spinoff, the biggest move yet from the tech giant to reposition itself for the cloud computing era.

Shares of McDonald's (MCD 0.63%) didn't fare as well, down slightly despite the company reporting U.S. sales growth and boosting its dividend.

A digital cloud against a black background.

Image source: Getty Images.

IBM announces major spinoff

IBM made a big bet on hybrid cloud when it paid $34 billion to acquire Red Hat last year. On Thursday, the tech giant announced that it would spin off its managed infrastructure services business, part of the global technology services segment, into a new independent company. The move will allow IBM to "sharpen its focus on its open hybrid cloud platform and AI capabilities."

The new company, called NewCo for now, will generate roughly $19 billion of annual revenue, making it the largest player in the managed infrastructure services industry by far. NewCo will serve 4,600 clients, including over 75% of the Fortune 100, and remain IBM's preferred partner for infrastructure.

IBM sees hybrid cloud as a $1 trillion opportunity. The company has lost the public cloud battle -- that market is dominated by Amazon Web Services and Microsoft Azure. But IBM has found that its clients find substantial value in a hybrid cloud approach compared to going all-in on public cloud. The spinoff will free up resources so that IBM can further invest in its hybrid cloud platform.

As it stands today, services account for more than 60% of IBM's revenue. Once the spinoff is complete, the bulk of IBM's revenue will come from software and solutions. Concentrating on high-margin software could help boost the bottom line, but the spinoff represents a step away from the integrated business model that has served IBM for many years.

IBM also provided preliminary third-quarter results. IBM expects to report revenue of $17.6 billion and adjusted earnings per share of $2.58 for the third quarter. Revenue was slightly higher than analyst expectations, while EPS was in line with estimates.

The spinoff, expected to be completed by the end of 2021, marks a sea change for a company that has failed to convince investors over the past few years that its transformation was making progress. Shares of IBM were up about 6.9% by late Thursday morning on the news. The stock is now down only slightly since the start of the year.

McDonald's reports solid U.S. results

Globally, McDonald's saw comparable sales sink in the third quarter due to weakness in international markets. Total comparable sales slumped 2.2%, down from a 5.9% gain in the same period last year. But the U.S. was a bright spot, despite falling guest counts. U.S. comparable sales rose 4.6%, driven by larger order sizes and strong performance in the dinner daypart.

Things looked even better in September, the final month of the quarter, with a marketing push driving low-double-digit U.S. comparable sales growth. Growth was positive in September for all dayparts, including breakfast. Less commuting during the worst of the pandemic hit breakfast sales the hardest.

"Our unique strengths, including our unrivaled drive-thru presence around the world, advanced delivery and digital capabilities, and marketing scale have become even more important during the pandemic," said McDonald's CEO Chris Kempczinski.

On top of the positive U.S. sales results, McDonald's announced that it was raising its quarterly dividend. The new dividend of $1.29 per share, payable on Dec. 10 to shareholders of record on Dec. 1, represents a 3% increase.

McDonald's stock didn't benefit from this news, and was down around 0.3% by late Thursday morning. Shares are still up around 14% so far this year.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of IBM. The Motley Fool owns shares of and recommends Amazon and Microsoft and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

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