International Business Machines Corp. (NYSE:IBM) reported less-than-stellar results on April 18. The next day the stock price dropped like a rock, down more than 8%. A third of the gain made over the last two years was wiped out.
Big Blue, the highest-priced stock in the Dow Jones industrial average, dragged the entire index down and it barely broke even. The broader market was mostly up on the day.
Are things really that bad with a company that had appeared to make a successful transition from the world’s biggest maker of PC’s to one of the biggest business-to-business suppliers of services and computer hardware and software? Will the most innovative company in the world have to reinvent itself again?
For the first time since 2005, the company reported earnings that were lower than consensus estimates. And as a supplier to most of the large-cap companies that are fellow members of the S&P 500 and to many government agencies, some analysts portend that the results are an ominous signal that the broader market and the economy are due for a setback, too. The theory is that if IBM is not making money its corporate customers are holding back on spending.
In the past, the company has been able to overcome sagging revenue, like the 5% drop just announced, and increase EPS by buying back boatloads of its own stock, spending over $100 billion in the process over the last 10 years. Share count has gone down by 35%. IBM has also returned even more value to investors by consistently raising its dividend.
This time financial engineering may not work and International Business Machines Corp. (NYSE:IBM) will probably need to close more deals in order to grow earnings again.
Fast food lagging too
Another Dow component reporting results that disappointed analysts was the fast- food restaurant chain McDonald’s Corporation (NYSE:MCD), which missed earnings estimates by a penny. The stock suffered and shares were down by about 2% on the day, interrupting a recent rally.
For the last year or so, the company has been warning that same-store sales were declining and could hurt McDonald’s performance. I guess they were right.
McDonald’s Corporation (NYSE:MCD) has been addressing the revenue weakness by trying to lure customers away from competitors with advertising and offerings geared toward the low-priced dollar menu instead of the “Extra Value” meals. Management stated it was willing to reduce margins in order to improve sales.
Based upon its history, the company will probably be able to ride out the storm. It appears to know what to do.
Lights out ?
The Dow’s oldest member also reported results recently. General Electric Company (NYSE:GE) said that earnings grew by 16% in spite of flat-revenue gains and it lowered full-year projections into the “single digits.” Previously, the company was expecting at least low double-digit growth for the full year.
The company was hurt by an “unexpected 17% drop in sales in Europe,” blaming it on the austerity measures taking place in the euro zone. Haven’t they been keeping an eye on the problems there?
The bad results in Europe were somewhat offset by improvement at GE Capital and cost-cutting measures across the enterprise.
The lowered guidance drove the stock down by 4% on the day of the announcement, cutting into a chunk of the 17% run-up in share price over the past year.
General Electric Company (NYSE:GE) did have a bright spot during the quarter. As a sign of improving future profitability perhaps there was a jump in order backlog to $216 billion.
The company didn’t appear to offer any solutions to overcome the reduced guidance going forward. Unless it offers more clues, the stock may not resume its upward march and shareholders will look elsewhere.
Conclusion
Three long-time members of the Dow posted “disappointing” quarterly results.
One, International Business Machines Corp. (NYSE:IBM), says it needs to execute better but not change overall strategy. That may be a good approach for such a huge company, one with a valuation of over $200 billion.
Another, McDonald’s Corporation (NYSE:MCD), says it is in the midst of reversing course and will emphasize lower-priced product offerings. Since it is a smaller company than International Business Machines Corp. (NYSE:IBM), with a market cap more than 50% lower, it’s more flexible in what it can do and has a good chance of being successful.
A third, General Electric Company (NYSE:GE) appears to be willing to let things slide and hope for the best. They keep saying things will get better in the future. That may not be the best approach.
Like the 1977 song by Meatloaf, two out of three ain’t bad.
The article Three Dow Stocks Disappoint originally appeared on Fool.com and is written by Mark Morelli.
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