Why Hewlett-Packard's Blowing the Dow Away
May 23rd 2013 2:38PM
Updated May 23rd 2013 3:25PM
Fear has held the Dow Jones Industrial Average back today after international markets were hammered overnight. The blue-chip index has dropped a nominal four points as of 2:30 p.m. EDT. What has kept the Dow afloat on a day when markets around the world are sinking? Thank Hewlett-Packard , which has roared to massive gains following last night's earnings report. Let's dig into the stories you need to know about today.
China takes down the market, but HP soars
The markets' woes began before U.S. markets opened this morning when it was reported that Chinese manufacturing slumped into contraction territory for the first time in more than half a year. The decline raised fresh concerns about China's slowdown as growth continues to tighten in the world's second-largest economy. Asian markets reacted violently: Japan's Nikkei plunged by 7.3%, and Hong Kong's Hang Seng fell 2.5%. The Hang Seng has been unable to keep up with other world markets this year, falling 3.5% year to date as China's slowdown takes its toll. Today's data won't help it recover its losses.
Despite the downbeat data from across the Pacific, however, HP has blown the doors off the Dow with a remarkable gain of 14.7%. The company's earnings per share beat analyst expectations, rising slightly year over year when adjusted for one-time items. Revenue fell more than 10%, thanks in part to a 20% drop in PC sales -- hardly surprising, considering the PC market's nosedive.
Yet HP's expectations for the future sparked investor optimism. HP expects earnings for the current quarter to top analyst projections, and CEO Meg Whitman plans to continue cutting costs by axing another 29,000 jobs by the end of fiscal year 2014. Still, investors need to be careful with this volatile stock. While Whitman has done a good job driving down the company's costs, until HP can turn around sales in a meaningful way, it will be in danger of losing more ground to competitors. The company's turnaround plan may look nice, but its results have hardly justified the stock's 70% gain this year alone.
HP is not the only reason the Dow is staying near breakeven. IBM is up just 0.2%, but the Dow's price-weighted formula means IBM's gains make a much bigger difference than many of today's losers. IBM's per-share cost of more than $200 -- far more than any other single stock on the Dow -- gives this stock plenty of influence in the Dow's activity.
IBM has offered an interesting change-up recently by positioning Watson, its robot that gained publicity for its success on Jeopardy, as a customer service agent. IBM's Watson Client Engagement Advisor is a step to bridge the gap between cheap automated customer service and actual humans, offering a more insightful technological assistant with all the knowledge of a computer at hand. It's an interesting take on traditional customer service that could, at the very least, relieve customers frustrated with traditional automated service.
Alcoa leads the Dow downward today with losses of 2.2%, a casualty of China's downbeat data. The metals industry as a whole has suffered from pricing pressures and lack of demand, and Alcoa has been one of the worst Dow performers year to date. With Chinese aluminum-suppliers projected to increase production and further dilute the market, the slowdown in the world's second-largest economy won't help boost prices -- something Alcoa desperately needs to turn around its fortunes.
Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant, simply click here now to get started.
The article Why Hewlett-Packard's Blowing the Dow Away originally appeared on Fool.com.Fool contributor Dan Carroll 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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