Dow 30 Stock Roundup: Home Depot Beats, Chevron Issues $6B in Bonds - Analyst Blog

The Dow had a somewhat mixed week as oil prices took center stage once again. The blue-chip index slipped on Monday after a decline in oil prices affected energy shares. Reassurances regarding the timing of a rate hike during Janet Yellen’s semiannual testimony before the Senate Banking Committee helped the Dow gain on Tuesday.

The blue-chip index moved upward again on Wednesday as the Fed Chair concluded her two-day Congressional testimony. However, the Dow declined again on Thursday as mixed economic data and another decline in oil prices dampened investor sentiment. The Dow has gained 0.4% during the first four trading days.

Last Week’s Performance

Last Friday, the Dow gained 0.9% after Eurozone’s officials approved a four-month extension to Greece’s bailout program. According to the deal, the creditors decided to give an extension of four months to Greece in order to settle a bailout of 240 billion euros. The blue-chip index finished at a record high for the first time this year.

Meanwhile, Markit’s preliminary survey report showed that business activity is recovering in the common currency bloc. The index increased to 53.5 in February from January’s reading of 52.6, reaching its highest level in seven months.

On the domestic front, Markit’s PMI index for the U.S. rose to 54.3 in February from 53.9 in January. However, another decline in oil prices weighed on energy shares, which in turn eroded some gains.

Over the week, the Dow increased 0.7%. Encouraging earnings results had a positive impact on the benchmarks. However, slump in oil prices continued to dent investor sentiment. Moreover, Greek concerns and debate regarding hiking interest rate dampened investor confidence. Fed minutes, released last Wednesday, showed that while “many” officials said premature rise in interest rates will hamper U.S. economic recovery, “several” officials opined delaying the same will result in high inflation.

Meanwhile, most economic data on the domestic front including Empire State Manufacturing Survey Index, NAHB/Wells Fargo Housing Market index, Producer Price Index, Philadelphia Federal Reserve’s manufacturing index and housing starts were disappointing.

The Dow This Week

Monday’s calm trading session ended with the Dow slipping 0.1% after another decline in oil prices affected energy shares. Though the blue-chip index eased off its record high, it was able to erode a chunk of their initial losses following a late-afternoon rally. VIX improved on Monday after it had dropped to the lowest level this year on Friday.

Investors also refrained from betting as they want to find out what Federal Reserve Chairwoman Janet Yellen has to say in her semiannual testimony. Fed minutes released on Feb 18 showed officials debated the effects of hiking interest rates from near zero level. The day was largely devoid of any major news. However, the Dow was negatively affected by the 2.3% fall in shares of The Boeing Company (BA).

The blue-chip index gained 0.5% on Tuesday following Janet Yellen’s semiannual testimony before the Senate Banking Committee. The Fed Chair said the Fed will decide on a rate hike "on a meeting-by-meeting basis." She also reconfirmed that the Fed will evaluate economic conditions before considering a rate hike. Additionally, Yellen stated that dropping the word "patient" from the Federal Open Market Committee’s (FOMC) statements does not imply that the Fed will raise interest rate immediately.

Investors interpreted her dovish comments as an indication that rate hike may only come in the latter half of the year. Meanwhile, the S&P/Case Shiller composite index of 20 metropolitan cities rose 4.5% year on year in December, higher than 4.3% gain in November. Meanwhile, Markit’s flash PMI for the U.S. services sector increased from 54.2 in January to 57.0 in February, reaching its highest level since October. However, Consumer Confidence Index declined to 96.4 in February from January’s reading of 103.8. The Dow reached a record high for second time this year.

Markets remained almost unchanged on Wednesday as Janet Yellen concluded her two-day Congressional testimony. Yellen stated the economy is growing at a steady pace with a rapid decline in unemployment rate and impressive recovery in labor market.

However, she also said that some areas of the economy remain weak. This includes slow growth in housing sector and sluggish wage growth. She added that slump in oil prices is one of the main reasons behind low inflation rate. Ultimately, the Fed Chair failed to provide enough clues to investors regarding rate hike.

Meanwhile, oil prices registered strong gains following comments from Ali al-Naimi, Saudi Arabia’s oil minister. Al-Naimi said oil demand is rising and oil market seems to be “calm now.” The Dow gained nearly 0.1%.

The blue-chip index lost nearly 0.1% on Thursday as mixed economic data and another decline in oil prices dampened investor sentiment. Consumer Price Index (CPI) declined 0.7% in January, witnessing its first drop since 2009.

Meanwhile, a separate report showed that initial claims increased to 313,000 in the week ending Feb 21 from previous week’s tally of 282,000. Moreover, the 4-week moving average came in at 294,500 in the week, increasing 11,500 from the prior week. However, durable goods gained 2.8% in January to $236.1 billion, outpacing the consensus estimate of 1.3% increase. This was also the biggest gain in six months.

Separately, increase in crude inventories weighed on oil prices yesterday. On Wednesday, the U.S. Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories rose 8.4 million barrels in the week ending Feb 20 to 434.1 million. This is the highest level of inventories witnessed in last 80 years.

Components Moving the Index

The Home Depot, Inc.’s (HD) adjusted earnings of $1.00 per share jumped nearly 37% from the year-ago quarter and surpassed the Zacks Consensus Estimate of 89 cents. Including one-time items, the quarterly earnings surged 43.8% year over year to $1.05 per share.

Net sales advanced 8.3% to $19,162 million from $17,696 million in the year-ago quarter, beating the Zacks Consensus Estimate of $18,672 million. The company’s overall comparable-store sales (comps) increased 7.9% while comps in the U.S. stores grew 8.9%.

The company declared a 26% hike in its quarterly dividend to 59 cents a share, payable on Mar 26, 2015, to shareholders of record as on Mar 12. Also, management authorized a share buyback plan of roughly $18 billion, which it aims to complete by 2017 as one of its capital allocation goals.

Home Depot expects diluted earnings per share to grow in the range of 8.5%–10%, with earnings expected in the band of $5.11–$5.17 per share in fiscal 2015. This guidance includes the expected impact of share buybacks in the fiscal.

Chevron Corp. (CVX) has issued bonds worth $6 billion, according to Bloomberg. These are rated AA by Standard & Poor’s. This reflects the biggest debt issuance by the integrated player since last July. The company will likely utilize the proceeds to refinance short-term debts and for normal corporate activities.

Out of the total offering, Chevron sold five-year $1.75 billion bonds having 1.961% coupon. The notes yield only 50 basis points more than the Treasury securities having the same maturity. Chevron will bear a lower cost of debt, especially in a weak crude pricing environment.

Pfizer Inc.’s (PFE) supplemental New Drug Application (sNDA) for Rapamune (sirolimus) has been accepted for priority review by the FDA. The company is looking to get the drug approved for the treatment of lymphangioleiomyomatosis (LAM) – a rare lung disease.

With the FDA granting priority review status to the sNDA, a response should be out by June this year. Rapamune has already been approved for the prevention of organ rejection in kidney transplant patients aged 13 years or older. The approval of Rapamune is expected to provide significant benefits to patients suffering from LAM considering the lack of approved treatments.

3M Company (MMM) recently announced its decision to acquire Polypore International Inc.’s Separations Media business for $1 billion cash. Post completion, Separation Media will be merged with 3M's purification business.

This acquisition is likely to expand 3M’s existing core filtration platform in many high-growth segments and strengthen its position in technology, manufacturing and branding. Also, the company will now be able to meet customers’ requirement for high-value filtration solutions more effectively. 3M expects the transaction to contribute 4 cents to recurring earnings in the first year following completion of the transaction.

Merck & Co. Inc. (MRK) announced that it has entered into a multi-year agreement with privately-held biotech company NGM Biopharmaceuticals, Inc., for the research, discovery, development and commercialization of novel biologic therapies across a broad range of therapeutic areas.

Merck intends to make an upfront payment of $94 million and acquire 15% equity stake in NGM for $106 million. Also, the company can pay up to $250 million on the fulfillment of certain conditions.

NGM has the option to either receive milestone and royalty payments (in certain cases) or share cost and revenue up to 50% prior to Merck initiating a phase III study for a licensed program. The agreement between the companies is initially for five years, but Merck will have the option to extend the research agreement for two more two-year terms.

JPMorgan Chase & Co. (JPM) is set to shut down around 300 bank branches, reflecting 5% of its total branch network of 5,602, over the next two years. The branch closures plans reveal an effort to prioritize advising retail banking clients over operating daily transactions. Notably, JPMorgan has closed 28 branches in 2014.

JPMorgan also intends to achieve annual cost savings of $1.4 billion, primarily in its consumer and investment banking. It expects expense reduction of $2.8 billion (excluding legal costs) in its investment banking business and around $2 billion in its consumer banking business. Management anticipates expenses to be nearly $57.0 billion in 2015, declining from $58.4 billion in 2014.

Performance of the Top 10 Dow Companies

The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has gained 1.1%.

Ticker

Last 5 Day’s Performance

6-Month Performance

V

+1.5%

+26.3%

IBM

+0.3%

-16.6%

GS

+1.7%

+8%

MMM

+2.2%

+17.3%

BA

+1.3%

+18%

CVX

-5%

-16.5%

UTX

+1.2%

+11.8%

XOM

-5.1%

-11%

MCD

+4.1%

+5.7%

CAT

-1.6%

-22.5%

Next Week’s Outlook

Fed Chair’s testimony and oil prices have been the major factors guiding markets this week. While Yellen’s comments have reassured investors, oil prices continue to be a cause for concern. They continue to impact stocks, with markets responding positively on the only day they moved upward.

Meanwhile, economic reports are making their presence felt. Overall, the data has been mixed in nature. The housing recovery continues, even though the pace of gains has slackened. Durable orders have moved upward, but inflation continues to be a cause for concern. Weak growth in prices has also been emphasized in the Fed Chair’s speech.

Oil prices may continue to guide markets in the absence of economic concerns. A series of crucial economic reports are lined up for release, starting today. This includes all important GDP numbers to be released today, as well as data on manufacturing, services, factory orders and unemployment. If most of these are positive in nature, markets are likely to receive a boost in the days ahead.

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