Dow Stocks Remain Attractive Despite Earnings Warnings

Strategic Insights -

Some Dow companies have issued earnings warnings due to a slowdown in China and Europe's debt crisis, but profit margins remain strong at 17.5%, close to the 2007 peak of 17.75%. The Great Recession provided corporations the opportunity to cut costs, improve productivity, and strengthen balance sheets, enabling them to operate more efficiently. Investors should consider buying Dow stocks from a long-term perspective, but wait for guidance to be released and stock prices to reset before entering.

Key Takeaways:

  • Profit margins for Dow Jones Industrial Average members have widened to 17.5%, close to the 2007 peak of 17.75%.
  • Some investors were jolted by news that Europe's debt crisis and a slowdown in China is hurting Dow members, including DuPont (DD) and Intel (INTC), which reduced their earnings estimates.
  • Caterpillar (CAT) expects "improving but slow growth in the developed parts of the world," which has been a concern for the construction-equipment company.
  • The average dividend yield for Dow components is just under 3%, higher than Treasury yields.
  • DuPont's 2012 earnings guidance is 12% to 17%, while providing respectable revenue guidance of a 10% to 20% increase.
  • Intel lowered its fourth-quarter guidance due to a worldwide disk-drive-supply shortage, a broader industry theme playing out with limp demand for PCs.
  • Management teams have learned from the 2008 experience, where it's better to beat conservative guidance than to miss.
  • Dow stocks are attractively valued, trading at only 12 times forward earnings compared to 16 times earnings in 2008 and 2009.

Statistics:

  • Profit margins for Dow Jones Industrial Average members have widened to 17.5%, close to the 2007 peak of 17.75%.

Sources:

  • TheStreet.com
  • Lindsey Bell (linkedin to her Twitter account)
  • DuPont (DD) earnings guidance
  • Intel (INTC) earnings guidance
  • Caterpillar (CAT) earnings guidance