Dow 30 Stock Roundup: AT&T Buys DIRECTV, Home Depot Earnings Surge - Analyst Blog

The Dow had a good week, but for Tuesday when it snapped a two-session winning streak to close in the red. Gains in Internet, bio-tech and small-cap stocks boosted the blue chip index on Monday. The Dow closed in the red on Tuesday following declines in retail stocks and disappointing sales numbers from Caterpillar Inc. CAT.  

Positive indications from the FOMC meeting helped the Dow gain on Wednesday. Small-cap and high-growth stocks moved higher, while existing home sales increased on Thursday. These factors combined to help the blue chip index move up 0.1%. During the first four trading days, the Dow has gained 0.19%.

Last Week's Performance

The Dow gained 0.3% on Friday and fellow benchmarks also ended in positive territory boosted by gains in in small-cap stocks and advances in the consumer discretionary sector. Markets also received mixed economic data on Friday. While a surge in construction of new U.S. homes in April lifted investor sentiment, an unforeseen fall in consumer sentiment in May adversely affected the mood.

Despite Friday's gains, the blue-chip index finished in the red for the week, losing 0.6%. Disappointing earnings numbers from Wal-Mart Stores Inc. WMT and Cisco Systems, Inc. CSCO were the primary reasons for the losses. Less-than-expected first quarter GDP growth in the Euro zone, a decline in small-cap stocks and a selloff in the consumer discretionary sector also had a negative impact on the benchmarks.

The Dow This Week

The blue chip index gained 0.1% on Monday, boosted by gains in Internet, bio-tech and small-cap stocks. However, developments on the deals front were mixed, limiting the Dow's gains. While AT&T, Inc. T agreed to acquire DIRECTV DTV, Pfizer Inc.'s PFE final bid was rejected by AstraZeneca PLC AZN. Investors witnessed one of the slowest trading days on Monday as trading volumes turned out to be the third-lowest this year.

Benchmarks snapped a two-session winning streak and ended in the red on Tuesday due to declines in retail stocks. Caterpillar Inc.'s disappointing sales figures also weighed on the benchmarks, especially the Dow. Global machine sales plunged 13% during the three-month period ending in April. This was the biggest drop in machine sales since February 2010. Shares of the company dropped 3.6%. The blue chip index lost 0.8%.

Encouraging minutes from the FOMC meeting helped benchmarks end higher on Wednesday. Fed officials discussed monetary tightening while remaining flexible on such a measure. They also discussed approaches to hiking rates, but clarified this was not an indication that rates would be hiked immediately. Meanwhile, gains from consumer discretionary and energy stocks also helped benchmarks finish in the green. These positives helped the Dow gain nearly 1.0%, its largest daily percentage jump in a month.

Gains in small-cap and high-growth stocks drove benchmarks higher on Thursday. Markets also received mixed economic data. While claims for unemployment benefits increased, existing home sales rose for the first time this year. Existing home sales increased 1.3% to a seasonally adjusted annual rate of 4.65 million in April from 4.59 million in March. Sales also rose at the fastest pace since December 2013. The blue chip index gained around 0.1%.

Components Which Moved the Index

AT&T, Inc. has finally reached a definitive agreement to buy DIRECTV for $48.5 billion. The proposed deal has been approved by the Boards of Directors of both companies. According to the press release, the deal is expected to be a combination of cash and stock bid of $95.00 per share based on AT&T's Friday i.e., May 16, closing price.

Besides offering financial synergies, the prospective buyout will likely elevate AT&T's position in the pay-TV business, which is currently catered to by its U-Verse brand. Further, it will enable AT&T to provide bundled services that would include video services together with mobile and broadband offerings.

The Home Depot Inc. HD reported a year-over-year improvement in its financial results for the first quarter of fiscal 2014. The company's adjusted earnings of 96 cents per share jumped nearly 15.7% from the year-ago quarter's earnings of 83 cents, primarily driven by effective cost management and lower share counts.

However, adjusted quarterly earnings fell short of the Zacks Consensus Estimate by a couple of cents. Home Depot's first quarter adjusted earnings figure does not include a benefit of approximately 4 cents per share associated with the partial sale of equity ownership interest in HD Supply Holdings, Inc. HDS. On inclusion of which, the company's earnings stand at $1.00 per share.

AstraZeneca announced on Monday that it has rejected Pfizer's latest takeover proposal. AstraZeneca stated that the proposal undervalued the company and would be significantly dilutive to its shareholders. Apart from that, AstraZeneca continued to harbor concerns regarding the transaction structure (low proportion of cash, high proportion of Pfizer shares) and risks related to the proposed inversion structure (Pfizer's intention to redomicile to the UK for tax purposes).

AstraZeneca was looking at an offer price of close to £58.85 per share, representing a 10% increase from Pfizer's last offer (£53.50 per share). However, Pfizer's final proposal valued AstraZeneca at approximately £55 per share.

JPMorgan Chase & Co. JPM declared a quarterly dividend of 40 cents per share on Tuesday. This marks a 5.3% hike from the previous payout. The dividend is payable on Jul 31, 2014, to stockholders of record at the close of business on Jul 3, 2014.

The latest dividend hike is reflective of the Federal Reserve Board's 2014 Comprehensive Capital Analysis and Review (CCAR) results wherein JPMorgan got the no-objection for its proposed 2014 capital distribution plan. The Board also authorized the bank to repurchase $6.5 billion of common equity between Apr 1, 2014 and Mar 31, 2015.

Microsoft Corp. MSFT recently added a new member to its Surface tablet family with the launch of Surface Pro 3, the thinnest, lightest and largest laptop-tablet hybrid so far. The tablet is already available for pre-order and will reach customers in the U.S. and Canada in June and 26 other markets by the end of August. It comes in three models, which are priced in the range of $799 to around $2,000.

According to Microsoft, Surface Pro 3 has the power and efficiency of a laptop combined with the portability and ease of a tablet. It has a 12 inch full high-definition HD screen, 4th-generation Intel INTC Core processor, up to 8 GB of RAM, click-in keyboards, 5MP front and rear cameras and a multi-position kickstand that shifts easily from movie mode to working and writing modes.

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 0.65%.

Next Week's Outlook

This has been a largely positive week for the Dow, following gains in Internet, bio-tech and small-cap stocks. The Russell 2000 is now less than 8.0% away from its record high of 1,208.65 achieved on March 4. Positive indications from the FOMC minutes and encouraging home sales data has added to investor optimism.

Next week has several important economic reports lined up. These include data on durable orders, consumer confidence and personal income. Initial claims data will also bear out whether this week's numbers are only an exception to the overall trend. But it is crucial GDP report, to be released on Thursday, which holds the key. The nature of this data could have a significant impact on market direction going forward.    

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