Despite equity markets hitting all-time highs, the Dow Jones Industrial Average is in a bit of a slump as component firms’ earnings are down 4.2% year over year in the fourth quarter of 2014. The DJIA, of course, is only composed on 30 firms, so the change of just one or two components in the index can make a major difference in the metrics for the entire index.
Apple to the rescue!
Tech giant Apple’s upcoming addition to the DJIA is an illustrative case in point. As FactSet Senior Earnings Analyst John Butters highlights in his March 13th report, if Apple had been added to the index during the fourth quarter 2014, it would have reported earnings growth of +1.4% (instead of -4.2%).
Impact on earnings of adding Apple to the Dow
Butters also notes that the DJIA is projected to end up with year-over-year declines in earnings in the first quarter of 2015 (-15.3%), as well as in Q2 2015 (-9.5%) and Q3 2015 (-5.9%), given both Exxon Mobil and Chevron are predicted to report significant declines in earnings in each of those quarters. Apple estimates for Q1 2015, Q2 2015, and Q3 2015, on the other hand, are for earnings growth of 27%, 30%, and 24%, respectively. This means adding Apple to the Dow will shrink the anticipated earnings declines for the DJIA in those quarters, but it does not look like it will result in actual earnings growth for any of these quarters.
Top value fund managers are ready for the small cap bear market to be done
During the bull market, small caps haven't been performing well, but some believe that could be about to change. Breach Inlet Founder and Portfolio Manager Chris Colvin and Gradient Investments President Michael Binger both expect small caps to take off. Q1 2020 hedge fund letters, conferences and more However, not everyone is convinced. BTIG strategist Read More
Also of note, the addition of Apple is predicted to have little impact on the estimated earnings growth rate for the index in the fourth quarter of 2015. The DJIA is projected to report earnings growth of 1.9% and Apple is predicted to report EPS growth of 3.5% for the fourth quarter. Given the lower EPS growth rate for Apple in the fourth quarter, Apple joining the Dow will have a minimal impact on the projected earnings growth rate of the index as a whole.
Analyst estimates up slightly after Apple Watch announcement
The Apple Watch was launched last week to much fanfare, but relatively little excitement on Wall Street. The share price slipped slightly, but analysts did nudge their target prices up a bit. The mean target price for Apple was up by 1.1% over the last week. The FactSet report also highlights that the current mean analyst target price of $137.27 is 10.3% higher than the March 12th closing price of $124.4.