Shake-Ups Raise Some Expectations About Dow Club

Instead of the Dow Jones 30 industrials, the famous blue chip stock average might better be called the Dow Jones 30 restructurers.

In the latest wave of corporate cutbacks and downsizing, longtime Dow stocks General Electric, Westinghouse and Eastman Kodak this week decided to jettison major pieces of their operations. They’re following a flurry of similar moves this year by such Dow club members as Sears, General Motors and International Business Machines.

In fact, it’s difficult to identify more than a handful of the Dow 30 that have been able to get through 1992 without a far-reaching shake-up in their businesses. And, of course, almost all of these shake-ups have been made in the name of slashing costs and boosting shareholder value.

Which raises an interesting question for opportunistic investors: If these are truly meaningful restructurings, do they set the stage for a dramatic earnings rebound for the Dow companies as a group in 1993?

The significance of better than expected earnings growth among Dow companies wouldn’t be lost on the market. The Dow, which jumped 25.66 points to 3,248.70 on Tuesday, is the indicator all investors know and watch. If the Dow stocks were to zoom in response to rising optimism about earnings, the effect could be to pump up interest in the stock market overall.

Peter Anderson, president of IDS Advisory Group, a large money manager based in Minneapolis, is one big believer in “Dow power.” He believes that the U.S. economy will grow much faster in 1993 than most experts predict. “If that works out, the big companies that have done major cost-cutting should be logical beneficiaries of the stronger economy,” he says.

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In a vote of confidence, Wall Street analysts expect Dow company earnings to grow 19% overall next year, versus an expected 14% rise in earnings for the much broader Standard & Poor’s index of 500 companies. Those figures represent the consensus views of the entire crowd of brokerage number-crunchers, as compiled by Zacks Investment Research in Chicago.

Whether the estimates represent more than a lot of pipe dreams is debatable, of course. Still, it’s worth noting that the last time investors hooked onto this better-earnings theme was almost exactly one year ago: Investors’ soaring optimism about a healthy economic recovery in 1992 sent the Dow rocketing from 2,875 early last December to nearly 3,300 by last March, a rise of about 15%.

In contrast, the Dow’s latest recovery-hopeful rally has pulled it up just 4% from its fall low in early October.

The problem in defending the Dow earnings optimists, however, is that their original expectations for 1992 turned out to be way too high, as the economy remained weak.

Though Dow company earnings are expected to be up 272% this year from 1991, that’s largely because 1991 results were so terribly depressed--coincidentally, because of the last big wave of write-offs related to restructurings. Even with the 1992 rebound, Dow company earnings remain well below peak levels of 1989.

Melissa Brown, earnings analyst at Prudential Securities in New York, wonders why investors should believe that the current round of restructurings by the Dow club will work wonders for the companies’ bottom line when the last go-round obviously didn’t prove to be enough. The latest wave of restructurings just shows that “whatever was causing the problems for those companies before . . . is still there,” she says.

What’s more, even if the Dow multinationals gain from a better U.S. economy in 1993, Brown notes that they could be hurt by weakening sales in Europe, where a recession is biting hard.

If the choice for ’93 is the Dow stocks or small NASDAQ stocks, money manager Michael Murphy of the Overpriced Stock Service in Half Moon Bay, Calif., says he’d stick with smaller firms. “Many of them are positioned to drive their own growth even if the economy doesn’t pick up,” he argues.

Still want to bet on the Dow? There’s one easy way to do it: The ASM Fund, an $18-million-asset mutual fund based in Tampa, Fla., invests exclusively in the 30 Dow stocks, and thus closely tracks the index’s performance. The no-load fund’s total return for the year to date is about 2.7%. For information on ASM, call 800-445-2763.

The Dow Companies’ Profit Boom--and Bust

Here’s a look at the aggregate profit growth of the 30 blue chip companies in the Dow Jones industrial average since 1984, expressed as an earnings-per-share (EPS) figure for the Dow index. Also shown is the percentage change in earnings each year for the broader Standard & Poor’s index of 500 companies.

S&P; Dow 30 Pct. 500 EPS Year EPS growth pct. growth 1984 $113.58 +57% +19% 1985 96.11 -15% -12% 1986 115.59 +20% -1% 1987 133.05 +15% +21% 1988 215.46 +62% +36% 1989 221.48 +3% -4% 1990 172.05 -22% -7% 1991 49.27 -71% -25% 1992 est. 183.13 +272% +42% 1993 est. 218.63 +19% +14%

Source: Merrill Lynch & Co.; Zacks Investment Research (’92 and ’93 estimates)