US Reporting Season Review - Top 10 Dow Jones Stocks

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• US reporting season highlights

• Reviewing top 10 Dow Stocks

• US earnings season beat rate

This week…

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General Advice & Risk WarningPlease note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:• US reporting season highlights• Reviewing top 10 Dow Stocks• US earnings season beat rate

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Dear Readers,

Throughout the monthly of November we will be publishing our views and insights on US stock markets, following key results and how this impacts the Dow, S&P500, NASDAQ and Russel 200 index. With quantitative easing now complete and all eyes on the US market recovery, we thought it important to explore key themes coming out of US companies and how this impacts the largest stock indices in the world.

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As usual the commentary from the next four weeks will be followed by our monthly webinar. Invast clients will also have access to a webinar presented by Invast Insights editor Peter Esho this week on Tuesday 25 November at 6:30PM.

Our focus will be on the key names that drive each index. We will spend the first few weeks look at individual company results and then the later part of the month determining where the indices are going. Our approach is bottom up, we look at individual stocks to determine where the broader market is heading. We don’t just look at financial numbers but important comments are highlight corporate confidence and signal intentions among investors.

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Our weekly summary will be as follows:

• Week commencing 10 November 2014 – US reporting season highlights – focus on key NASDAQ and technology names• Week commencing 17 November 2014 – US reporting season highlights – focus on the Russell 2000 and key names within the index• Week commencing 24 November 2014 – Summary for price and valuation on the key indices, where they are heading into 2015

• Week commencing 3 November 2014 – US reporting season highlights – focus on key Dow stocks

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Results from US companies are important for any type of trader, even if you are purely trading forex markets the outcome of corporate America and movements on Wall Street are all important factors in determining where the US Fed sets rate policy. We see a strong US dollar over the next few years and the market will go through turbulent times when adjusting to this. Keeping an eye on company news is vital. US stocks are among the largest in the world and even through Invast at the moment does not quote direct international stocks across its platforms, it does quote key indices on its MT4 platform. Our focus therefore from a trading perspective will be on the key indices through a bottom up approach.

This week we will spend some time going through key company results. We will touch on the top ten companies on the Dow Jones index. The index is quoted on Invast MT4 platform as the US30. The chart below shows the price action on a daily basis.

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Image: US30 daily price chat as quoted on Invast MT4 platform

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The top 10 stocks which make up just over 15% of the Dow Jones index in order from smallest to largest are: Apple, Exxon Mobil, Microsoft, Johnson & Johnson, General Electric, Berkshire Hathaway, Wells Fargo, Procter & Gamble, JP Morgan Chase and Chevron. The Dow Jones shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second oldest U.S. market index after the Dow Jones Transportation Average, which was also created by Dow.

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Calculation of the Dow is fairly different to its peer indices. The average is price-weighted (not market cap weighted), and to compensate for the effects of stock splits and other adjustments, it is currently a scaled average. The value of the Dow is not the actual average of the prices of its component stocks, but rather the sum of the component prices divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. Since the divisor is currently less than one, the value of the index is larger than the sum of the component prices.

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As of the time of writing, the “beat rate” during the current US earnings season is again above the historical average. More than seven out of 10 companies, or 73%, of the 245 companies in the Standard & Poor’s 500-stock index that have reported earnings, have topped Wall Street forecasts. That “beat rate” is better than the 20-year average of 63%, according to Thomson Reuters. The “beat rate” is important in setting the overall momentum for the Dow Jones index. The higher the beat rate, the greater the analyst earnings upgrades and with that room for stock prices to rise. The Dow being a price-weighted index benefits immensely.

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Let’s take a look at how each of the top 10 Dow components reported during the third quarter of 2014:

1. Apple: Another amazing result from the world’s largest company in terms of market capitalisation. Apple posted quarterly revenue of $42.1 billion and quarterly net profit of $8.5 billion, or $1.42 per diluted share. These results compare to revenue of $37.5 billion and net profit of $7.5 billion, or $1.18 per diluted share, in the year-ago quarter. Gross margin was 38% compared to 37% in the year-ago quarter. International sales accounted for 60% of the quarter’s revenue.

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2. Exxon Mobil: We’re looking for decreased profit for Exxon Mobil when the company reports its results for the third quarter on Friday, October 31, 2014. Exxon Mobil reported profit of $1.79 a year ago, but the consensus estimate calls for earnings per share of $1.75 this time around. Consensus estimates have fallen over the past three months, from $1.94. Analysts are expecting earnings of $7.49 per share for the fiscal year. After being $112.37 billion a year ago, analysts project revenue to drop 6% year-over-year to $105.51 billion for the quarter. For the year, revenue is projected to come in at $424.54 billion. No doubt the big talking point here will be where energy prices go as the US economy improves.

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3. Microsoft: Continues to raise eyebrows and defy the critics who wrote the business off a few years. Microsoft has been working hard to dominate its key commercial enterprise market while maintaining a solid presence in the consumer market, albeit behind rival peers. The company recently announced revenue of $23.20 billion for the quarter ended September 30, 2014. Gross margin, operating income and diluted earnings per share (“EPS”) for the quarter were $14.93 billion, $5.84 billion and $0.54 per share, respectively. Devices and Consumer revenue grew 47% to $10.96 billion while Commercial revenue grew 10% to $12.28 billion.

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4. Johnson & Johnson: Announced sales of $18.5 billion for the third quarter of 2014, an increase of 5.1% as compared to the third quarter of 2013. Operational results increased 5.8% and the negative impact of currency was 0.7%. Domestic sales increased 11.6%. International sales decreased 0.3%, reflecting operational growth of 1.0% and a negative currency impact of 1.3%. The key here for us is the growth in the US exposed business. During the quarter the Company completed the divestiture of the Ortho-Clinical Diagnostics business. Worldwide, domestic and international operational sales growth, excluding the impact of this divestiture, was 8.4%; 14.8% and 3.1% respectively.

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5. General Electric: Like the above, all eyes were on the consistency of earnings and stability from this global heavyweight. GE announced third-quarter 2014 operating earnings of $3.8 billion, with operating earnings per share of $0.38, up 6% from the third quarter of 2013. GAAP earnings from continuing operations were $3.5 billion, with earnings per share of $0.34, up 6% from last year. Revenues were $36.2 billion for the quarter, up 1% from the year-ago period.

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6. Berkshire Hathaway: If you haven’t already figured out, this is Warren Buffett’s investment company. The stock will report in early November but many are already eyeing large disappointments in key holdings like Coca Cola which have outperformed other technology driven names in the economy. Still, Buffett has been around for a while and so he will put his stamp behind this result.

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7. Wells Fargo: Reported third-quarter profit of $5.73 billion last week. The San Francisco-based bank said it had earnings of $1.02 per share. The results met Wall Street expectations. A bit of a yawn for the market but no disappointment, that’s what counts. The average estimate of analysts surveyed by Zacks Investment Research was also for earnings of $1.02 per share. The biggest U.S. mortgage lender posted revenue of $21.21 billion in the period, topping Street forecasts. Analysts expected $20.95 billion, according to Zacks. Wells Fargo shares have risen 11% since the beginning of the year, while the Standard & Poor's 500 index has climbed slightly more than 1 per cent. The stock has increased 20% in the last 12 months.

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8. Procter & Gamble: Like the above, P&G reported quarterly earnings that met analysts' expectations on Friday, but revenue fell a bit short. The consumer products giant also said it would split off its Duracell battery business into a separate company. The company reported fiscal first-quarter earnings excluding items of $1.07 per share, up from $1.04 a share in the year-earlier period. Revenue slipped to $20.79 billion from roughly $21.21 billion a year ago. Wall Street had expected P&G to report earnings of $1.07 a share on roughly $20.83 billion in revenue, according to a consensus estimate from Thomson Reuters.

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9. JP Morgan Chase: One of the biggest banks “on the street” as they say. It returned to third quarter profitability, but did not earn as much as Wall Street believed it would in the third quarter of 2014. JPMorgan Chase reported third-quarter net income of $5.6 billion, or $1.36 per share, a big improvement from the same period last year, when the bank’s hefty legal bills caused it to lose $380 million. But JPMorgan Chase did miss profit expectations of $1.38 per share.

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10. Chevron: Like Exxon, Chevron is a play on energy markets and will continue to fluctuate based on energy sentiment which we have mentioned in our previous notes. Earnings are out on Friday 31 October.

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The key takeout from the above is that third quarter reporting season is so far going to plan for most companies that make up key constituents on the Dow Jones index. As we said above the beat rate continues to remain above the historical average and the momentum behind company earnings is positive. The big test will come when the US dollar starts to appreciate and the amount of repatriated funds back into the USA starts to diminish from levels seen over the past few years. Within the results, we didn’t find any key threat from companies around this occurring so if it occurs it might actually be seen as a surprise.

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Chart: Artesian Capital presentation, source here

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We also didn’t get a sense of any double around inflation or business intentions. Next week we will have a look at a broader spectrum of stocks listed on the NASDAQ – no doubt one of the most attractive indices for technology companies. Tech stocks have been the buzz around investment circles in recently years and we will have a strong look to see if earnings have been matched by expectations.

The chart above shows how important technology stocks have become to the wider economy, even indices like the S&P500. The chart highlights the diminishing lifespan of blue-chip stocks due to tech.

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US stock market outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise his November outlook for US markets, focusing on key indices like the Dow Jones, S&P500, NASDAQ and Russell 2000. Esho will go through recent company results to determine how the US economy is shaping up after the completion of quantitative easing.

Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

Outlook for where Wall St will go in 2015US Reporting season results & the effect on the key US IndicesWhat signals are companies suggesting about the economyWhat valuations are implied by the key indices at the moment

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Peter’s webinar will cover both the fundamental and technical outlook on key US indices, plus the key drivers to look out for when trading. This webinar is expected to fill fast. Q&A will be open straight after the presentation. Register now by visiting http://www.invast.com.au/webinars.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

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