The Dow Jones Industrial Average, long the key index of the stock market’s overall movements and health, has been holding above 28,000 for two weeks now. The index hasn’t seen these levels since late February – it’s rise now is being taken as an indicator that the Dow is moving to catch up with the S&P 500 and the NASDAQ, both of which are regularly setting new record levels.
With the Dow clearly back on an upward trajectory, now is the time to start looking at the component stocks; after all, an index is nothing more than the sum of its parts, and while it maybe useful as an analytical tool, those parts have something to say, too.
So now let’s tell a tale of three stocks on the Dow, showing how some parts can move up, and others down, while the index as a whole gains.
Using TipRanks’ Stock Comparison tool, we lined up the three alongside each other to get the lowdown on what the near-term holds for these Dow players.
Coca-Cola Company (KO)
The first stock on our list, Coca Cola, is a long-time favorite of investing great Warren Buffett. Buffett is not shy about his opinions, and his love for Coke, as an investment and a product, is well documented. He has said of the latter, If I eat 2700 calories a day, a quarter of that is Coca-Cola.”
Regarding Coke as an investment, however, Buffett’s insight is keen: “No business has ever failed with happy customers… and you’re selling happiness.” Coca Cola has a great brand built up around its flagship drink, one that it has used to promote a much wider portfolio of products. The company makes and distributes over 350 different brands in 200 countries around the world. Late last month, Coke announced that it will be streamlining its management structure, to improve efficiency during and beyond the pandemic.
The COVID pandemic, however, has hit Coke hard. Social lockdowns kept customers home and stores closed, while trade and restrictions disrupted both supply and distribution chains. It was a retailer’s nightmare. EPS managed to beat forecasts in Q1, but fell off 33% in Q2. Since Q4 of last year, revenue has fallen sequentially from $9.1 billion to $8.6 billion to $7.2 billion.
Even during the pandemic, Coke kept up its regular dividend payments. The company next declared payment date is October 1, which will be the third payment at the current level of 41 cents per common share. Coke has an 11-year history of gradually raising the dividend, which is currently yielding 3.3%.
Deutsche Bank analyst Steve Powers sees a clear path forward for Coke. He writes, “Management changes give us greater confidence in KO's ability to exit the current pandemic in a stronger position than from which it entered. If successful, we see them helping to enable significant cost efficiencies already directionally envisioned in DB estimates, while at the same time driving quicker decision-making and less overlap/redundancy with local bottling operations… this new organizational structure should also allow KO to better unlock and uncover new revenue opportunities, particularly in its less scaled beverage categories…”
In line with his optimism, Powers rates KO stock a Buy. Meanwhile, his $55 price target suggests a 7.5% upside growth from current levels. (To watch Powers’ track record, click here)
Overall, with 10 analyst reviews, including 9 Buys and a single Hold, KO has a Strong Buy rating from the analyst consensus. This Dow standard is currently selling for $51.19, and the average price target of $54.7 implies a 7% upside. (See KO stock analysis on TipRanks)
UnitedHealth Group (UNH)
Next on our list is UnitedHealth, the world’s largest provider of health insurance policies. UNH brings in more than $240 billion in annual revenues and boasts a market cap of $304 billion. With over 130 million customers signed up around the world, UnitedHealth has the customer base and the deep pockets to weather the pandemic.
United Health’s Q2 results show how the company has met the challenges of COVID-19. EPS surged 91%, to $7.12, on $62 billion in revenue. The company credited a historically low medical loss ratio of 70% for the big jump in earnings, and maintained its full-year guidance of $16.25 to $16.55 per share.
Looking ahead, UNH warns that Q3 may see a rise in business costs. Paradoxically, this will come from an increase in business. As lockdown and distancing policies ease, the company predicts that more customers will catch up on deferred medical treatments, resulting in an increase of claims to be paid.
Frank Morgan, 5-star analyst with RBC, was impressed with UNH’s second quarter: “The quarter dramatically exceeded Street expectations and were within range of our estimate... With inpatient, outpatient, physician office, pharmaceutical, and other activity continuing to show signs of recovery in 2H20, mgmt maintained FY20 guidance, however we believe this could prove conservative.”
In line with those comments, Morgan rates UNH stock an Outperform (i.e. Buy) along with a $384 price target. The target implies a 20% upside for the coming year. (To watch Morgan’s track record, click here)
UnitedHealth’s Strong Buy analyst consensus rating is based on 17 reviews, breaking down to 15 Buys and just 2 Holds. The shares are selling for $321.58, and the average price target of $350.35 suggests room for a 9% upside in the next 12 months. (See UNH stock analysis on TipRanks)
American Express (AXP)
The last stock on our Dow list, American Express, has a less bullish outlook. Amex, based in New York City, is one of the world’s best-known financial service providers, and its credit cards, charge cards, and travelers’ checks have long been ubiquitous. The company’s marketing reflects this, and until 2005 the company’s charge-card slogan was ‘Don’t leave home without it.’
The pandemic, however, by reducing commerce, took a heavy toll on the company. Quarterly revenues have slid almost 25% since the start of the year, and are down to $6.1 billion. EPS fell a dramatic 85% in Q2, dropping from $1.98 per share to just 29 cents. Yet, that number was far better than the 13-cent EPS forecast.
Falling revenues, sliding earnings, and a share price that has yet to recover – all of these underly the recent caution that Wall Street is expressing on Amex.
Writing for Compass Point, William Ryan says, “In 2021, we are still expecting a slower recovery at AXP relative to other issuers as T&E spending trends take longer to recover than other categories… Shares of AXP have historically traded between 12x-16x, and we believe it is fair to value the company on the lower end of this range due to the disproportionate impact that lower T&E spending is having on AXP relative to other issuers… We believe revenue will remain suppressed as spending volume stays at lower levels in the near future until the environment is more conducive for T&E to recover.”
Ryan rates AXP shares as Neutral (i.e. Hold), and his $85 price target, suggesting a 20.5% downside to the stock for the coming year, indicates just how little confidence he has. (To watch Ryan’s track record, click here)
Ryan’s caution is typical. Of the 19 analyst reviews on this stock, 11 are Hold and 3 are Sell, against 5 Buys. The average share price, at $102, suggests a 5% downside from the current share price of $107.28. (See AXP stock analysis on TipRanks)
To find good ideas for Dow stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.