A strong start to the second-quarter earnings-reporting season lit the afterburners of a stock market rally already soaring on favorable economic trends.
Better-than-expected results posted Tuesday by International Paper, one of the 30 Dow Jones industrial average stocks, helped push stock prices to record highs.
The Dow Jones industrial average jumped 103.81 points, or 1.3 percent, to a record closing high 7962.31, on New York Stock Exchange volume of 526 million shares.
Broader market indexes also advanced, as winning stocks outnumbered losers by about 16-to-11 among NYSE-listed issues. The Nasdaq composite index added 14.36 points, or nearly 1 percent, to a record closing high 1485.10. The Russell 2000 index of small-company stocks gained 2.02 points, to a record closing high 398.28.
The International Paper report, with second-quarter earnings per share 33 percent higher than the average analyst estimate compiled by Zacks Investment Research, was the second strong showing in two days by a Dow 30 company. International Paper climbed $4.94, to $56.12. On Monday, Aluminum Co. of America posted quarterly earnings per share 3 percent above analysts’ consensus.
After Big Board trading ended Tuesday, the good news continued to roll. Schaumburg-based Motorola, which is not in the Dow Jones industrial average but is the earnings-season leader for the technology sector, reported second-quarter results, excluding a special charge, 11 percent above the Zacks consensus estimate.
Investors anticipating good news from Motorola had bid the shares up by $2.12, to a record closing high $82.50, during regular trading hours. Motorola reported total second-quarter sales rose 10 percent, while semiconductor sales edged up 3 percent. Motorola’s net profit margin on sales slipped to 3.6 percent in the second quarter from 4.8 percent in the year-earlier period.
Elsewhere in the tech sector, Advanced Micro Devices fell in after-hours trading after the company reported much worse-than-expected second-quarter results of 7 cents a share vs. the Zacks consensus of 22 cents.
There’s no denying the remarkable power of U.S. corporations to produce robust quarterly earnings growth, a trend now in its sixth year. Many analysts had forecast a sharply slowing growth rate for the second quarter, but the initial reports do not support that view.
Nonetheless, investors should not forget to ask how their company’s profit growth was produced, said David Klaskin, president of Chicago-based Oak Ridge Investments.
Share repurchases, which boost earnings per share, and cost-cutting may boost quarterly earnings in the short run but do nothing to sustain earnings growth for the long-run, he said.
One place to look for sustainability is the trend in sales growth, he said.
“I feel very strongly that a lot of company earnings are the result of financial engineering,” he said. “You have to see increases in revenues.”
More than its quarterly earnings announcement, International Paper, which is benefiting from cyclical increases in paper prices, wowed Wall Street Tuesday by announcing 9,000 job cuts and plans for $1 billion in asset sales. Proceeds from the cost-cutting and asset sales will be used to pay off debt, the company said. Sales in the second quarter declined to $5 billion from $5.1 billion.
Procter & Gamble, the giant consumer-products company that said this spring it plans to double its sales in 10 years, led the Dow industrials higher Tuesday, adding $5.25, to a record closing high $149.37.
P&G announced a 2-for-1 stock split effective Aug. 22, following a quarterly dividend boost to 50.5 cents a share from 45 cents, to be paid Aug. 15 to shareholders of record July 18. The company also plans to repurchase up to $1 billion of its shares in the fiscal year.
Bonds edged lower ahead of Wednesday’s auction of $8 billion in five-year inflation-protected Treasury notes. Jim Donnelly, chief strategist for Technical Data in Boston, said the bond market maintains a positive tone.
“We are now facing Friday’s producer price index data, which should not appear to be a problem for bonds and the inflation story,” he said. Strong corporate earnings and low inflation are powerful ingredients for a stock market rally.
Local news: Rymer Foods, Chicago, filed a pre-packaged Chapter 11 bankruptcy petition–its second bankruptcy reorganization petition in four years. The latest plan calls for a 1-for-25 reverse stock split. After the plan is implemented, holders of senior notes to be eliminated under the plan will own 80 percent of the company.
– Illinois Superconductor, a Mt. Prospect-based supplier of equipment to the wireless communications industry, announced a management reorganization, placing chief executive officer Ora Smith in the post of chairman. Smith succeeds Steven Lazarus. Edward Laves, chief operating officer, was named president and chief executive officer, succeeding Smith. Stephen Wasko, chief financial officer, was named to an additional post of senior vice president for corporate development. Sheldon Drobny, a major shareholder of the company who has proposed his own management and board lineup, continued to press for his candidates, who were rejected by the company board Monday. The stock slipped 62 cents to $9.50.
– Salomon Brothers issued a “buy” rating on USFreightways, a Rosemont-based trucking company. The stock gained $1.62, to a record closing high $29.50.
