Wall Street turned a skeptical eye on another round of good earnings reports Tuesday, with markets down for the first time in five trading days.
The Dow Jones industrial average fell 7.12 points to 3748.31 on Big Board volume of 252 million shares. The Nasdaq index fell 3.30 points to 719.32.
Technology stocks dropped even though Intel, the world’s largest independent manufacturer of semiconductors, reported earnings that matched or exceeded analysts’ estimates. Intel’s second-quarter profits rose to $1.46 a share from $1.30 a share a year earlier.
Analysts found a lead lining in the silver cloud: They pointed out that Intel’s gross margins fell to 58.3 percent from 64 percent, which apparently was taken more to heart than the 12 percent gain in earnings.
Better-than-expected earnings at Citicorp, Chemical Banking and Chase Manhattan failed to rally bank stocks.
Citicorp, the nation’s largest banking company, said net income rose to $1.83 a share from 88 cents a year earlier. Zacks Investment Research had put the mean forecast by analysts at $1.28 a share. Citicorp stock dropped $1.25, to $40.75.
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Chase shares lost $2.37, to $36.37. The company’s chief financial officer told analysts that Chase’s net interest revenue is under pressure because of increased competition in the mortgage and credit-card businesses.
“It’s the old saying, `Buy them at their wake and sell them at the wedding,’ ” said Alfred Goldman, director of technical research at A.G. Edwards & Sons. “We are seeing some very normal profit-taking on the news.”
Heartland report: When a company goes public with a hot issue, it often follows up with a get-rich-quick scheme for itself.
Having seen the stock soar to the heights, company officials figure they’re on to a good thing. They immediately sell more stock. The price drops, robbing shareholders of value, but the company rakes in cash for itself.
The market should discipline this sort of thing, and it often does. When Chicago-based ABC Rail Products went public early this year, executives watched the stock price forge ahead to $20 from $12.
What a great way to raise cash, thought Donald W. Grinter, chairman and chief executive. Grinter arranged a further sale of 2 million shares of stock.
The market sent the stock from $20 to $15 and some change.
Grinter, to his credit, pulled back the follow-up offering and doesn’t plan to put it forward again in the near future.
Grinter told this story in response to a question at a Tuesday luncheon with financial analysts in Chicago. ABC has an outstanding company story to tell.
ABC helps make the railroads run on time. It makes rail switches and crossings (not rails), wheels for cars and locomotives, and brakes. Its sales, income and margins are rising.
As passenger and freight rail transport continues to revive, ABC will participate and prosper.
“We’re riding the coattails of a rejuvenated passenger and freight market,” Grinter said.
ABC has a joint venture with a French firm, giving it access to foreign markets and a different approach to rail transport-the Europeans generally lead America in passenger rail technology. ABC has sold rail wheels in China, a potentially major market, and it is looking at Latin America.
ABC, having learned a lesson, now plans to finance a $24 million capital-improvements program and future acquisitions with debt.
No company should deny itself a follow-up offering of stock for good cause in good time. What the market should do, and what worked in this case, is cautioning executives against repetitive stock sales to finance every project.
Investors who buy shares in growing companies know that in time their ownership will be diluted. But they should expect the dilution to be measured, not precipitous. They should reap a generous reward for investing in successful companies at a stage when success is not assured.