Material ETFs In Focus On Dow Chemical, DuPont Earnings

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July 29, 2015 5:17pm NYSE:IYM NYSE:VAW

earningsSweta Killa: With the Q2 earnings season on high gear, almost all sectors save retail are seeing busy trading sessions. One that needs special mention is materials which has been garnering enough investors’ interest especially after Dow Chemical (NYSE:DOW)


and DuPont (NYSE:DD) earnings reports. Both the chemical giants missed our revenue estimates pushing their shares into red. Dow Chemical however beat on earnings.

DOW Earnings in Focus

Earnings per share came in at 91 cents, crushing the Zacks Consensus Estimate of 81 cents and improving from 74 cents earned a year ago. This marks the eleventh consecutive quarter of year-over-year earnings growth. Healthy earnings were credited to the incredible performance by the Performance Plastics segment due to lower cost of raw materials like oil and natural gas.

Revenues dropped 13.5% year over year to $12.91 billion and missed our estimate of $13.11 billion. EBITDA margin expanded to the highest quarterly level since 2005 even as a strong dollar took a toll on revenues.

The largest U.S. chemical maker remained committed to cost reduction and efficiency programs that will likely boost margins in the coming quarters. Notably, it is on track to lower cost by $1 billion over the three-year period. The company has been focusing on high growth and profitable businesses such as construction, packaging and automotive that outweigh the softness in agriculture and energy-related markets.

However, Dow Chemical warned of weak demand in China in the coming months that would not allow it to sustain its current growth rate of 14% in the key market.

Considering the revenue miss reported on July 23, shares of Dow Chemical have fallen 6.7% to date. This decline could be a buying opportunity form many investors as the stock carries a Zacks Rank #2 (Buy) with triple enticing flavors of Growth, Value and Momentum.

DD Earnings in Focus

The world’s second-largest seed maker reported earnings per share of $1.18, a penny below the Zacks Consensus Estimate but up by one cent from the year-ago earnings. Total revenue slipped 11% year over year to $8.6 billion and fell short of our $9.28 billion estimate.

Lackluster performance came on the heels of currency headwinds and a sluggish agriculture business, which accounted for about 37% of total revenue. Notably, the agriculture business has been stressed by weak global demand for crop protection products, reduced corn farming in Latin America, lower soybean volumes in North America and lower crop prices.

The similar situation is likely to persist for the remainder of the year. As a result, DuPont lowered its full-year earnings per share guidance to $3.10 from $4.00. The guidance is well below the Zacks Consensus Estimate of $3.90. Reduced guidance also came from the spin-off of its performance chemicals unit, Chemours. The company now expects currency headwinds to dilute 2015 earnings by 60 cents per share instead of the prior projection of 80 cents per share dilution due to the spin-off.

Further, the leading U.S. chemical maker is seeking to cut $1.3 billion in annual costs by the end of 2017 and is on track for savings of 40 cents per share in 2015 through operational redesign initiatives.

Following the earnings announcement, DD shares dropped as much as 7% on July 28 and then recovered somewhat to close at down 1.5%. Currently, DuPont carries a Zacks Rank #5 (Strong Sell) with unfavorable Growth, Value and momentum Score Styles of D, D, and F, respectively. This suggests that some pain may be in store for this company at least in the near term.

ETFs in Focus

Rough trading by these two chemical titans has put the spotlight on the materials ETFs that are heavily invested in these stocks. Below, we have highlighted some of them that would be on investors’ radar in the weeks ahead:

Materials Select Sector SPDR (XLB)

The most popular materials ETF, XLB follows the S&P Materials Select Sector Index. This fund manages about $2.2 billion in its asset base and trades in heavy volume of more than 3.8 million. The ETF charges 15 bps in fees per year from investors. In total, the fund holds about 30 securities in its basket with DD and DOW taking the top two spots with over 9% allocation each. In terms of industrial exposure, chemicals dominates about three-fourths of the portfolio while metals & mining and containers & packaging round off the top three.

iShares U.S. Basic Materials ETF (IYM)

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 58 stocks in its basket. The fund has AUM of $398 million and charges 44 bps in fees and expenses. Volume is good as it exchanges around 96,000 shares in hand a day. DD and DOW occupy the top two positions in the basket with nearly 9% of assets each. The product is heavily skewed toward the chemical segment, as it makes up for more than three-fourths of the portfolio while steel, forestry & paper, metals & mining receive minor allocations (read: Gold Mining ETFs Are Crashing).

Vanguard Materials ETF (VAW)

This fund has amassed about $1.2 billion in its asset base and offers exposure to 123 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.12% in expense ratio while volume is moderate at 67,000 shares. Here, DOW and DD are the top two firms accounting for over 7% share each. Chemicals make up for nearly 69% of assets while container & packaging and steel also make a nice mix in the portfolio.

In Conclusion

Though the trio lost over 5% in the last one-week period, investors should not completely write these off from their portfolio given rough trading in their top two holdings.

This article is brought to you courtesy of Sweta Killa.


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