Despite Weak Sector Earnings, Industrial ETFs Still Attractive Amid Trump Presidency

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February 2, 2017 9:48am NYSE:XLI

From Zacks: If any particular industry is hogging attention in the Trump era, then that is Industrials. The U.S. President’s pledge to pour about $1 trillion dollar in infrastructure spending is behind such interest in the sector (read: Welcome Trump Era with These ETFs).


Spending is supposed to be financed by new tax credits to goad private equity investors. Increased outlays will be aimed at improving roads, bridges and telecommunications. He also promised lower corporate taxes and ease in regulations (read: 5 Top-Ranked Sector ETFs Thankful to Trump).

The sector now falls in the top 26% of the Zacks Industry Universe. Obviously, such a situation drifts investors’ attention toward the earnings reports of the sector, which are actually mixed-to-downbeat this season. Let’s delve a little deeper.

Industrial Earnings in Focus

General Electric Company (GEFree Report)

Diversified industrial conglomerate General Electric posted mixed fourth-quarter 2016 results. Its earnings per share of $0.46 matched the Zacks Consensus Estimate while revenues of $33.1 billion fell short of $34.1 billion. On a year-over-year basis, earnings and revenues declined 12% and 2.4%, respectively.

For 2017, the company expects earnings per share of $1.60–$1.70, the midpoint of which is in line with the Zacks Consensus Estimate. Additionally, organic revenues are expected to grow 3–5%. GE has a Zacks Rank #3 (Hold) but the VGM (Value-Growth-Momentum) score stands at a disappointing ‘F’ (read: Should You Buy Industrial ETFs After GE Disappoints?).

3M Company (MMMFree Report)

Another major conglomerate, 3M Company reported earnings of $1.88 per share in fourth-quarter 2016, beating the Zacks Consensus Estimate of $1.87. Net sales during the quarter were $7.33 billion, up 0.4% year over year but below the Zacks Consensus of $7.37 billion. Organic local-currency sales increased 4.6% in Industrial, 2.2% in Safety and Graphics, and 1.3% in Health Care, somewhat offset by a decrease of 0.6% in Electronics and Energy, and 0.7% in Consumer.MMM has a Zacks Rank #3 and VGM score of ‘B’.

Honeywell International Inc. (HONFree Report)

Honeywell International’s earnings per share of $1.74 in the reported quarter were in line with the Zacks Consensus Estimate, but up from $1.53 in the year-ago quarter. Fourth-quarter revenues were almost flat (year over year) at $9.99 billion and short of the Zacks Consensus Estimate of $10.2 billion. HON has a Zacks Rank #4, but a VGM score of ‘B’.

Union Pacific Corporation (UNPFree Report)

The rail transportation operator, Union Pacific’s fourth-quarter 2016 earnings of $1.39 beat the Zacks Consensus Estimate of $1.34 per share. The bottom line climbed 6.11% on a year-over-year basis due to lower costs. Operating revenues of $5,168 million edged past the Zacks Consensus Estimate of $5,143.6 million. Revenues declined 1% year over year. UNP has a Zacks Rank #2 but a VGM score of ‘C.’

ETF Impact

Post earnings, some industrial stocks fell and some tacked on slight gains. The performance of industrial ETFs was moderate in the last 10 trading sessions (as of January 30, 2017), which covered the peak of the industrial earnings releases. Below we highlight a few industrial ETFs that are heavy on the above-said stocks (see all Industrial ETFs here).

Industrial Select Sector SPDR Fund (XLIFree Report)

This product tracks the Industrial Select Sector Index. General Electric occupies the top spot with 9.24% allocation, while 3M, Union Pacific and Honeywell have a combined exposure of roughly 15% in the fund. The Zacks ETF Rank is 2 or ‘Buy’ with a medium risk outlook.

Vanguard Industrials ETF (VISFree Report)

This fund follows the MSCI US IMI Industrials 25/50 index and holds about 348 securities in its basket. Of these firms, GE occupies the top position with 11% share, while 3M, Union Pacific and Honeywell together comprise almost 11% of the fund’s assets. The Zacks ETF Rank is 2 with a medium risk outlook.

iShares U.S. Industrials ETF (IYJFree Report)

IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to 208 U.S. companies that produce goods used in construction and manufacturing. General Electric occupies the top spot in the fund with almost 9.23% share while 3M, Honeywell and Union Pacific have a combined exposure of about 10%. The Zacks ETF Rank is 2 with a medium risk outlook.

Summing Up

Given that most of the industrial companies do not have a Buy rank (except UNP), it is better bet on industrial ETFs with a Zacks Rank #2. At least, this way, investors can mitigate one company’s weakness by another company’s strength as well as cash in on the Trump effect on the broader industrial ETFs.

The The Industrial Select Sector SPDR Fund (NYSE:XLI) was trading at $62.99 per share on Thursday morning, down $0.28 (-0.44%). Year-to-date, XLI has gained 1.24%, versus a 1.57% rise in the benchmark S&P 500 index during the same period.

XLI currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 32 ETFs in the Industrials Equities ETFs category.


This article is brought to you courtesy of Zacks Research.


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