Weak Sector Earnings Dragging Pharmaceutical ETFs Down (XPH)

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May 7, 2018 6:56am NYSE:XPH

From Zacks: Total earnings for 83.1% of the total healthcare market capitalization are up 14.7% on revenue growth of 8.1%. The growth rates seem unimpressive when compared with some of the other sectors. Earnings and revenue beat ratios of 88.9% and 75%, respectively, are also not great either.


Among the most notable players, Johnson & Johnson (JNJ – Free Report) was the first major drug company to report earnings on Apr 17, followed by Eli Lilly and Company (LLY – Free Report) and Bristol-Myers Squibb Company (BMY – Free Report) on Apr 24 and Apr 26, respectively. Other major U.S. drug companies — Merck (MRK – Free Report) and Pfizer (PFE – Free Report) — reported on May 1. These industry bigwigs came up with earnings or revenue beat or both.

Earnings in Focus

Johnson and Johnson

The world’s biggest maker of healthcare products continued its long streak of earnings beat. Earnings per share came in at $2.06, 5 cents ahead of the Zacks Consensus Estimate and 12.6% higher than the year-ago quarter. Revenues grew 12.9% year over year to $20.01 billion and edged past the estimated $19.4 billion. Johnson & Johnson raised its revenue guidance from $80.60-$81.40 billion to $81.0-$81.8 billion but maintained its earnings per share outlook of $8.00-$8.20, which reflects growth of 6.8%-9.6% (read: Healthcare ETFs in Focus After Johnson & Johnson Q1 Earnings).

Pfizer

The U.S. drug giant surpassed earnings estimates but lagged on revenues. Earnings per share of 77 cents came in 3 cents above the Zacks Consensus Estimate while revenues of $12.9 billion fell shy of the estimated $13.1 billion. On an annual basis, earnings per share and revenues rose 12% and 1%, respectively. For 2018, Pfizer expects revenues in the range of $53.5-$55.5 billion and earnings per share of $2.90-$3.00.

Merck

Merck also beat earnings estimates but missed on revenues. Earnings per share came in at $1.05, surpassing the Zacks Consensus Estimate of 99 cents and improving 19.3% from the year-ago quarter. Revenues inched up 6% year over year to $10.04 billion and were below the estimated $10.12 billion. Merck increased its 2018 revenue guidance to $41.8-$43.0 billion from $41.2-$42.7 billion and earnings per share guidance to $4.16-$4.28 from $4.08-$4.23.

Bristol-Myers

Bristol-Myers topped estimates on both fronts. It reported earnings per share of 94 cents, 9 cents above the Zacks Consensus Estimate and ahead of the year-ago earnings of 84 cents. Revenues grew 5% to $5.19 billion and edged past the Zacks Consensus Estimate of $5.18 billion. The company raised 2018 earnings per share guidance to $3.35-$3.45 from $3.15-$3.30 (see: all the Healthcare ETFs here).

Eli Lilly

Eli Lilly also surpassed earnings and revenue estimates. Earnings of $1.34 outpaced the Zacks Consensus Estimate by 21 cents and came in 37% higher than the year-ago quarter. Revenues grew 9% to $5.7 billion and beat the estimated $5.53 billion. Like the other drug makers, Eli Lilly also raised its 2018 revenue guidance to $23.7-$24.2 billion from $23-$23.5 billion and earnings guidance to $5.10-$5.20 from $4.81-$4.91.

ETF Angle

Pharma ETFs saw terrible trading over the past month as mediocre results failed to boost confidence in the space, pushing many funds to 52-week lows. Below, we have highlighted them in detail. These funds have a Zacks ETF Rank #3 (Hold):

iShares U.S. Pharmaceuticals ETF (IHE – Free Report)

This ETF provides exposure to 43 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus firms are the top five holdings in the basket, accounting for a combined 39.6% of total assets, suggesting heavy concentration. The product has $365.3 million in AUM and charges 44 bps in fees and expense. Volume is light as it exchanges about 21,000 shares a day. The fund has shed 4.5% in a month.

SPDR S&P Pharmaceuticals ETF (XPH – Free Report)

This fund provides exposure to pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of $326.1 million, it trades in good volume of around 95,000 shares a day and charges 35 bps in fees a year. In total, the product holds 43 securities with the in-focus five firms taking over 4% share each. The product was down 6% in the same period (read: Is SPDR S&P Pharmaceuticals ETF (XPH – Free Report) a Hot ETF Right Now?).

VanEck Vectors Pharmaceutical ETF (PPH – Free Report)

This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. The in-focus five firms account for more than 4% share each. The product has amassed $237.4 million in its asset base and trades in a moderate volume of about 102,000 shares a day. Expense ratio comes in at 0.35%. The fund has lost 2% in a month.

PowerShares Dynamic Pharmaceuticals Fund (PJP – Free Report)

This is by far the most popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. The product has AUM of about $511.6 million and sees lower volume of around 52,000 shares a day. The fund charges 56 bps in fees and expenses. Holding 30 stocks, the fund invests at least 4% share each in BMY, PFE and LLY. The ETF has lost 3.1% in a month.

First Trust Nasdaq Pharmaceuticals ETF (FTXH – Free Report)

This fund tracks the Nasdaq US Smart Pharmaceuticals Index, holding 30 securities in its basket. Of these, Pfizer and Johnson & Johnson account for more than 8% share each while Merck, Bristol-Myers and Eli Lilly make up for more than 4% each. FTXH has a lower level of $3 million in AUM and 2,000 shares in average daily volume. It charges 60 bps in annual fees and has shed 4.1% in the same time frame.


The SPDR S&P Pharmaceuticals ETF (XPH) was unchanged in premarket trading Monday. Year-to-date, XPH has declined -9.61%, versus a -0.31% rise in the benchmark S&P 500 index during the same period.

XPH currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #31 of 35 ETFs in the Health & Biotech ETFs category.


This article is brought to you courtesy of Zacks Research.


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