Is Pain Ahead For Healthcare ETFs After Weak JNJ Q1?

The hot healthcare sector has made a nice comeback this year on cheap valuation, robust earnings results, encouraging industry trends, and a slew of positive actions taken by the President despite the collapse of the healthcare bill.

This is especially true as popular funds – Health Care Select Sector SPDR Fund (XLV), Vanguard Health Care ETF (VHT - Free Report) iShares U.S. Healthcare ETF (IYH - Free Report) and Fidelity MSCI Health Care Index ETF (FHLC - Free Report) – have gained at least 8% so far this year, easily outpacing the gain of 5.7% for the broad market fund (SPY - Free Report) .

However, the ETFs took hit from lackluster Johnson & Johnson (JNJ - Free Report) quarterly results last week as the company lagged our revenue estimate for the second consecutive quarter on sluggish drug sales. JNJ occupies the top position in the above-mentioned ETFs with double-digit allocation. 

Results from the world's biggest maker of health care products could be a warning sign for other drug makers as many of them are losing their exclusivity with the launch of biosimilars. As a result, the sector is expected to post modest earnings growth of 0.8% and revenue growth of 6.3%, as per the latest Earnings Trends.

Let’s delve deeper into the earnings picture of some of the largest companies in the healthcare space that are expected to report this week and in the next and have the potential to drive the performance of the above-mentioned funds.

Some of the big names dominating the funds include Pfizer (PFE - Free Report) , Merck (MRK - Free Report) , Amgen (AMGN - Free Report) ), AbbVie (ABBV - Free Report) , Gilead Sciences (GILD - Free Report) and Bristol-Myers Squibb (BMY - Free Report) . All these stocks collectively account for 27.3% share in XLV, 26.1% in IYH, 23.9% in VHT and 23.6% in FHLC.

According to the our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases the chance of an earnings beat, while a Zacks Rank #4 or 5 (Sell rated) are best avoided.

Inside Our Surprise Prediction of These Stocks

Pfizer has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The Zacks Consensus Estimate for first-quarter 2017 is 67 cents, up a nickel over the past three months. The stock delivered positive earnings surprises in two of the past four quarters, with an average beat of 4.36%. Additionally, it has an impressive Value and Momentum Style Score of B and A, respectively, though a Growth Style Score of C is unfavorable. Pfizer is scheduled to report earnings on May 2 before the opening bell.

Merck is expected to report its results on May 2 before the market opens. It has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. Though the stock witnessed a negative earnings estimate revision of four cents over the past 90 days for the to-be-reported quarter, it delivered positive earnings surprises in the last four quarters, with an average beat of 4.03%. Merck seems a triple play stock with strong Value, Growth and Momentum Style Score of B each.

Amgen has a Zacks Rank #3 and an Earnings ESP of +2.33%, indicating a reasonable chance of beating estimates this quarter. The earnings surprise track over the past four quarters is robust with an average positive surprise of 7.38%. Amgen witnessed positive earnings estimate revision of a nickel over the past 90 days for the yet-to-be-reported quarter. Though the stock has a solid Value and Momentum Style Score of B and A, respectively, the Growth Style Score of D looks dull. Amgen will report earnings on April 26 after market close.

AbbVie has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The company delivered positive earnings surprises in the last four quarters, with an average beat of 1.92% and saw positive earnings estimate revision by a penny over the past three months for the to-be-reported quarter. The stock has a solid Value and Momentum Style Score of B each while the Growth Style Score of D is unimpressive. The company is scheduled to report on April 27 before the opening bell.  

Gilead is expected to release earnings on May 2 after market close. It has a Zacks Rank #3 and an Earnings ESP of +2.77%, indicating a reasonable chance of beating estimates. Gilead delivered positive earnings surprises in two of the last four quarters, with an average beat of 2.88% but saw a negative earnings estimate revision of 34 cents over the past three months for the to-be-reported quarter. Though it has a solid Value and Momentum Style Score of A each, the Growth Style Score of C looks ugly.

Bristol-Myers will likely report its earnings on April 27 before the opening bell. It has a Zacks Rank #3 and an Earnings ESP of -1.37%, indicating less chances of beating estimates this quarter. The stock delivered positive earnings surprises in three of the past four quarters with an average beat of 7.26% and witnessed no earnings estimate revision for the to-be-reported quarter. It has an unfavorable Value, Growth and Momentum Style Score of C each.

Summing Up

Given a few earnings surprises in store this season, healthcare ETFs are likely to remain range bound. The funds also have a Zacks ETF Rank #3 each.

Disclosure: None.

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