Q4 Earnings Faring Well For Pharma ETFs

The Q4 earnings season is faring better than the last few years with not only earnings growth on track to reach the highest level in two years but also total earnings set to create a new quarterly record. Most sectors are coming up with good results, with healthcare being no exception. The sector has impressed with both results and price performance.

Total earnings for 75.8% of the sector’s total market capitalization are up 9.8% on revenue growth of 5.2%, with earnings and revenue beat ratios of 80.6% and 54.8%, respectively. Healthcare is the third sector that surprised investors the most on earnings, trailing aerospace and industrial products, as per the Earnings Preview.

Among the most notable players, Johnson & Johnson (JNJ - Free Report) was the first major drug company to report earnings on January 24, followed by Bristol-Myers Squibb Company (BMY - Free Report) and Eli Lilly and Company (LLY - Free Report) on January 26 and January 31, respectively. Two other major U.S. drug companies – Pfizer (PFE - Free Report) and Merck (MRK - Free Report) – reported on January 31 and February 2, respectively.

These industry primes posted mixed results with a few missing on earnings while some lagging on the revenue front. Despite this, the stocks witnessed smooth trading following their results.

Johnson and Johnson Earnings in Focus

The world's biggest maker of healthcare products continued its long streak of earnings beat but narrowly missed on the top line. Earnings per share came in at $1.58, a couple of cents ahead of the Zacks Consensus Estimate and 9.7% higher than the year-ago earnings. Revenues inched up 1.7% year over year to $18.11 billion and fell short of our estimated $18.17 billion.

Johnson & Johnson issued its guidance for 2017. The company expects revenues in the range of $74.1–$74.8 billion, reflecting operational growth of 4–5%. Additionally, earnings per share guidance of $6.93–$7.08 reflect operational growth in the range of 4.8–7%. The Zacks Consensus Estimate currently is pegged at $74.59 billion for revenues and $7.01 for earnings per share. JNJ has gained 1.7% since its earnings announcement.

Pfizer Earnings in Focus

The U.S. drug giant missed on earnings and beat on revenue. Earnings per share of 47 cents came in three cents below the Zacks Consensus Estimate while revenues of $13.6 billion were ahead of our estimate by $0.74 billion. Earnings per share and revenue declined 11% and 3%, respectively, from the year-ago quarter.

For 2017, Pfizer expects revenue in the range of $52-$54 billion and earnings per share of $2.50–$2.60. The Zacks Consensus Estimate at the time of the earnings release was $54.26 billion for revenues and $2.56 for earnings per share. Shares of PFE are up 2.5% since the earnings announcement.

Merck Earnings in Focus

Earnings per share came in at 89 cents, a penny ahead of the Zacks Consensus Estimate but 4.3% lower than the year-ago earnings. Revenues slipped 1% year over year to $10.1 billion and were slightly below the Zacks Consensus Estimate of $10.2 billion.

Merck also issued its 2017 earnings and revenues guidance. It expects revenues in the band of $38.6–$40.1 billion and earnings per share in the range of $3.72–$3.87. The Zacks Consensus Estimate at the time of the release was pegged at $40.2 billion for revenues and $3.82 for earnings per share. The stock has added 0.2% following its earnings announcement.

Bristol-Myers Earnings in Focus

Bristol-Myers reported earnings per share of 63 cents, lagging our estimate by three cents but increasing 66% from the year-ago quarter. Revenues climbed 22% to $5.24 billion and edged past the Zacks Consensus Estimate of $5.15 billion.

Like other drug makers, the company also provided its revenue and earnings per share outlook for 2017. It expects earnings per share in the range of $2.70-$2.90 per share. The Zacks Consensus Estimate at the time of the earnings announcement was pegged at $2.92. Revenues are expected to grow in the low single-digit. Shares of BMY are up 2.5% to date since the earnings announcement.

Eli Lilly Earnings in Focus

Earnings of 95 cents at Eli Lilly missed the Zacks Consensus Estimate by four cents but came in 22% higher than the year-ago earnings. Revenues grew 7% to $5.76 billion and beat our estimate of $5.56 billion.

Eli Lilly continues to expect revenue in the range of $21.8–$22.3 billion and earnings per share in the range of $21.8–$22.3 for 2017. The Zacks Consensus Estimate at the time of the earnings release was pegged at 21.96 billion for revenues and $4.10 earnings per share. Shares of LLY have gained 3.4% since the earnings release.

ETF Angle

Smooth trading in stocks has also been felt in the pharma ETFs, with the four funds posting positive returns over the past 10 days. Below, we have detailed this:

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 $840.5 million and sees healthy volume of around 148,000 shares a day. The fund charges 57 bps in fees and expenses from investors. Holding 21 stocks, the fund invests around 5% share each in the in-focus five firms. The ETF gained about 5.1% over the past 10 days and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

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

This ETF provides exposure to 41 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus firms are among the top six holding in the basket accounting for a combined 37.5% of total assets, suggesting heavy concentration. The product has $685.1 million in AUM and charges 44 bps in fees and expense. Volume is moderate as it exchanges about 45,000 shares a day. The fund has added 3.9% over the past 10 days and has a Zacks ETF Rank of 3 with a High risk outlook.

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

This fund provides exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of $467 million, it trades in good volume of around 231,000 shares a day and charges 35 bps in fees a year. In total, the product holds 39 securities with the in-focus five firms taking at least 4% share each. The product was up 4.8% in the same period and has a Zacks ETF Rank of 3 with a High risk outlook.

VanEck Vectors Pharmaceutical ETF (PPH - Free Report)

This ETF follows the MVIS US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. Johnson & Johnson takes the top spot in the basket with 10.4% of assets while Pfizer, Bristol-Myers, Merck and Eli Lilly collectively accounts for 21.7% of assets. The product has amassed $301.8 million in its asset base and trades in a moderate volume of about 151,000 shares a day. Expense ratio came in at 0.35%. The fund has added 1.7% over the past 10 days. It has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook.

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Disclosure: None.

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