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Can Industrial ETFs Gain Post Mixed Q4 Earnings?

Sweta Jaiswal, FRM

The industrial sector has been delivering mixed results so far this reporting season. Of the 69% S&P industrial companies that have reported, 60% beat on the bottom line while 45% surpassed revenue estimates. For these companies, earnings declined 0.6% and revenues deteriorated 1.5% year over year, per the latest Earnings Trends (read: Will Virus Infect Q1 Earnings? Multi-Asset ETFs to Play).

The release reports with impressive data reflect a thriving domestic economy. The ISM Manufacturing PMI in the United States rose to a reading of 50.9 in January, marking the highest level since July, from an upwardly revised 47.8 in December.  After three rate cuts in 2019, the Fed has hinted at keeping interest rates unchanged in 2020 unless there is any major change in the economic outlook. Fed’s dovish stance on interest rates can prove beneficial for the industrial sector, as it will enhance the ability of industries to borrow funds at a lower rate. Moreover, Trump’s signing of various trade deals, including the Sino-US phase one deal, can provide some support to the sector.

Against this backdrop, we take a look at some big industrial earnings releases and see if these can leave an impact on ETFs exposed to the space.

Inside Q4 Earnings

On Jan 29, General Electric Company’s GE fourth-quarter 2019 adjusted earnings were 21 cents per share, beating the Zacks Consensus Estimate of 18 cents. Moreover, the bottom line improved 50% from the year-ago figure of 14 cents. Consolidated revenues totaled $26.24 billion, reflecting a year-over-year drop of 1%. Weakness in GE Capital offset the strong performance by the Industrial segment. However, the company’s revenues beat the Zacks Consensus Estimate of $26.16 billion by 0.3%. Shares have gained about 10.4% since earnings release (as on Feb 6, 2020).

On Jan 28, 3M Company MMM reported weaker-than-expected results for the fourth quarter of 2019, with earnings and sales missing respective estimates by 7.1% and 0.2%. The company’s adjusted earnings in the reported quarter were $1.95 per share. On a year-over-year basis, bottom-line results declined 15.6% due to weaker organic sales, the Acelity buyout and organizational realignment charges. In the reported quarter, 3M’s net sales totaled $8.11 billion, reflecting an increase of 2.1% from the year-ago period. The stock has lost 7.3% since the earnings release (as on Feb 6, 2020).

On Jan 31, Honeywell International Inc. HON reported mixed results for fourth-quarter 2019, with earnings surpassing estimates but revenues lagging the same. Adjusted earnings were $2.06 per share, beating the Zacks Consensus Estimate of $2.04. The bottom line also rose 11% year over year led by organic sales growth during the quarter. Honeywell’s fourth-quarter revenues came in at $9.50 billion, missing the consensus estimate of $9.59 billion. Notably, the top line declined 2.4% year over year primarily due to the impact of spin-offs of some of the company’s businesses in 2018. The stock has lost about 1.1% since earnings (as on Feb 6, 2020).

On Jan 23, Union Pacific Corporation’s UNP fourth-quarter 2019 earnings of $2.02 per share lagged the Zacks Consensus Estimate by a penny. The bottom line also declined 4.7% on a year-over-year basis, primarily due to a drop in volumes. Operating revenues came in at $5.21 billion, which surpassed the Zacks Consensus Estimate of $5.17 billion. The figure declined 9% year over year due to sluggish freight revenues (down 10%). The stock has rallied 2.9% since earnings (as on Feb 6, 2020).

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs that have relatively high exposure to the industrial companies discussed (see all Industrial ETFs here).

Industrial Select Sector SPDR Fund XLI

The fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. It comprises 70 holdings with the above-mentioned companies taking about 18.5% of the fund. Its AUM is $11.79 billion and expense ratio is 0.13%. The fund carries a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Phase-One Trade Deal to Boost These ETF Areas).

Fidelity MSCI Industrials Index ETF FIDU

The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index. It comprises 336 holdings and puts about 14.7% weight in the companies discussed above. Its AUM is $478.4 million and expense ratio, 0.08%. The fund carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Industrials ETF VIS                   

This fund offers exposure to the industrial sector and follows the MSCI US IMI Industrials 25/50 Index. It holds about 355 securities in its basket with the concerned companies having 14.3% weight in the fund. Its AUM is $3.66 billion and expense ratio is 0.10%. The fund carries a Zacks ETF Rank #1 with a Medium risk outlook.

iShares U.S. Industrials ETF IYJ

The iShares U.S. Industrials ETF seeks to track the investment results of the Dow Jones U.S. Industrials Index. It holds about 205 securities in its basket and puts about 11.8% weight in the companies in focus. Its AUM is $970.6 million and expense ratio is 0.42%. The fund carries a Zacks ETF Rank #2 with a Medium risk outlook.

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Union Pacific Corporation (UNP) : Free Stock Analysis Report
 
Honeywell International Inc. (HON) : Free Stock Analysis Report
 
General Electric Company (GE) : Free Stock Analysis Report
 
3M Company (MMM) : Free Stock Analysis Report
 
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
 
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
 
Fidelity MSCI Industrials Index ETF (FIDU): ETF Research Reports
 
Vanguard Industrials ETF (VIS): ETF Research Reports
 
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