Pharma ETFs in Focus on String of Earnings Beat - ETF News And Commentary

The pharma space has been seeing smooth trading thanks to encouraging industry trends such as development of new drugs, the rising wave of mergers and acquisitions, increased need for medical services, expansion into emerging markets and the Affordable Care Act (often known as Obamacare). Further, strong earnings from pharma players are fueling growth in the sector.

Johnson & Johnson

was the first major drug company to report second-quarter earnings. It reported earnings and revenues with a huge bang on July 15, spreading optimism into the sector. Another chain of forecast-beating earnings from the industry primes like Pfizer

, Merck

, Eli Lilly and Company

and Bristol-Myers Squibb Company

is again building up confidence in the sector (read:

).

Earnings per share came in at 58 cents, a couple of cents ahead of the Zacks Consensus Estimate and 4% above the year-ago earnings. Revenues dropped 2% year over year to $12.77 billion but surpassed the Zacks Consensus Estimate of $12.4 billion thanks to growing sales of its cancer medicines.  

For 2014, the U.S. drug maker giant reiterated the earnings per share guidance at $2.20–$2.30 but reduced the revenue guidance to $48.7–$50.7 billion from $49.2–$51.2 billion due to the earlier-than-expected arrival of generic competition for arthritis drug Celebrex in December. The Zacks Consensus Estimates for earnings and revenues are currently $2.25 per share and $50.11 billion, respectively.

Shares of PFE ended the day in the red, losing 1.2% on elevated volume.

The second largest U.S. drug maker reported earnings per share of 85 cents outpacing our estimate by 4 cents and improving 1.2% from the year-ago earnings. Though revenue slipped 1% to $10.9 billion, it is well above the Zacks Consensus Estimate of $10.7 billion. Better-than expected performance was buoyed by strong sales of consumer products and medicines for arthritis and HIV.

Merck projects revenue of $42.4-$43.2 billion and earnings per share in the range of $3.43–$3.53 for 2014. The Zacks Consensus Estimate for revenue and earnings are currently $42.63 billion and $3.49 per share, respectively.

The stock gained about 1% in Tuesday trading after its earnings announcement (read:

).

Eli Lilly topped the Zacks Consensus Estimate on both the top and bottom lines. Earnings per share of 68 cents and revenue of $4.94 were ahead of our earnings estimate by a couple of cents and revenue estimate by $0.11 billion. The company reiterated its earnings per share guidance of $2.72–$2.80 on revenues of $19.4–$20.0 billion. The Zacks Consensus Estimate for earnings and revenue are currently of $2.79 and $19.7 billion, respectively.

Shares of LLY are down 2.5% post earnings announcement on July 24.

Second quarter earnings for Bristol-Myers Squibb beat the Zacks Consensus Estimate by four cents but revenue of $3.89 billion slightly missed our estimate of $3.92. The company maintained its 2014 revenue guidance of $15.2-$15.8 billion and earnings per share guidance of $1.70-$1.80. The Zacks Consensus Estimates for revenue and earnings are currently of $15.5 billion and $1.78, respectively.

The shares of BMY are up 3.1% post its earnings announcement on July 24.

Though these firms beat on earnings, they have given mixed performances depending on their specific fundamentals and dragged down pharma ETFs. Given this, the pharma ETFs having largest allocation to these drug makers are currently in focus. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the stock prices (see:

).

It is worth noting that all the four stocks mentioned above and the following ETFs have a favorable Zacks Rank of 3 or ‘Hold' rating.

This ETF provides exposure to 39 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus four firms are among the top six holdings accounting for 30.4% of total assets, suggesting heavy concentration.

The product has $704.5 million in AUM and charges 43 bps in fees and expense. Volume is light as it exchanges about 34,000 shares a day. The fund lost nearly 1% in the past five trading sessions but is up 12.7% year to date.

This ETF follows the Market Vectors US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. Pfizer and Merck occupy the third and fourth positions with a combined 13% share while LLY takes the eight spot at 4.57%.

The product has amassed $321.9 million in its asset base and trades in moderate volume of roughly 92,000 shares a day. Expense ratio came in at 0.35%. Though the fund lost about 1% over the past five days, it is leading the pharma corner of the broad healthcare space from the year-to-date look, having gained 17% (read:

).

This is by far the most popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. The product has a good level of AUM of about $1.2 billion and sees solid volume of roughly 225,000 shares a day. The fund charges 63 bps in fees and expenses from investors.

Holding 28 stocks, the fund invests nearly 5% of total assets in each of the in-focus four firms, which are among the top 10 holdings. The ETF has lost just 0.3% in the past five days but is up 12.7% in the year-to-date time frame.

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