J&J Earnings Beat Fails to Cheer Healthcare ETFs

The healthcare sector – once an investors’ darling – was hit hard by the recent market rout and some sector-specific headwinds. In particular, the twin attacks of political uncertainty surrounding healthcare reform, and soft enrollment in public health insurance exchanges are weighing heavily on the sector and the performance of the related ETF and will continue to do so throughout the year (read: Is The Time Ripe for Ex-Health Care S&P 500 ETF?).
 
Even mediocre Q4 earnings results from Johnson & Johnson (JNJ), the first company to have reported earnings in the healthcare space, failed to drive healthcare ETFs. The world's biggest maker of healthcare products continued its long streak of earnings beat but revenues came in below our estimates due to currency headwinds. The company also provided a decent fiscal 2016 outlook.

Johnson and Johnson Q4 Results in Focus

Earnings per share came in at $1.44, a nickel ahead of the Zacks Consensus Estimate and 5.1% above the year-ago earnings. Revenues slid 2.4% year over year to $17.81 billion and fell shy of the Zacks Consensus Estimate of $17.94 billion.

Healthy sales of new drugs like Zytiga, Invokana, Imbruvica, and Xarelto and the strength of established drugs such as Stelara, Concerta, Simponi, and Invega Sustenna partially offset a steep decline in sales of the hepatitis C medicine – Olysio – which lost its competitive position in the U.S. to its rivals Gilead (GILD) and AbbVie (ABBV). Notably, Imbruvica is expected to be a blockbuster cancer drug, fetching in about one billion dollars in revenues as early as next year.
 
Johnson & Johnson issued the guidance for fiscal 2016. It expects revenues in the range of $70.8- $71.5 billion and earnings per share of $6.43–$6.58. The Zacks Consensus Estimate for revenues and earnings per share is $71.2 billion and $6.35, respectively (see: all the Healthcare ETFs here).
 
Market Impact
 
Based on earnings beat, shares of JNJ climbed nearly 6% over the past two days. The rally failed to spur the following healthcare ETFs having the largest allocation to this diversified drug maker in the same period. Let’s dig into the funds and their performance post JNJ results:
 
Health Care Select Sector SPDR Fund (XLV)
 
The most popular healthcare ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $13.4 billion in its asset base and trades in heavy volume of more than 15.2 million shares. Expense ratio came in at 0.14% annually. In total, the fund holds 58 securities in its basket with JNJ taking the top spot at 10.9% of the assets. Pharma accounts for 39.2% share from a sector look while biotech, healthcare providers and services, and equipment and supplies make up for a double-digit exposure each. The fund shed about 0.4% in the past two days and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.
 
iShares U.S. Healthcare ETF (IYH)
 
This fund provides exposure to 124 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s return at 10.3% of total assets. In terms of industrial exposure, pharma takes the top spot at 37.7%, followed by biotech (25.8%), and health care equipment (15.4%). The product has amassed nearly $1.8 billion in its asset base while charges 44 bps in annual fees. It trades in solid volume of around 303,000 shares a day and fell 0.5% in the last two days post JNJ results. The fund has a Zacks ETF Rank of 1 with a Medium risk outlook (read: Pfizer in Talks to Buy Allergan: Prescribed ETFs).
 
iShares U.S. Pharmaceuticals ETF (IHE)
 
This ETF targets the pharma corner of the broad healthcare space and tracks the Dow Jones U.S. Select Pharmaceuticals Index. Holding 44 stocks in its basket, Johnson & Johnson occupies the top position at 10.1%. Pharma takes the largest share at 88.8% while biotech takes the remainder. The product has managed nearly $792.2 million in its asset base while volume is relatively light at about 66,000 shares a day on average. The fund charges 44 bps in fees per year from investors and was down 1.9% following the JNJ earnings release. IHE has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook (read: What Does 2016 Hold in Store for Pharma ETFs).
 
Vanguard Health Care ETF (VHT)
 
This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 347 stocks in its basket. Out of these, Johnson & Johnson takes the top spot with 8.8% allocation. Pharma takes the largest share at 33.5% while biotech and healthcare equipment round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $5.4 billion and average daily volume of about 345,000 shares. It charges 9 bps in annual fees and expenses. The product lost 0.6% in the same period. The fund has a Zacks ETF Rank of 1 with a Medium risk outlook.
 
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JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
ISHARS-US HLTHC (IYH): ETF Research Reports
 
ISHARS-US PHARM (IHE): ETF Research Reports
 
VIPERS-HLTH CR (VHT): ETF Research Reports
 
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