DuPont (DD), disappointed investors last week after it reduced its profit guidance for the second quarter and the fiscal year. This leading U.S. chemical maker apparently took cues from weaker-than-expected performance in the agricultural business despite the solid sales of soybean.
This is especially true as sales of corn seed dropped owing to more soybean plantations during the second quarter, leaving large inventories for the company for the write-downs. The crop protection herbicide sales were also hampered by unfavorable weather conditions. Additionally, lower-than-expected selling prices in refrigerants for mobile and stationary applications also hurt the chemical business (read: Stumbling Start to June for Agricultural Commodity ETFs).
The impressive soybean sales, however, failed to fully offset the weakness in corn given the ongoing transition in the soybean lineup to newer, higher performing products. However, the negative trend seems short-lived as the company expects strong demand for its next generation of soybean products in the coming months.
Since the agricultural division is the biggest contributor that generated about two-fifths of revenues in the first quarter of this year, it will negatively impact the company’s profit. As such, the company now projects earnings for Q2 to come moderately below $1.28 per share recorded in the year-ago quarter. However, this is still well above the Zacks Consensus Estimate of $1.19.
DuPont also slashed its full-year earnings guidance to $4.00–$4.10 per share, a far cry from its previous estimate of $4.20–$4.45. The Zacks Consensus Estimate of $4.03, however, seems attainable.
As expected, DD shares fell sharply as much as 5% on Friday trading session following the disappointed outlook but recovered slightly to down 3.3% at the close. Volume levels were also notable with three times more shares trading hands than the normal trading days.
The sluggish trading of the stock could also put some downward pressure on the materials ETFs that are heavily invested in this chemical giant. This is especially true as DuPont currently has a Zacks Rank #4 (Sell) and falls in a poor industry category, with a Zacks Industry Rank in the bottom 22%. This suggests downside movement in DD share price and the related ETFs in the coming days.
As such, we have highlighted three ETFs with the highest allocation to DD that are in focus following the company’s weak outlook (see: all the Materials ETFs here).
Materials Select Sector SPDR (XLB)
The most popular materials ETF on the market, XLB follows the S&P Materials Select Sector Index. This fund manages about $5.5 billion in asset base and trades in heavy volume of more than 5.5 million. The ETF charges 16 bps in fees per year from investors.
In total, the fund holds about 32 securities in its basket. Of these firms, DD takes the third spot, making up roughly 10.20% of the assets. In terms of industrial exposure, about three-fourths of the portfolio is dominated by chemicals while metals & mining and containers & packaging round off to the top three.
The fund lost 0.30% at the close on Friday trading session and currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.
iShares U.S. Basic Materials ETF (IYM)
This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 59 stocks in its basket. The fund has AUM of nearly $1.1 billion and charges 44 bps in fees and expense. Volume is moderate as it exchanges more 195,000 shares in hand a day.
DuPont occupies the third position in the basket with 9.07% of assets. The product is heavily skewed toward the chemical segment, as these make up for more than three-fourths of the portfolio. Industrial metals & mining, mining, and forestry & paper take the remaining portion in the basket (read: Monsanto Stock Strength Is Great for These ETFs).
The fund was down 0.30% on the day and has a Zacks ETF Rank of 3 with a High risk outlook.
Vanguard Materials ETF (VAW)
This fund has amassed about $1.3 billion in its asset base and provides exposure to 131 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.14% in expense ratio while volume is moderate.
Here, DD is the top firm with 7.8% allocation. From a sector perspective, specialty chemicals take the largest share at 21.3%, closely followed by diversified chemicals (19.3%) and fertilizers & agricultural chemicals (11.9%).
VGT lost just 0.02% in the last trading session and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook.
Investors should note that these products have not performed as badly as the stock. This is because these ETFs are well diversified across various segments and securities, suggesting that the space can easily counter shocks from some of the industry’s biggest components (read: 3 Sector ETFs for This Shaky Market).
As such, investors shouldn’t completely write off materials ETFs from their holdings based on DD’s sluggish outlook.
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