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ETFs to Watch on Industrial Sector Q3 Results

Zacks Equity Research

Major industrial ETFs suffered in the recent days as some of the bellwethers from the space came up with dismal third quarter earnings results. Though recent economic data indicated that the manufacturing sector is gradually improving to finish the fourth quarter on a higher note, concerns, including dismal global growth conditions and stronger U.S. dollar, continue to pose threats to the sector. In this backdrop, it will be interesting to find how major industrial companies performed in the third quarter and their effect on ETFs from the domain.  

Industrial Earnings to Watch

General Electric Company GE

This industrial conglomerate giant reported mixed third-quarter results as its earnings beat the Zacks Consensus Estimate but missed the same on revenues. The company’s operating earnings per share (including industrial and other verticals) of 32 cents came in higher than the Zacks Consensus Estimate by a cent and increased 10% from the prior-year level. However, third quarter revenues of $29,266 million missed the Zacks Consensus Estimate of $29,836 million despite increasing 4% year-on-year. Meanwhile, third quarter GAAP net earnings of $1,994 million was 20% lower than the 2015 third quarter figure.

While a significant decline in revenues in segments including Energy Connections & Lighting, Oil & Gas and Transportation weighed on GE’s third quarter performance, impressive performance witnessed in segments such as Aviation, Power, Healthcare and Renewable Energy boosted the same. Sustained restructuring initiatives for a leaner firm with a re-focus on core operations also played a key role in leading the company to register healthy growth during the quarter. However, it now expects 2016 organic revenue growth to be between 0% and 2%, compared to its earlier projection of 2-4% (read: GE Posts Mixed Q3 Results: Industrial ETFs in Focus).

3M Company MMM

Shares of 3M declined nearly 3% on Tuesday after it third quarter results failed to impress investors. Though the company’s reported GAAP earnings of $1,329 million or $2.15 per share came in significantly higher than year-ago level, its net sales during the quarter of $7,709 million were slightly below the year-ago period’s $7,712 million. However, earnings came in a cent higher than the Zacks Consensus Estimate and revenues were in line with the same. It also posted a year-over-year increase of 1.5% to $1,904 million during the third quarter. Separately, the company forecast 2016 GAAP earnings between $8.15 and $8.20 per share, compared with earlier projections of $8.15 to $8.30.     

Honeywell International Inc. HON

Honeywell International’s adjusted earnings per share of $1.67 in the reported quarter beat the Zacks Consensus Estimate of $1.60 and increased 4.4% year over year. Revenues in third-quarter 2016 were up 2% year over year to $9,804 million, higher than the Zacks Consensus Estimate $9,769 million. Honeywell revised its 2016 guidance. The company anticipates earnings in the range of $6.60 to $6.64 per share, which marks a 8-9% jump from the year-ago period. It now expects revenues to increase 2–3% year-on-year to $39.4 billion – $39.6 billion (read: Industrial Q2 Results Fail to Lift ETFs).

Union Pacific Corporation UNP

The rail transportation operator, Union Pacific reported third-quarter 2016 adjusted earnings of $1.36 per share, missing the Zacks Consensus Estimate by three cents. Earnings also declined 9% on a year-over-year basis. Revenues decreased 7% year over year to $5.2 billion in the third quarter but beat the Zacks Consensus Estimate of $5.1 billion. A 7% decline in freight revenues hurt the top line. Declining coal shipments weighed on the railroad operator’s results yet again.

ETFs in Focus

Like the industrial stocks, ETFs from this space also faced investor wrath in the recent times following disappointing third-quarter earnings performances. Below we discuss four ETFs having a sizeable exposure to the above stocks (see all Industrial ETFs here).

Industrial Select Sector SPDR Fund XLI

This product tracks the Industrial Select Sector Index. General Electric occupies the top spot with 10.4% allocation, while 3M, Honeywell and Union Pacific have a combined exposure of roughly 15% in the fund. XLI has garnered $7.4 billion in assets and trades in a heavy volume of 11 million shares per day. It has a low expense ratio of 0.14%. The fund has the highest exposure to Aerospace & Defense (22.3%), followed by Industrial Conglomerates (21.9%). The product lost 0.7% in the past five days and currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETFs & Stocks to Play as U.S. Manufacturing Grows).

Vanguard Industrials ETF VIS

This fund follows the MSCI US IMI Industrials 25/50 index and holds about 344 securities in its basket. Of these firms, GE occupies the top position with 11.5% share, while 3M, Honeywell and Union Pacific together comprise almost 11.6% of the fund’s assets. The fund manages nearly $2.2 billion in its asset base and charges only 10 bps in annual fees. From an industry perspective, the fund has the highest exposure to Industrial Conglomerates (20.6%), followed by Aerospace & Defense (19%). Volume is moderate as it exchanges roughly 101,000 shares a day on average. The product lost 0.6% in the past five days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares US Industrials IYJ

IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to 207 U.S. companies that produce goods used in construction and manufacturing. General Electric occupies the top spot in the fund with almost 10% share while 3M, Honeywell and Union Pacific have a combined exposure of more than 10.1%. The ETF manages an asset base of $845.1 million and trades in an average volume of 86,000 shares. The fund has top exposure to Capital Goods (57.3%), Software & Services (14.1%) and Transportation (12.1%). The fund is slightly expensive with 44 basis points as fees. It declined almost 0.4% in the last five days and currently has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Fidelity MSCI Industrials Index ETF FIDU

This fund tracks the MSCI USA IMI Industrials Index, holding 333 stocks in its basket. General Electric takes the top spot at 12% share while 3M, Honeywell and Union Pacific have a combined exposure of almost 11.7%. The product has amassed $150.3 million in its asset base while it trades in moderate volume of nearly 48,000 shares a day on average. The fund has the highest exposure to Aerospace & Defense (21.4%) and Industrial Conglomerates (20.1%). It is one of the low-cost choices in the space charging 8 bps in annual fees from investors. The fund lost 0.8% in the last five days and currently has a Zacks ETF Rank #2 with a Medium risk outlook.

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UNION PAC CORP (UNP): Free Stock Analysis Report
 
3M CO (MMM): Free Stock Analysis Report
 
HONEYWELL INTL (HON): Free Stock Analysis Report
 
GENL ELECTRIC (GE): Free Stock Analysis Report
 
VIPERS-INDUS (VIS): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
FID-INDUSTL (FIDU): ETF Research Reports
 
ISHARS-US INDU (IYJ): ETF Research Reports
 
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