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Mixed Q2 Earnings Releases Put Spotlight on Industrial ETFs

Sweta Jaiswal, FRM

The industrial sector delivered mixed results so far this reporting season. Of the 64% S&P industrial companies that have reported, 68.8% beat on the bottom line while 18.8% surpassed revenue estimates. For those companies, earnings declined 5.3% and revenues deteriorated 1.9% year over year, per the latest Earnings Trends (read: 5 Sector ETFs That Crushed the Market in July).

However, the start of trade truce talks between the United States and China, and the Fed’s dovish stance toward the future rate policy position the industrial sector well for the long term.

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 Q2 Earnings

On Jul 31, General Electric Company’s GE second-quarter 2019 adjusted earnings were 17 cents per share, surpassing the Zacks Consensus Estimate of 12 cents. However, the bottom line declined 5.6% from the year-ago figure of 18 cents due to disappointing revenue performance and deteriorating margins. Consolidated revenues totaled $28.83 billion, reflecting a year-over-year drop of 1%. Weakness in Power and Healthcare businesses within the Industrial segment might have led to the sluggishness. Revenues at the GE Capital business were also disappointing. Also, the company’s revenues lagged the Zacks Consensus Estimate of $28.87 billion. Shares have lost about 0.7% since earnings release (as on Jul 31, 2019).

On Jul 25, 3M Company MMM reported better-than-expected results for the second quarter of 2019, with earnings and sales beating respective estimates by 7.8% and 1.9%. The company’s adjusted earnings in the reported quarter were $2.20 per share. On a year-over-year basis, bottom-line results declined 28.3% due to weak sales, rise in costs of sales and decline in operating results. In the reported quarter, 3M’s net sales totaled $8.17 billion, reflecting a decline of 2.6% from the year-ago period. The stock has lost 2.6% since the earnings release (as on Jul 31, 2019).

On Jul 18, Honeywell International Inc. HON reported mixed results for second-quarter 2019, with earnings surpassing estimates but revenues lagging the same. Adjusted earnings were $2.10 per share, beating the Zacks Consensus Estimate of $2.08. The bottom line also rose 8.8% year over year led by organic sales growth during the quarter. Honeywell’s second-quarter revenues came in at $9.24 billion, missing the consensus estimate of $9.36 billion. Notably, the top line declined 15.3% year over year. The fall was primarily due to the impact of spin-offs of some of the company’s businesses in 2018. The stock has gained about 2.3% since earnings (as on Jul 31, 2019).

On Jul 18, Union Pacific Corporation’s UNP second-quarter 2019 earnings of $2.22 per share surpassed the Zacks Consensus Estimate by 10 cents. The bottom line also increased 12.1% on a year-over-year basis primarily supported by lower costs. Operating revenues came in at $5.60 billion, which edged past the Zacks Consensus Estimate of $5.58 billion. The figure declined 1.3% year over year due to sluggish freight revenues (down 2%). Shares were up 9.4% since earnings (as on Jul 31, 2019).

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 68 holdings with the above-mentioned companies taking about 19.2% of the fund. Its AUM is $10.58 billion and expense ratio is 0.13%. The fund carries a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Top Sectors of 1H & Their Top Stocks).

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 341 holdings and puts about 15.2% weight in the companies discussed above. Its AUM is $460.5 million and expense ratio, 0.08%. The fund carries a Zacks ETF Rank #2 (Buy) 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 357 securities in its basket with the concerned companies having 14.7% weight in the fund. Its AUM is $3.67 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 214 securities in its basket and puts about 12.2% weight in the companies in focus. Its AUM is $968.1 million and expense ratio is 0.43%. The fund carries a Zacks ETF Rank #2 with a Medium risk outlook (read: US Manufacturing PMI Data Highly Disappointing: ETFs in Focus).

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