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Upbeat Industrial Q1 Results Fail to Lift ETFs

Most of the industrial bellwethers have beaten on earnings in the first quarter of 2016. However, it’s not surprising given the low estimates, which had fallen ahead of this reporting cycle. Among other factors, a recent pullback in the greenback and encouraging manufacturing trends could have played a role in the beat. A strong dollar impacts most industrial bigwigs adversely as most of these companies have significant international exposure. However, the earnings beat came largely on the back of lowered expectations (read: ETFs to Watch on U.S. Manufacturing Revival).
 
Meanwhile, revenue weakness in the sector remains thanks to reduced spending, volatility in oil prices and lackluster global growth.
 
Below we have highlighted in greater detail earnings of some of the major industrial companies which really drive this sector’s outlook.
 
Industrial Earnings in Focus
 
General Electric Company (GE)
 
Diversified industrial conglomerate General Electric posted mixed first quarter results as it reported in line earnings but missed on revenues. The company’s earnings came in at 21 cents per share, in line with the Zacks Consensus Estimate but up 5% from the year-ago quarter. Shares of the company fell slightly after the earnings release.
 
Revenues were up 6% to $27.8 billion, missing the Zacks Consensus Estimate of $29 billion. The revenue miss was due to a weak global economy and an oil price slide that hurt the renewable and oil and gas segments. For 2016, the company reaffirmed its earnings per share guidance of $1.45–$1.55 (read: Industrial ETFs in Focus on Mixed GE Q1 Performance).
 
3M Company (MMM)
 
Another major conglomerate, 3M Company reported earnings of $2.05 per share in first-quarter 2016, beating the Zacks Consensus Estimate of $1.92. Net sales during the quarter were $7.4 billion, down 2.2% year over year but ahead of the Zacks Consensus Estimate of $7.3 billion. The year-over-year decrease in sales was largely due to a significantly negative foreign currency translation impact. 3M shares fell on the day of its earnings release.
 
Honeywell International Inc. (HON)
 
Honeywell International’s earnings per share of $1.53 in the reported quarter beat the Zacks Consensus Estimate of $1.50. Revenues in first-quarter 2016 were up 3% year over year to $9.5 billion, ahead the Zacks Consensus Estimate $9.4 billion. Based on favorable business conditions, Honeywell narrowed its 2016 guidance. The company anticipates earnings in the range of $6.55 to $6.70 per share on revenues of $40.3 billion and $40.9 billion. Shares of the company rose slightly on the day of its earnings release.
 
Union Pacific Corporation (UNP)
 
The rail transportation operator, Union Pacific reported first-quarter 2016 earnings of $1.16 per share, which beat the Zacks Consensus Estimate of $1.09. Earnings declined 11% on a year-over-year basis.
 
Revenues decreased 14% year over year to $4.8 billion in the first quarter, falling short of the Zacks Consensus Estimate of $4.9 billion. A 14% decline in freight revenues hurt the top line. Declining coal shipments weighed on the railroad operator’s results yet again. The stock gained after reporting results.
 
ETF Impact
 
Despite reporting encouraging earnings, most of the industrial stocks failed to hold up gains over the past 10 days, sending the related ETFs into rocky territory. This has put the spotlight on industrial ETFs. Below we discuss four of these 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 11.2% allocation, while 3M, Honeywell and Union Pacific have a combined exposure of roughly 14.7% in the fund. XLI has garnered $7.2 billion in assets and trades in a heavy volume of 13.2 million shares per day. It has a low expense ratio of 0.14%. The fund has the highest exposure to Aerospace & Defense (26%), followed by Industrial Conglomerates (21%). The product gained 0.3% in the past 10 days and currently has a Zacks ETF Rank #4 or ‘Sell’ rating with a Medium risk outlook (read: ETFs & Stocks Set to Surge on Solid Industrial Data).
 
Vanguard Industrials ETF (VIS)
 
This fund follows the MSCI US IMI Industrials 25/50 index and holds about 342 securities in its basket. Of these firms, GE occupies the top position with 12.7% share, while 3M, Honeywell and Union Pacific together comprise almost 10.7% of the fund’s assets. The fund manages nearly $2.1 billion in its asset base and charges only 10 bps in annual fees. From an industry perspective, the fund has the highest exposure to Aerospace & Defense (21.7%), followed by Industrial Conglomerates (20.6%). Volume is moderate as it exchanges roughly 112,000 shares a day on average. The product lost 0.1% in the past 10 days and currently has a Zacks ETF Rank #3 or ‘Hold’ rating with a Medium risk outlook.
 
iShares U.S. Industrials ETF (IYJ)
 
IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to 214 U.S. companies that produce goods used in construction and manufacturing. General Electric occupies the top spot in the fund with almost 11% share while 3M, Honeywell and Union Pacific have a combined exposure of more than 10%. The ETF manages an asset base of $737.6 million and trades in an average volume of 75,000 shares. The fund has top exposure to Capital Goods (58.9%) and Software & Services (12.7%) and Transportation (11.7%) have double-digit exposure each. The fund is slightly expensive with 45 basis points as fees. It rose almost 0.4% in the last 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.
 
Fidelity MSCI Industrials Index ETF (FIDU)
 
This fund tracks the MSCI USA IMI Industrials Index, holding 342 stocks in its basket. General Electric takes the top spot at 12.7% share while 3M, Honeywell and Union Pacific have a combined exposure of almost 11.5%. The product has amassed $161.2 million in its asset base while it trades in moderate volume of nearly 115,000 shares a day on average. The fund has top exposure to Aerospace & Defense (23.4%) and Industrial Conglomerates (20.9%). It is one of the low cost choices in the space charging 12 bps in annual fees from investors. The fund gained 0.5 % in the last 10 days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.
 
 
 
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GENL ELECTRIC (GE): Free Stock Analysis Report
 
3M CO (MMM): Free Stock Analysis Report
 
HONEYWELL INTL (HON): Free Stock Analysis Report
 
UNION PAC CORP (UNP): Free Stock Analysis Report
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
VIPERS-INDUS (VIS): ETF Research Reports
 
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