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Healthcare Q1 Earnings Look Solid: ETFs to Benefit

The healthcare space has been on a wild ride since the start of the year on a global market rout and a biotechnology sell-off. However, a positive momentum built up in the space over the past one month on improving market fundamentals, low valuations and positive earnings expectation.

In fact, earnings from 24.4% of the sector market capitalization that have reported so far are up 8.7% with a beat ratio of 87.5% on revenue growth of 14% and revenue surprise of 75%. Additionally, stock prices have moved up by an average of 2.4% in the wake of earnings results as per the Zacks Earnings Report. Notably, a solid Q1 earnings report from the leading drug maker Johnson & Johnson (JNJ) spread strong optimism into the sector last week (read: Healthcare ETFs to Buy on Blockbuster J&J Q1 Results).
 
As a result, healthcare ETFs saw smooth trading with the popular funds – Health Care Select Sector SPDR Fund (XLV), Vanguard Health Care ETF (VHT), iShares U.S. Healthcare ETF (IYH) and Fidelity MSCI Health Care Index ETF (FHLC) – gaining at least 7% over the past one-month period. The robust trend is likely to continue in the weeks ahead. This is especially true as the sector is expected to post Q1 earnings growth of 2% and revenue growth of 9%.

Let’s delve into the earnings picture of some of the largest companies in the healthcare space that would drive the performance of the above-mentioned funds in the coming days.

Gilead Sciences Inc. (GILD) and Amgen Inc. (AMGN) are scheduled to report after the market closes on April 28 while Bristol-Myers Squibb Company (BMY) will report before the opening bell on the same day. Pfizer Inc. (PFE) and Merck & Co. Inc. (MRK) are expected to report their results next week on May 3 and May 5, respectively. All these stocks collectively account for the maximum portion in the fund’s basket with 27.1% share in XLV, 25.8% in IYH, 23.5% in FHLC and 22.8% in VHT.

Inside Our Surprise Prediction of These Stocks

Gilead has a Zacks Rank #2 (Buy) and an Earnings ESP of +1.65%, indicating a higher chance of beating estimates this quarter. The company delivered positive earnings surprises in the last four quarters, with an average beat of 7.79% and saw solid positive earnings estimates revision of 27 cents over the past three months for the to-be-reported quarter. Further, the stock has a top Value Style Score of A while Growth and Momentum Style Score is unimpressive at C each (read: Q1 Earnings Appear Dull: ETFs & Stocks to Bet On).

Amgen has a Zacks Rank #3 (Hold) and an Earnings ESP of +3.52%, indicating a good chance of beating estimates this quarter. The earnings surprise track over the past four quarters is robust with an average positive surprise of 13.71%. The stock also witnessed positive earnings estimate revision of four cents over the past 90 days for the yet-to-be-reported quarter. Additionally, the stock has a top Momentum Style Score of A, and a solid Value and Growth Style Score of B each.

Bristol-Myers has a Zacks Rank #2 but an Earnings ESP of -1.54%, indicating a lower probability of beating estimates this quarter. While the stock delivered positive earnings surprises over the past four quarters, with an average beat of 35.14%, the earnings estimate revision for the to-be-reported quarter has been on a downtrend. The current Zacks Consensus Estimate for the first quarter is 65 cents, down 56 cents over the past three months. In addition, the stock has an unfavorable Value and Growth Style Score of D and F, respectively, though a Momentum Style Score of A looks better.

Pfizer has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. It delivered positive earnings surprises in the last four quarters, with an average beat of 7.84%. However, the Zacks Consensus Estimate for first-quarter 2016 is 55 cents, down by a nickel over the past three months. Further, the stock has an unfavorable Growth Style Score of C while the Value and Momentum Style Score is good at B and A, respectively (read: New Tax Inversions Rules: Threats to Healthcare ETFs?).

Merck also has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The stock has seen negative earnings estimate revision of five cents over the past 90 days for the to-be-reported quarter. However, the drug maker delivered positive earnings surprises in the last four quarters, with an average beat of 7.13%. The stock has an unfavorable Value and Growth Style Score of C and D, respectively.

Summing Up

Given that most companies are expected to bring in earnings surprises, healthcare ETFs will certainly get a boost in the coming days. Currently, XLV, VHT and IYH have a Zacks ETF Rank of #1 (Strong Buy) while FHLC has a Zacks ETF Rank of #3 (see: all the Healthcare ETFs here).
 
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SPDR-HLTH CR (XLV): ETF Research Reports
 
VIPERS-HLTH CR (VHT): ETF Research Reports
 
ISHARS-US HLTHC (IYH): ETF Research Reports
 
FID-H CARE (FHLC): ETF Research Reports
 
GILEAD SCIENCES (GILD): Free Stock Analysis Report
 
AMGEN INC (AMGN): Free Stock Analysis Report
 
BRISTOL-MYERS (BMY): Free Stock Analysis Report
 
PFIZER INC (PFE): Free Stock Analysis Report
 
MERCK & CO INC (MRK): Free Stock Analysis Report
 
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