Pharma ETFs To Buy On String Of Q3 Earnings Beats

Includes: IHE, PJP, PPH, XPH
by: Zacks Funds

Like in the past few quarters, the healthcare sector continued to impress with its earnings in Q3. This is especially true as total earnings for 78.8% of the sector's total market capitalization are up 12.5% on revenue growth of 8.4%, with earnings and revenue beat ratios of 83.3% and 61.1%, respectively. In fact, the sector is leading the way higher in terms of beating revenue estimates, where the overall growth picture of the S&P 500 is lagging.

Among the most notable players, Johnson & Johnson (NYSE:JNJ) was the first major drug company to report earnings on October 13, followed by Eli Lilly and Company (NYSE:LL) on October 22. The other three major U.S. drug companies - Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Bristol-Myers Squibb Company (NYSE:BMY) - reported on October 27. All these industry primes outpaced our earnings estimates as well as raised their full-year outlook, while some missed on the revenue front.

Johnson & Johnson's Earnings in Focus

The world's biggest maker of healthcare products continued its long streak of earnings beats despite currency headwinds, which were responsible for the revenues missing our estimates. Earnings per share came in at $1.49, a nickel above the Zacks Consensus Estimate, but 7.4% lower than the year-ago earnings. Revenues slid 7.4% year over year to $17.1 billion and fell shy of the Zacks Consensus Estimate of $17.4 billion.

In spite of the fact that a strong U.S. dollar would remain a major drag on international revenue growth, the company raised the lower end of the earnings per share guidance range to $6.15-6.20 from $6.10-6.20. The new midpoint is above the Zacks Consensus Estimate of $6.16 at the time of revising the guidance, reflecting confidence in its future growth. JNJ has gained 6.4% to-date since its earnings announcement.

Pfizer's Earnings in Focus

The U.S. drug giant topped the Zacks Consensus Estimate for the top and the bottom lines, and raised its guidance for the fiscal 2015. Earnings per share of 60 cents and revenues of $12.01 billion were ahead of our estimates by a nine cents and $0.65 billion, respectively. Notably, earnings per share rose 5%, while revenues slid 2% year over year.

Based on the earnings beat, Pfizer raised its revenue and earnings outlook for fiscal 2015. The company now expects earnings per share of $2.16-2.20 and revenues of $47.5-48.5 billion, compared to the previous outlook of $2.04-2.10 and $46.5-47.5 billion, respectively. The Zacks Consensus Estimate was $2.09 for earnings and $47.7 billion for revenues at the time of revising the guidance. Shares of PFE have moved up 2.6% since the earnings announcement.

Merck's Earnings in Focus

Merck's earnings per share came in at 96 cents, a nickel ahead of the Zacks Consensus Estimate and 6.7% higher than the year-ago earnings. Revenues slipped 4.6% year over year to $10.07 billion, and were slightly below the Zacks Consensus Estimate of $10.09 billion.

For fiscal 2015, Merck raised the low end of the revenue guidance to $39.2-39.8 billion from $38.6-39.8 billion, including currency headwinds of $1 billion, and boosted the earnings per share outlook to $3.55-3.60 from $3.45-3.55. The Zacks Consensus Estimate at the time of the earnings release was pegged at $3.50 for earnings and $39.6 billion for revenues. The stock has added about 4.1% to-date post its earnings announcement.

Bristol-Myers' Earnings in Focus

Bristol-Myers reported earnings per share of 39 cents, outpacing our estimate by four cents, but declining 13% from the year-ago earnings. Meanwhile, revenues climbed 4% to $4.07 billion and edged past the Zacks Consensus Estimate of $3.85 billion.

Like the other drug makers, the company raised its full-year earnings per share guidance range to $1.85-1.90 from $1.70-$1.80, the midpoint of which was lower than our estimate of $1.82 at the time of the earnings announcement. Revenues are expected at $16.0-16.4 billion, which is at the low end of the Zacks Consensus Estimate of $16 billion. Shares of BMY are up 1.8% to-date since the earnings announcement.

Eli Lilly's Earnings in Focus

Earnings of 89 cents at Eli Lilly strongly beat the Zacks Consensus Estimate by 13 cents and came in 22% higher than the year-ago earnings. Revenues slid 4% to $4.960 billion, and were marginally below our estimate of $4.962 billion.

Eli Lilly also boosted its full-year outlook, with earnings per share revised upward from $3.20-3.30 to $3.40-3.45. Meanwhile, the company maintained its revenue guidance of $19.7-20.0 billion. The Zacks Consensus Estimate at the time of the earnings release was pegged at $3.27 per share for earnings and $19.9 billion for revenues. Shares of LLY have climbed 6.5% since the earnings announcement.

ETF Angle

The string of earnings beats and raised outlook has driven pharma ETFs higher from a one-month look. This trend is likely to continue for the rest of the year, given that the industry has a robust Zacks Industry Rank in the top 25% at the time of writing. Further, all these funds have a solid Zacks ETF Rank of 1 (Strong Buy) or 2 or (Buy), suggesting their continued outperformance (see all the Healthcare ETFs here).

iShares U.S. Pharmaceuticals ETF (NYSEARCA:IHE)

This ETF provides exposure to 43 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The five in-focus firms are among the top six holdings, accounting for 42.6% of total assets, suggesting heavy concentration. The product has $891.8 million in AUM and charges 43 bps in fees and expense. Volume is light, as the fund exchanges about 67,000 shares a day. IHE added about 6.9% over the past one month.

PowerShares Dynamic Pharmaceuticals Portfolio ETF (NYSEARCA:PJP)

This is by far the most popular choice in the pharma space that follows the Dynamic Pharmaceuticals Intellidex Index. The product has AUM of about $1.6 billion, and sees good volume of around 233,000 shares a day. The fund charges 56 bps in fees and expenses from investors. Holding 23 stocks, PJP invests more than one-fourth of its assets in the in-focus five firms. The ETF surged about 8% over the trailing one-month period.

Market Vectors Pharmaceutical ETF (NYSEARCA:PPH)

This ETF follows the Market Vectors US Listed Pharmaceutical 25 Index and holds 26 stocks in its basket. JNJ, PFE, MRK, LLY and BMY are among the top 12 holdings that make up for a combined 28.9% share. The product has amassed $338.6 million in its asset base, and trades in a moderate volume of about 72,000 shares a day. The expense ratio came in at 0.35%. The fund was up about 4% over the past one-month period.

SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH)

This fund provides an almost equal-weight exposure to the pharma companies by tracking the S&P Pharmaceuticals Select Industry Index. With AUM of over $719.6 million, it trades in moderate volume of around 72,000 shares a day and charges 35 bps in fees a year. In total, the product holds 43 securities, with the in-focus five firms taking nearly 3% share each. The product has added 7.2% in the same period.

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