Industrial Q2 Results Fail To Lift ETFs

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Includes: FIDU, GE, HON, IYJ, MMM, UNP, VIS, XLI
by: Zacks Funds

Most of the industrial bellwethers have managed to beat or meet earnings estimates in the second quarter of 2016 despite a challenging macroeconomic environment. Although the U.S. is witnessing an encouraging manufacturing trend, business in the ex-U.S. territories could enter choppy terrain due to the adverse fallout of Brexit. Especially, export-oriented zones may come under threat in the near term. Meanwhile, a strong dollar can impact most industrial bigwigs adversely as most of these companies have significant international exposure.

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 (NYSE:GE)

Diversified industrial conglomerate General Electric posted strong second-quarter results as it reported better-than-expected earnings and revenues. The company's earnings came in at 51 cents per share, surpassing the Zacks Consensus Estimate of 46 cents and rising 65% from the year-ago quarter.

Revenues rose 15% year over year to $33.5 billion and were well above the estimated $30.8 billion. Although organic revenue growth and total orders for the Industrial segment were disappointing, sustained restructuring initiatives with a re-focus on core operations enabled the company to report better-than-expected results. For 2016, the company reaffirmed its earnings per share guidance of $1.45-$1.55.

3M Company (NYSE:MMM)

Another major conglomerate, 3M Company reported earnings of $2.08 per share in second-quarter 2016, in line the Zacks Consensus Estimate. Net sales during the quarter were $7.7 billion, down 0.3% year over year and in line with the Zacks Consensus. Organic local-currency sales declined 0.2%, while inorganic growth added 1.4% to sales. 3M shares fell on the day of its earnings release.

Honeywell International Inc. (NYSE:HON)

Honeywell International's earnings per share of $1.66 in the reported quarter beat the Zacks Consensus Estimate of $1.64. Revenues in second quarter 2016 were up 2.2% year over year to $10 billion, below the Zacks Consensus Estimate of $10.1 billion. Honeywell revised its 2016 guidance. The company anticipates earnings in the range of $6.60 to $6.70 per share on revenues of $40.0 billion and $40.6 billion. Shares of the company fell slightly on the day of its earnings release.

Union Pacific Corporation (NYSE:UNP)

The rail transportation operator Union Pacific reported second-quarter 2016 earnings of $1.17 per share, in line with the Zacks Consensus Estimate. Earnings declined 15% on a year-over-year basis.

Revenues decreased 12% year over year to $4.8 billion in the second quarter, again broadly in line with the Zacks Consensus Estimate. A 13% decline in freight revenues hurt the top line. Declining coal shipments weighed on the railroad operator's results yet again. The stock fell after reporting results.

ETF Impact

Post earnings, most of the industrial stocks fell, 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.

Industrial Select Sector SPDR ETF (NYSEARCA: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 15% in the fund. XLI has garnered $7.1 billion in assets and trades in a heavy volume of 12.6 million shares per day. It has a low expense ratio of 0.14%. The fund has the highest exposure to Aerospace & Defense (26.9%), followed by Industrial Conglomerates (17.9%). The product lost 0.3% in the past five days and currently has a Zacks ETF Rank #4 or 'Sell' rating with a Medium risk outlook.

Vanguard Industrials ETF (NYSEARCA:VIS)

This fund follows the MSCI US IMI Industrials 25/50 index and holds about 345 securities in its basket. Of these firms, GE occupies the top position with 12.5% share, while 3M, Honeywell and Union Pacific together comprise almost 11.2% of the fund's assets. The fund manages nearly $2.3 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 (22.7%), followed by Industrial Conglomerates (20.7%). Volume is moderate as it exchanges roughly 110,000 shares a day on average. The product lost 0.2% in the past five days and currently has a Zacks ETF Rank #3 or 'Hold' rating with a Medium risk outlook.

iShares U.S. Industrials ETF (BATS:IYJ)

IYJ tracks the Dow Jones U.S. Industrials Index to provide exposure to 213 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 10.4%. The ETF manages an asset base of $805.6 million and trades in an average volume of 92,000 shares. The fund has top exposure to Capital Goods (57.8%), Software & Services (13.5%) and Transportation (11.8%). The fund is slightly expensive with 44 basis points as fees. It gained almost 0.1% in the last five days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Fidelity MSCI Industrials Index ETF (NYSEARCA:FIDU)

This fund tracks the MSCI USA IMI Industrials Index, holding 335 stocks in its basket. General Electric takes the top spot at 12.8% share while 3M, Honeywell and Union Pacific have a combined exposure of almost 11.8%. The product has amassed $160.7 million in its asset base while it trades in moderate volume of nearly 82,000 shares a day on average. The fund has top exposure to Aerospace & Defense (23.7%) and Industrial Conglomerates (18.6%). It is one of the low-cost choices in the space, charging 8 bps in annual fees from investors. The fund lost 0.1% in the last five days and currently has a Zacks ETF Rank #3 with a Medium risk outlook.

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