Like the past few quarters, the health care sector continued its impressive earnings trend in Q2. In fact, the sector is leading the way higher to become the star performer in terms of beating earnings and revenue estimates. This is especially true as total earnings for 50% of the sector’s total market capitalization are up 9% on revenue growth of 5.2% with earnings and revenue beat ratios of 92.3% and 69.2%, respectively.
Among the most notable players, Johnson & Johnson (JNJ) was the first major drug company to report earnings on July 14, followed by Eli Lilly and Company (LLY) and Bristol-Myers Squibb Company (BMY) on July 23. Other two major U.S. drug companies – Pfizer (PFE) and Merck (MRK) – reported on July 28. All these industry primes outpaced our estimates on both revenue and earnings as well as raised their full-year outlook, though some lagged on the year-over-year basis.
Johnson and Johnson Earnings in Focus
The world's biggest maker of health care products continued its long streak of earnings beat despite currency headwinds and revenues came in above our estimates. Earnings per share came in at $1.71, a couple of cents above the Zacks Consensus Estimate but 3.9% below the year-ago earnings. Revenues slid 8.8% year over year to $17.8 billion but edged past the Zacks Consensus Estimate of $17.7 billion (read: 4 Healthcare ETFs to Buy as JNJ Beats Estimates).
In spite of the fact that a strong U.S. dollar would remain a major drag on international revenue growth, the company raised its earnings per share guidance to $6.10–$6.20 from $6.04–$6.19. The new midpoint was above the Zacks Consensus Estimate of $6.14 at the time of revising the guidance. JNJ is modestly down 0.25% to date since its earnings announcement.
Pfizer Earnings in Focus
Though the U.S. drug giant topped the Zacks Consensus Estimate for the top and the bottom lines, the numbers are weaker than the year-ago level. Earnings per share of 56 cents and revenues of $11.85 billion were ahead of our estimates by a nickel and $0.42 billion, respectively. Notably, earnings per share fell 3% and revenues slid 7% 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 $2.01–$2.07 and revenues of $45–$46 billion compared to the previous outlook of 1.95–$2.05 and $44–$46 billion, respectively. The Zacks Consensus Estimate was $2.04 for earnings and $45.8 billion for revenues at the time of revising the guidance. Shares of PFE have surged 5.3% since the earnings announcement.
Merck Earnings in Focus
Earnings per share came in at 86 cents, six cents ahead of the Zacks Consensus Estimate and 1.2% higher than the year-ago earnings. Revenues slipped 10.5% year over year to $9.78 billion, but were above the Zacks Consensus Estimate of $9.71 billion.
For fiscal 2015, Merck also boosted its earnings per share guidance from $3.35–$3.48 to $3.45–$3.55 driven by higher demand for its diabetes and cancer drugs. Further, it expects revenues to range between $38.6 billion and $39.8 billion, including currency headwind of $1 billion. The Zacks Consensus Estimate at the time of the earnings release was pegged at $3.44 for earnings and $39.5 billion for revenues. The stock has gained about 3.6% to date post its earnings announcement (read: A Beginner's Guide to Pharma ETFs).
Bristol-Myers Earnings in Focus
Bristol-Myers reported earnings per share of 53 cents, strongly outpacing our estimate by 18 cents and improving 10% from the year-ago earnings. Meanwhile, revenues climbed 7% to $4.2 billion and edged past the Zacks Consensus Estimate of $3.7 billion.
The company raised its full-year earnings per share guidance range to $1.70–$1.80 from $1.60–$1.70; the midpoint of which was lower than our estimate of $1.73 at the time of the earnings announcement. Revenues are expected at $15.5–$15.9 billion, which is above the Zacks Consensus Estimate of $15.3 billion. Shares of BMY have lost 5.8% to date since the earnings announcement.
Eli Lilly Earnings in Focus
Earnings of 90 cents at Eli Lilly beat the Zacks Consensus Estimate by 16 cents and came in 22% higher than the year-ago earnings. Revenues slid 4% to $4.98 billion but were above our estimate of $4.84 billion.
Like the other drug makers, Eli Lilly also boosted its full-year outlook with earnings per share revised upward from $3.10–$3.20 to $3.20–$3.30. Further, the company raised the lower end of its revenue guidance by $0.2 billion to $19.7–$20.0 billion. The midpoint of both earnings and revenue was above the Zacks Consensus Estimate of $3.16 and $19.7 billion respectively at the time of the earnings release. Shares of LLY are down 2.6% since the earnings announcement.
ETF Angle
Given the string of earnings and revenue beat, pharma ETFs will be in focus in the days ahead. We have highlighted three pharma ETFs having the largest allocation to these drug makers. Investors should closely monitor the movement in these funds and could catch any opportunity that arises (see: all the Healthcare ETFs here).
iShares U.S. Pharmaceuticals ETF (IHE)
This ETF provides exposure to 39 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The in-focus five firms are among the top six holdings accounting for 37.3% of total assets, suggesting heavy concentration. The product has $1.3 billion in AUM and charges 45 bps in fees and expense. Volume is light as it exchanges about 54,000 shares a day. The fund added about 3.2% over the past one month.
PowerShares Dynamic Pharmaceuticals Fund (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 $2.1 billion and sees good volume of around 200,000 shares a day. The fund charges 58 bps in fees and expenses from investors. Holding 24 stocks, the fund invests less than one-fourth of its assets in the in-focus five firms. The ETF gained 3.8% over the trailing one-month period.
Market Vectors Pharmaceutical ETF (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 16 holdings that make up for a combined 26% share. The product has amassed $418.1 million in its asset base and trades in a moderate volume of about 71,000 shares a day. Expense ratio came in at 0.35%. The fund was up about 3.8% over the past one-month period.
Bottom Line
Investors should note that the pharma ETFs are clearly outpacing the broad health care fund (XLV) by wide margins from a one-month look. This trend is likely to continue in the weeks ahead given the encouraging earnings results by the big pharma companies and their robust Zacks Industry Rank in the top 18% (read: 3 Unique ETFs Beating the Market).
Moreover, the three funds have a solid Zacks ETF Rank of 2 or ‘Buy rating’, suggesting their continued outperformance. In addition, LLY and MRK have a Zacks Rank #2 while BMY, JNJ and PFE carry a Zacks Rank #3 (Hold).
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JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
LILLY ELI & CO (LLY): Free Stock Analysis Report
MERCK & CO INC (MRK): Free Stock Analysis Report
PFIZER INC (PFE): Free Stock Analysis Report
BRISTOL-MYERS (BMY): Free Stock Analysis Report
ISHARS-US PHARM (IHE): ETF Research Reports
PWRSH-DYN PHARM (PJP): ETF Research Reports
MKT VEC-PHARMA (PPH): ETF Research Reports
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