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How Are Material ETFs Performing Post Q4?

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We are in the middle of the earnings season, and the materials sector is brightening up the overall Q4 growth picture after energy. This is especially true as total earnings from 62.7% of the sector's total market capitalization reported so far are up 19.6% on a 4.3% revenue increase.

Though the revenue beat ratio of 44.4% looks dull, earnings surprises are impressive with a beat ratio of 66.7%. Additionally, the sector is performing well, having gained an average 0.2% (average price difference between a day before and after the earnings announcement of a stock), per the Earnings Trend s.

While Dow Chemical DOW and DuPont DD came up with earnings surprises, Air Products and Chemicals APD missed while Praxair PX reported in-line earnings. On the revenue front, DD, PX and APD lagged our estimates while DOW surpassed.

DOW Earnings in Focus

The largest U.S. chemical maker continued its streak of earnings beat for the thirteenth consecutive quarter and year-over-year earnings growth for the seventeenth quarter in a row. Earnings per share came in at 99 cents, trumping the Zacks Consensus Estimate of 88 cents and improving from 93 cents earned a year ago. Revenues rose 14% year over year to $13 billion but surpassed our estimate of $12.48 billion. This represents 13 consecutive quarters of volume growth.

The company's pending all-stock merger with DuPont will now take longer than expected with the closing target in the first half of 2017. Upon combination, the new company will be named DowDuPont and split into three publicly traded companies, namely material sciences, specialty products and agrochemicals, through tax-free spin-offs. The combination is expected to deliver cost synergies of $3 billion within the first two years of completion.

Following the solid results on January 26, shares of Dow Chemical climbed as much as 2.4% and has risen 1.8% since its results.

DD Earnings in Focus

The world's second-largest seed maker reported earnings per share of 51 cents, which strongly beat the Zacks Consensus Estimate by nine cents and were ahead of 27 cents in the year-ago quarter. Total revenue slipped 2% year over year to $5.21 billion and came below our $5.25 billion estimate.

For the first quarter, DuPont expects earnings per share to increase about 8% year over year.

Following the earnings announcement, on January 24, before the market opened, DD shares climbed nearly 6.8% to date (see: all the Materials ETFs here ).

PX Earnings in Focus

Though Praxair reported in-line earnings per share of $1.41, revenues of $2.64 billion were below the Zacks Consensus Estimate of $2.67 billion. On a year-over-year basis, earnings per share declined by 4.1% while revenues grew 1.9%.

The Industrial gas producer and supplier provided outlook for the first quarter and fiscal 2017. It expects earnings per share in the range of $1.28-$1.35 for the quarter and $5.45-$5.80 for the full year. The current Zacks Consensus Estimate is pegged at $1.33 for Q1 and $5.72 for 2017.

Following the results on January 26, shares of Dow Chemical climbed 0.5% to date.

APD Earnings in Focus

Air Products and Chemicals missed our estimates on both earnings and revenues. Earnings per share of $1.47 and revenues of $1.88 billion in first-quarter fiscal 2017 lagged our estimates by a penny and $77 million, respectively. On a year-over-year basis, earnings per share and revenues increased 9% and 1%, respectively.

The company expects earnings per share in the range of $1.30-$1.40 for Q1 and $6.00-$6.25 for 2017. The current Zacks Consensus Estimate is pegged at $1.35 for Q1 and $6.28 for 2017.

The stock fell as much as 7.9% on the day post dismal results on January 27.

ETFs in Focus

Given the mixed results from these titans, material ETFs that are heavily invested in these stocks are in focus. These funds gained more than 3% over the past five trading days and have a Zacks ETF Rank of 1 (Strong Buy) or 2 (Buy), suggesting their outperformance in the coming days. We have detailed them below (read: Will Material ETFs Sustain Their Rally as Q4 Earnings Unfold? ):

Materials Select Sector SPDR XLB

This is the most popular material ETF that follows the Materials Select Sector Index. This fund manages about $3.7 billion in its asset base and trades in heavy volume of more than 5 million shares. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 25 securities in its basket with DOW and DD accounting for more than 11% allocation each and PX and APD making up for over 5% share each. In terms of industrial exposure, chemicals dominates the portfolio with 72.7% share while containers & packaging, and metals & mining round off the top three positions. XLB has a Zacks ETF Rank of 2.

iShares U.S. Basic Materials ETF IYM

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 52 stocks in its basket. The fund has AUM of $727.6 million and charges 44 bps in fees and expenses. Volume is good as it exchanges around 187,000 shares in hand a day. Here also, DOW and DD make up for 11% allocation each while PX and APD takes over 5% share each. The product is heavily skewed toward the chemical segment, as it makes up for more than two-thirds of the portfolio while industrial gases, steel, and metals & mining receive minor allocation each. The ETF has a Zacks ETF Rank of 1.

Vanguard Materials ETF VAW

This fund has amassed about $1.7 billion in its asset base and offers exposure to 125 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.10% in expense ratio while volume is moderate at 117,000 shares. Here, the in-focus four firms collectively account for 24.5% share in the basket. Chemicals makes up for nearly three-fifths of the portfolio while container & packaging and steel also make a nice mix in the portfolio. VAW has a Zacks ETF Rank of 2 (read: 5 Top-Ranked Sector ETFs Thankful to Trump ).

Fidelity MSCI Materials Index ETF FMAT

This fund provides exposure to 119 materials stocks with AUM of $167.3 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, the in-focus four firms collectively make up for 24.2% share. Chemicals accounts for 64.9% share while metals & mining, and container & packaging round off the top three spots with a double-digit exposure each. The ETF has 0.08% in expense ratio while volume is moderate at 77,000 shares a day. It has a Zacks ETF Rank of 2.

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E.I. du Pont de Nemours and Company (DD): Free Stock Analysis Report

Dow Chemical Company (The) (DOW): Free Stock Analysis Report

Praxair, Inc. (PX): Free Stock Analysis Report

Air Products and Chemicals, Inc. (APD): Free Stock Analysis Report

SPDR-MATLS SELS (XLB): ETF Research Reports

FID-MATRLS (FMAT): ETF Research Reports

VIPERS-MATERIAL (VAW): ETF Research Reports

ISHARS-US BA MA (IYM): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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