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ETF News And Commentary

The industrial stocks have seemingly failed to impress the markets with their Q2 earnings performance. The sector has seen mixed earnings from most of the top giants including General Electric Company (GE), Caterpillar Inc. (CAT), 3M Company (MMM), Union Pacific Corporation (UNP) and Honeywell International Inc. (HON). Shares of most of these companies have dropped roughly 1% to 3% after their earnings announcement.
 
Industrials Earnings in Focus
 
General Electric
 
This largest industrial company in the U.S. set the trend this season for industrial companies reporting mixed results (read: Top ETF Picks for Q2 Earnings Season).
 
The conglomerate reported an 8.3% jump in its operating earnings to 39 cents a share, in line with the Zacks Consensus Estimate. Though revenues increased 3% year over year to $36.2 billion, it marginally fell short of the Zacks Consensus Estimate of $36.3 billion.
 
Though revenues from the company’s Industrials segment remained strong, the company reported a year-over-year drop in revenues from the Capital segment. The company is realigning its corporate strategy to a manufacturing-based entity and intends to shrink its finance business by 2015 to reduce credit risks.
 
Moreover, during the quarter the company acquired Alstom’s Power and Grid business to generate cost synergies, while it also plans to go for an IPO of its North American financial division, Synchrony Financial. 
 
Nonetheless, poor performance from GE Capital failed to cheer investors as the segment's loan defaults are likely to be a drag on the company’s profitability.
 
Caterpillar
 
Though heavy-equipment maker Caterpillar managed to beat our estimates on the earnings front, the company disappointed investors on revenues. Moreover, the company tightened the range of its revenue estimates to between $54 billion and $56 billion from its earlier projected range of $53.2 billion to $58.8 billion
 
The company’s second quarter earnings of $1.69 per share increased 17% year over year, trumping the Zacks Consensus Estimate of $1.51. However, revenues declined 3% year over year to $14.1 billion in the quarter, falling short of the Zacks Consensus Estimate of $14.4 billion (read: 3 ETFs for Manufacturing "Renaissance").
 
Soft segment results from Machinery, Energy & Transportation (ME&T) were the primary reason for the disappointment. Resource Industries, an ME&T business, witnessed a huge 29% plunge in revenues owing to lower end-user demand across China, Africa and the Middle East.
 
3M Company
 
3M also followed GE’s footsteps to report earnings in line with our estimates while beating on revenues. The company reported a 5.8% increase in profits and most of its segments reported higher revenues.
 
Strong sales of respiratory face masks and water-filtration products in China as well as in other developing countries were the main drivers in boosting profits, as per Wall Street Journal.
 
Union Pacific Corporation
 
The rail transportation operator, Union Pacific, did manage to beat both Q2 earnings and revenue estimates. Earnings per share rose 21% year over year to $1.43, beating our estimates by a penny, while revenues increased 10.0% year over year to $6.015 billion, ahead of the Zacks Consensus Estimate of $5.982 billion.
 
Market Impact
 
Lukewarm results from the big caps in the industrial space failed to impress the Industrial ETFs too.  General Electric has dropped roughly 2% following its results on July 18, while Caterpillar and Union Pacific are down 3% and 0.7% respectively following their earnings (read: Best ETF Strategies for 2014).
 
General Electric, Caterpillar, 3M and Union Pacific are among the top ten holdings and have a combined exposure of at least 20% in the top three industrials ETFs - Vanguard Industrials ETF (VIS - ETF report), Industrial Select Sector SPDR (XLI - ETF report) and iShares U.S. Industrials ETF (IYJ - ETF report).
           
All of the above ETFs have delivered flat returns in the past five days and were trading marginally lower yesterday. GE occupies the top spot in all the above ETFs with roughly 10% exposure.
 
XLI is the most popular ETF in the space with an AUM of $9.7 billion and average trading volume of 7.9 million shares a day. On the other hand, VIS and IYS manage an asset base of $1.8 billion and $1.7 billion respectively.
 
Bottom Line
 
With the major players coming up with indifferent Q2 numbers, the industrial segment presently is a non-event. While Union Pacific managed to beat on both fronts, the others have either missed or reported in line results (see all Industrials ETFs here).
 
Thus it wouldn’t be wise on the part of investors to stay invested in any single stock. Investors interested in the space should rather use the basket form and use the above ETFs. All the above three industrial ETFs currently have a Zacks Rank #3 or Hold rating and are expected to perform in line with the broader markets in the near term.
 
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