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Material ETFs in Focus on Dow Chemical & DuPont Q2 Earnings

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We are in the middle of the earnings season and the materials sector seems to be tempering the overall Q2 picture while the energy sector remains the biggest drag. This is especially true as total earnings from 81.8% of the material sector’s total market capitalization reported so far are down 5.9% on a 10.1% revenue decline (read: 5 ETFs for Those Who Believe the Oil Rally is Over).

Though the revenue beat ratio of 46.2% looks dull, earnings surprises are impressive with a beat ratio of 69.2%. In particular, Dow Chemical (DOW - Free Report) and DuPont (DD - Free Report) came up with both earnings and revenue surprises. Additionally, both the companies provided an upbeat guidance for this year. Further, the sector is remained remarkably stable, having lost an average 0.1% (average price difference between a day before and after the earnings announcement of a stock), per the Earnings Trends report.

DOW Earnings in Focus

The largest U.S. chemical maker continued its streak of earnings beat for the eleventh successive quarter. Earnings per share came in at 95 cents, trumping the Zacks Consensus Estimate of 85 cents and improving from 91 cents earned a year ago. Revenues dropped 7% year over year to $12 billion but surpassed our estimate of $11.3 billion.

Healthy earnings were credited to restructuring efforts that led to improvement in margins. EBITDA margin expanded 160 bps to 21%. The company remained committed to cost reduction and efficiency programs that are likely to boost margins and shareholder returns in the coming quarters. Additionally, its pending all-stock merger with DuPont is on track to close in the second half of this year. Upon combination, the new company will be named DowDuPont and would be 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 (read: Best ETFs of July).

DD Earnings in Focus

The world's second-largest seed maker reported earnings per share of $1.24, which swept past the Zacks Consensus Estimate by 14 cents. Total revenue slipped 0.8% year over year to $7.1 billion and edged past our $7 billion estimate.

The company is in the midst of a global cost saving plan ahead of its merger with Dow Chemical as mentioned above. DuPont remains on track to attain $1 billion in cost savings on a run-rate basis by end2016. The company raised the bottom end of its adjusted earnings guidance range for 2016 by 10 cents per share to $3.15–$3.20 per share.

ETFs in Focus

Given the upbeat results from these two chemical titans, material ETFs that are heavily invested in them are in focus. These funds have an unfavorable Zacks ETF Rank of 5 or ‘Strong Sell’ rating, suggesting their underperformance in the coming days. We have detailed them below (read: More Pain Ahead for Basic Materials ETFs in 2016?):

Materials Select Sector SPDR (XLB - Free Report)

The most popular material ETF, XLB follows the Materials Select Sector Index. This fund manages about $2.7 billion in its asset base and trades in heavy volume of around 6.3 million. The ETF charges 14 bps in fees per year from investors. In total, the fund holds about 27 securities in its basket with DOW and DD taking the top two spots, with nearly 11% allocation each. In terms of industrial exposure, chemicals dominates the portfolio with approximately 70% share while metals & mining and containers & packaging round off the top three positions.

iShares U.S. Basic Materials ETF (IYM - Free Report)

This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 52 stocks in its basket. The fund has AUM of $608.2 million and charges 44 bps in fees and expenses. Volume is good as it exchanges around 161,000 shares in hand a day. DOW and DD occupy the top two positions in the basket, with nearly 11% of assets each. The product is heavily skewed toward two sectors, diversified chemicals and specialty chemicals (see: all the Materials ETFs here).
 
Vanguard Materials ETF (VAW - Free Report)
 
This fund has amassed about $1.4 billion in its asset base and offers exposure to 121 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 101,000 shares. Here, DOW and DD are the top two firms accounting for nearly 8% share each. Specialty chemicals makes up for nearly one-fourth of the portfolio while diversified chemicals rounds off the top two with 17.5% exposure.
 
Fidelity MSCI Materials Index ETF (FMAT - Free Report)
 
This fund provides exposure to 120 materials stocks with AUM of $123.8 million. This is done by tracking the MSCI USA IMI Materials Index. Here too, DD and DOW are the top two firms with nearly 8% allocation each. Chemicals accounts for 64.3% share while container & packaging, and metals & mining 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 59,000 shares a day (read: Fidelity Slashes Fees for 11 Sector ETFs).

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