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What Pushed Industrial ETFs Down Despite Upbeat Earnings?

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The earnings season for the industrial sector is off to a great start this year. Of the 83.3% S&P industrial companies that have reported earnings, 85% beat on both lines. There have been earnings improvement of 38.4% and revenue growth of 14% year over year, per the Earnings Trends issued on May 2, 2018.

Against this backdrop, we take a look at some big industrial earnings releases within the last 15 days and see if these can leave an impact on ETFs exposed to the space.

Inside Q1 Earnings

On Apr 26, Union Pacific Corporation’s (UNP - Free Report) first-quarter 2018 earnings of $1.68 beat the Zacks Consensus Estimate of $1.65 per share. The bottom line expanded 27.3% on a year-over-year basis. Results were aided by higher revenues. Operating revenues of $5,475 million also surpassed the Zacks Consensus Estimate of $5,370.8 million. Moreover, revenues increased 6.7% year over year. Higher freight revenues boosted the top line.

On Apr 24, Caterpillar Inc. (CAT - Free Report) , the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives, reported first-quarter 2018 results, wherein adjusted earnings of $2.82 surpassed the Zacks Consensus Estimate of $2.11 by a margin of 34%.

Caterpillar posted revenues of $12.9 billion, handily beating the Zacks Consensus Estimate of $11.6 billion. However, post earnings, stocks got beaten down as management noted that the company is less likely to match the blockbuster performance of Q1 during any of the next three this year.

On Apr 24, 3M Company (MMM - Free Report) reported solid first-quarter 2018 results, with impressive year-over-year improvement in adjusted earnings and revenues. Excluding non-recurring items, adjusted earnings for the quarter were $2.50, which came in line with the Zacks Consensus Estimate. Notably, the reported figure increased 15.7% on a year-over-year basis. Net sales came in at $8,278 million, up from $7,685 million in the year-ago quarter and ahead of the Zacks Consensus Estimate of $8,079 million.

On Apr 20, Honeywell International Inc. (HON - Free Report) posted impressive first-quarter 2018 results with a year-over-year surge in revenues and adjusted earnings. The company’s adjusted earnings of $1.95 a share surpassed the Zacks Consensus Estimate of $1.89 by 3.2%.

Notably, the reported figure increased 17.5% on a year-over-year basis. Honeywell’s first-quarter revenues came in at $10,392 million, up 9.5% year over year. The top line also exceeded the Zacks Consensus Estimate of $9,936 million.

On Apr 20, General Electric Company (GE - Free Report) reported first-quarter 2018 adjusted earnings of 16 cents per share, which beat the Zacks Consensus Estimate of 11 cents. Total consolidated revenues for the reported quarter rose 7% year over year to $28,660 million and trumped the Zacks Consensus Estimate of $27,884 million.

In the current scenario, we believe it is prudent to discuss the following ETFs that have relatively high exposure to the industrial companies discussed (see all Industrial ETFs here).

ETFs in Focus

Industrial Select Sector SPDR Fund (XLI - Free Report)

This $12 billion-fund focuses on providing exposure to the U.S. industrial sector. The above-mentioned companies take about 24% of the fund. The fund has lost about 6.2% since Apr 19.

Vanguard Industrials ETF (VIS - Free Report)

This $3.46-billion ETF is a pure play on the U.S. industrials sector. The concerned companies take about 18.2% of the basket. The fund has shed about 5.8% since Apr 19.

iShares U.S. Industrials ETF (IYJ - Free Report)

This $1.04-billion ETF puts about 16.4% weight in the in-focus companies. The fund has retreated about 5.5% since Apr 19.

Why the Slump?

The sector is presently suffering from rising prices and supply chain issue. Trump’s imposition of tariffs on steel and aluminum is a major concern. So, at this point, it is better to wait on the sidelines (read: Manufacturing 9-Month Low: Are Industrial ETFs in Trouble?).

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