Two chemical giants - DuPont (DD - Analyst Report) and Dow Chemical (DOW - Analyst Report) – reported their second-quarter earnings this week. The world's second-largest seed maker reported earnings as expected but missed on revenue while Dow Chemical beat the Zacks Consensus Estimate on both the top and bottom lines.
DD Earnings in Focus
Earnings per share of $1.17 met the Zacks Consensus Estimate, but fell 8.6% from the year-ago level. Total revenue slipped 1.4% year over year to $9,706 million and fell short of our $10,022 million estimate. This is primarily thanks to lower corn seed sales owing to more soybean plantations that led to write-downs on seed inventories and hurt the performance of the agricultural business.
Despite this, the leading U.S. chemical maker reaffirmed its recently updated earnings guidance of $4.00–$4.10 per share for the fiscal year. This represents an increase of 3–6% from $3.88 reported in 2013 and makes the Zacks Consensus Estimate of $4.03 seem attainable. However, DuPont expects second half of 2014 to be strong with earnings per share of $1.25–$1.35. Only 40% of earnings are likely to come in the third quarter (read: Materials ETFs in Focus as DuPont Cuts Guidance).
Further, the company raised its quarterly dividend by 2 cents to 47 cents. This marks the third rise in the last 27 months.
Following the earnings announcement before the bell on Tuesday, DD shares initially traded in the positive territory but slid as much as 1.4% within a few moments. The stock is down just 0.50% since the results.
DOW Earnings in Focus
Earnings per share came in at 74 cents, beating the Zacks Consensus Estimate by a couple of cents and improving from the year-ago earnings of 64 cents. Revenues grew 2.3% year over year to $14,917 million and surpassed our estimate of $14,876 million.
Revenue gains were broad-based across all segments with Performance Plastics, and Electronic and Functional Materials leading (read: 3 Agricultural Commodity ETFs Slumping in July).
The largest U.S. chemical maker is seeking optimization of its portfolio by selectively spinning off or selling its underperforming assets and gradually shifting focus to high growth businesses like the launch of Enlist, a new version of herbicide designed to kill weeds. The company targets $4.5 billion to $6 billion of proceeds from assets sale by year-end 2015.
Based on the earnings and revenue beat, shares of Dow Chemical rose as much as 3.8% in Wednesday trading session on heavy volumes. In fact, the stock touched a new 52-week high of $54.28 on the day and is up nearly 9% in the last two days.
ETFs in Focus
The mixed results from these two chemical titans put materials ETFs in focus for the coming days. Investors should note that DuPont currently has a Zacks Rank #4 (Sell) while Dow Chemical has a Zacks Rank #3 (Hold). However, both the firms fall in a poor industry category, with a Zacks Industry Rank in the bottom 10%.
As such, we have highlighted three ETFs that are heavily invested in these chemical giants. The trio has been modestly up over the past three trading sessions and has a favorable Zacks ETF Rank of 3 or ‘Hold’ rating, suggesting room for further upside (see: all the Materials ETFs here).
Materials Select Sector SPDR ((XLB - ETF report) )
The most popular materials ETF on the market, XLB follows the S&P Materials Select Sector Index. This fund manages about $5.2 billion in asset base and trades in heavy volume of nearly 5.6 million. The ETF charges 16 bps in fees per year from investors.
In total, the fund holds about 32 securities in its basket. Of these firms, DOW takes the top spot at 10.23% while DD accounts for the third position with 9.69% allocation. In terms of industrial exposure, chemicals dominates about three-fourths of the portfolio while metals & mining and containers & packaging round off the top three.
iShares U.S. Basic Materials ETF ((IYM - ETF report) )
This ETF tracks the Dow Jones U.S. Basic Materials Index and holds 61 stocks in its basket. The fund has AUM of nearly $1 billion and charges 43 bps in fees and expense. Volume is moderate as it exchanges around 223,000 shares in hand a day.
DOW and DD occupy the top and third positions in the basket with 9.10% and 8.62% of assets, respectively. The product is heavily skewed toward the chemical segment, as these make up for three-fourths of the portfolio. Industrial metals & mining, mining, and forestry & paper take the remaining portion in the basket (read: Monsanto Stock Strength Is Great for These ETFs).
Vanguard Materials ETF ((VAW - ETF report) )
This fund has amassed about $1.3 billion in its asset base and offers exposure to 132 stocks by tracking the MSCI US Investable Market Materials 25/50 Index. The ETF has 0.14% in expense ratio while volume is light at under 100,000 shares.
Here, DOW and DD is the second and third firms with nearly 7% share each. From a sector perspective, specialty chemicals take the largest share at 21.6%, closely followed by diversified chemicals (18.3%) and fertilizers & agricultural chemicals (11.7%).
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