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Healthcare ETFs in Focus After Johnson & Johnson Q1 Earnings

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Shares of Johnson & Johnson JNJ decreased 1.2% at market close on Apr 17, 2018 despite beating the Zacks Consensus Estimate on both earnings and revenues. This was primarily due to the fact that its top- selling drug, Remicade witnessed a 17% decline in sales, owing to recent competition in the United States.

The company’s revenues increased 12.9% on a year-over-year basis to $20.1 billion in first-quarter 2018 and came ahead of the consensus mark of $19.5 billion.

Increase in sales was driven primarily by strong sales of cancer drugs, favorable foreign exchange trends and recent acquisition activity. In June 2017, JNJ in its biggest ever acquisition bought Swiss biopharmaceutical company, Actelion for $30 billion.

Johnson & Johnson reported non-GAAP earnings per share (EPS) of $2.06 for first-quarter 2018, up 12.6% year over year and 18.4% on a sequential basis. It beat the Zacks Consensus Estimate of $2.01.

Segment Sales and Outlook

The company reported increase in sales by geographical segments. U.S. sales increased 6.1% to $10.0 billion from $9.4 billion in the year ago quarter, while International sales increased 10.9% to $10.1 billion from $8.4 billion.

Moreover, on a business-segment basis, the company reported improvements in all the three segments. Consumer, Pharmaceutical and Medical devices revenues increased 5.3%, 19.4% and 7.5% respectively.

Although the company is facing headwinds related to sales of some of its key drugs like Remicade and Zytiga, certain new drugs are expected to make up for the loss. Its blood cancer drugs Darzalex and Imbruvica delivered strong sales growth in the quarter. However, the company’s high dependence on the pharma segment is a concern, as the consumer and medical devices segment failed to register attractive growth.

Although J&J still expects 2018 adjusted earnings per share in the range of $8.00-$8.20, it increased its revenue guidance to a range of $81.0-$81.8 billion from $80.6-$81.4 billion expected earlier.

In the current scenario, we believe it is prudent to discuss the following ETFs that have a relatively high exposure to Johnson and Johnson (see all Health Care ETFs here).

Health Care Select Sector SPDR Fund XLV

This fund seeks to provide exposure to healthcare stocks and tracks the Health Care Select Sector Index. It has AUM of $15.5 billion and charges a moderate fee of 13 basis points a year.

From a sector look, the fund has high exposure to Pharmaceuticals, Health Care Equipments and Supplies and Health Care Providers & Services, with 33.3%, 20.9% and 19.8% exposure, respectively. The fund’s top three holdings are Johnson & Johnson, Unitedhealth (UNH - Free Report) and Pfizer PFE, with 10.9%, 7.3% and 6.9% allocation, respectively.  The fund has returned 13% in a year but lost 0.5% year to date. XLV currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Healthy Q1 Earnings at UnitedHealth: ETFs to Watch).

Vanguard Healthcare ETF VHT

This fund seeks to provide exposure to healthcare stocks and tracks the MSCI US Investable Market Health Care 25/50 Index. It has AUM of $7.2 billion and charges a moderate fee of 10 basis points a year.

From a sector look, the fund has high exposure to Pharmaceuticals, Biotech and Health Care Equipment, with 29.9%, 22.3% and 19.6% exposure, respectively. The fund’s top three holdings are Johnson & Johnson, Pfizer and Unitedhealth with 9.5%, 5.9% and 5.7% allocation, respectively.  The fund has returned 15.2% in a year and 0.8% year to date. VHT currently has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Healthcare ETF IYH

This fund seeks to provide exposure to healthcare stocks and tracks the Dow Jones U.S. Health Care Index. It has AUM of $1.8 billion and charges a moderate fee of 44 basis points a year.

From a sector look, the fund has high exposure to Pharmaceuticals, Biotech and Health Care Equipment, with 31.5%, 20.6% and 20.0% exposure, respectively. The fund’s top three holdings are Johnson & Johnson, Unitedhealth and Pfizer, with 10.4%, 6.9% and 6.4% allocation, respectively.  The fund has returned 14.1% in a year and 0.1% year to date. IYH currently has a Zacks ETF Rank #3 with a Medium risk outlook.

Below is a one-year chart comparing the performance of the three ETFs discussed above with JNJ.

Source: Yahoo Finance

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