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JNJ Beats, Offers Bleak Outlook: Health Care ETFs in Focus

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The Q4 earnings season has commenced and Johnson & Johnson (JNJ - Free Report) was the first drug company to report on Jan 22, before the opening bell. The world's biggest maker of health care products continued its long streak of earnings beat and outpaced the estimate on the revenue front. However, it offered a downbeat outlook for 2019.

Earnings per share came in at $1.97, a couple of cents ahead of the Zacks Consensus Estimate and 13.2% higher than the year-ago quarter. Revenues inched up 1% year over year to $20.39 billion and edged past the Zacks Consensus Estimate of $20.1 billion. Robust results were driven by double-digit growth in sales of Crohn's disease treatment Stelara and cancer drugs such as Darzalex and Imbruvica.

Johnson & Johnson expects its sales growth to slow down this year due to pricing pressures and generic-drug competition for its pharmaceutical division. This is especially true as the company's prostate cancer drug Zytiga, an important growth driver, is expected to be pressured by generic competition while sales of its rheumatoid arthritis drug Remicade have been slipping due to competition from cheaper biosimilar versions (read: 10 Top-Ranked ETFs That Crushed the Market in 2018).

As a result, revenues are expected in the range of $80.4-$81.2 billion, reflecting year-over-year growth of 0.0-1.0% while earnings per share will likely range between $8.50 and $8.65, reflecting growth of 5.7-7.6%. The midpoints of the guidance are well below the Zacks Consensus Estimate of $82.61 billion for revenues and $8.64 for earnings.

Market Impact

Shares of JNJ were down 1.5% at the close of session. Currently, the stock has a Zacks Rank #3 (Hold) and VGM Score of B. Additionally, Johnson & Johnson belongs to a top-ranked Zacks industry Rank (top 15%.

As a result, investors should closely watch the movement of the stock and keep a close eye on ETFs having double-digit allocation to this diversified drug maker. Below we have highlighted them (see: all the Healthcare ETFs here).

iShares U.S. Pharmaceuticals ETF (IHE - Free Report)

This ETF provides exposure to 47 companies that manufacture prescription or over-the-counter drugs or vaccines by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Of these, Johnson and Johnson takes the top spot, accounting for 11.1% share. The product has $391.6 million in AUM and charges 43 bps in fees and expenses. Volume is lower as it exchanges about 20,000 shares a day. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

Health Care Select Sector SPDR Fund (XLV - Free Report)

The most popular health care ETF, XLV follows the Health Care Select Sector Index. This fund manages nearly $18.6 billion in its asset base and trades in heavy volume of around 10.7 million shares. Expense ratio comes in at 0.13%. In total, the fund holds 62 securities in its basket, with JNJ taking the top spot at 10.3% of the assets. Pharma accounts for 32.4% share from a sector look, while health care equipment and supplies, health care providers and services, and biotech have double-digit exposure each. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Top-Ranked Sector ETFs & Stocks to Buy for 2019).

iShares U.S. Healthcare ETF (IYH - Free Report)

This fund offers exposure to 128 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Johnson & Johnson dominates the fund’s returns with 9.5% of total assets. In terms of industrial exposure, pharma takes the top spot at 30.7%, followed by health care equipment (21.2%) and biotech (20.1%). The product has amassed nearly $2.5 billion in its asset base, while charges 43 bps in annual fees. It trades in a good volume of around 128,000 shares a day and has a Zacks ETF Rank #2 with a Medium risk outlook.

iShares Evolved U.S. Innovative Healthcare ETF (IEIH - Free Report)

This actively managed ETF employs data science techniques to identify companies with exposure to the innovative health care sector. Holding 203 stocks in its basket, JNJ is the top firm with 9.6% allocation. The product has accumulated $5.1 million in its asset base and trades in a meager volume of 1,500 shares per day on average. It charges 18 bps in annual fees (read: Bristol-Myers to Acquire Celgene: Healthcare ETFs in Focus).

Vanguard Health Care ETF (VHT - Free Report)

This ETF tracks the MSCI US Investable Market Health Care 25/50 Index and holds 359 stocks in its basket. Of these, Johnson & Johnson occupies the top position with 9.2% allocation. Pharma takes the largest share at 30.7%, while health care equipment and biotech round off the top three spots. VHT is also one of the popular and liquid ETFs with AUM of $8.9 billion and average daily volume of about 300,000 shares. It charges 10 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.

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