XLV Health Care Select Sector

The Health and the Biotech space saw some terrible trading lately, hit hard by bubble fears as the Fed unwinds its massive bond buying program.

However, the earnings season has brought in some relief to this sector, with a series of earnings beats by some of the major companies in this space such as Gilead Sciences (GILD) and Johnson & Johnson (JNJ).
Though another biotech major, Amgen (AMGN), managed to beat the Zacks Consensus Estimate on the earnings front, it missed our estimates for revenue (read: Pharma ETFs: A Safe Haven from the Biotech Stock Slump?).

Adding to investor cheer, the No. 2 U.S. drug maker Merck & Co. (MRK) surprised the markets by posting better-than-expected earnings for first quarter 2014. Though the company missed our estimates on revenues, sharply lower research and development costs enabled the company to boost its bottom line.

Merck Earnings in Focus

Earnings per share came in at 88 cents, comfortably beating our estimates by roughly 11%.  However, revenues for the quarter declined 3.8% to $10,264 million, missing the Zacks Consensus Estimate of $10,448 million.
The company’s top line was primarily hit by competition from generic drugs due to patent expirations and negative currency fluctuations (read: Any Survivors from the Biotech ETF Meltdown?).

For 2014, Merck reaffirmed its earnings guidance of $3.35–$3.53 per share on revenues of $42.4–$43.2 billion. The Zacks Consensus Estimate for both earnings and revenues is well within the guidance range.

Merck to Sell Consumer Health Care Business

Moreover, the day prior to the earnings release, Britain's Reckitt Benckiser confirmed that it was in talks to buy Merck's consumer health business. Merck is in final talks with Reckitt to divest this business. The segment reported a 4% drop in revenues to $546 million during the reported quarter, hurt by a shortened allergy season in North America.

Market Reaction

Given the strong earnings beat and the news of a sell-off of the company’s loss making unit, Merck shares jumped 3.6% to close at $58.72. In fact, positive investor sentiment led the company’s share prices to hit a new 52-week high of $58.86.

Buoyed by the strong performance from MRK, healthcare  ETFs that have exposure to this stock also climbed during recent trading. The below mentioned ETFs, which also have good amount of exposure to MRK, have seen decent performance in the past two weeks. 

Investors should keep a close eye on these funds to tap any opportunity of a surge in their prices (see: all the Healthcare ETFs here).

ETFs in Focus

iShares U.S. Pharmaceuticals ETF (IHE)

The fund provides exposure to the healthcare sector by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The fund holds 38 stocks in its basket with Johnson and Johnson taking the top position at 12.92%, followed by Pfizer Inc. at 10.89% and Merck & Co Inc. at 9.57%.

The product manages an asset base of $659.8 million and charges 46 bps in fees and expense. The fund has added 5.82% in the past two weeks and rose 0.7% in yesterday’s session (read: 4 ETFs Riding High in Q2).
IHE has a Zacks ETF Rank of 2 or ‘Buy’ rating.

Health Care Select Sector SPDR Fund (XLV)

With an asset base of $9.5 billion, XLV is the most popular fund in its space. The fund holds a basket of 56 stocks with Merck occupying 7.5% of the assets. JNJ occupies the top spot with 12.95% allocation, while the fund also has roughly 5% exposure to Gilead as well.

The fund rose 0.6% in recent trading and it has added 3.02% in the past two weeks. The product currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook.

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GILEAD SCIENCES (GILD): Free Stock Analysis Report
 
ISHARS-US PHARM (IHE): ETF Research Reports
 
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
 
MERCK & CO INC (MRK): Free Stock Analysis Report
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
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