XLV Health Care Select Sector

The U.S. largest drug maker Pfizer (PFE) disappointed investors with its first quarter 2014 results yesterday. While earnings were encouraging, lower-than expected revenues and the rejected AstraZeneca (AZN) acquisition bid pushed PFE shares down nearly 2.6%.

Pfizer Earnings in Focus

Earnings per share came in at 57 cents, a couple of cents ahead of the Zacks Consensus Estimate and 11.8% above the year-ago earnings. Revenues dropped 9% year over year to $11.35 billion, missing the Zacks Consensus Estimate of $12.0 billion by a wide margin thanks to expiring patents and rising competition from generic drugs.  

For 2014, Pfizer reiterated its $49.2–$51.2 billion revenue guidance and $2.20–$2.30 earnings per share forecast. Both are above the Zacks Consensus Estimate of $48.9 billion and $2.24, respectively, reflecting bullishness for this company (read: Pharma ETFs: A Safe Haven from the Biotech Stock Slump?).

AstraZeneca Offer in Focus

The company is making continued efforts to acquire the second-largest British drug maker AstraZeneca, which has a robust line of cancer and cardiovascular therapies, since January this year.

Last week, the company made a revised offer and raised its bid for AstraZeneca to about $106 billion. But AstraZeneca rejected the proposal for the third time, citing the bids as too low and undervaluing the company. Pfizer nevertheless continued to review other options and will soon come up with new proposal.

ETFs in Focus

Though Pfizer was down on the day, an optimistic guidance could provide support to the stock price in the coming days. This is especially true as the stock has a decent Zacks Rank of #3 (Hold), suggesting some room for upside. Further, if the AstraZeneca deal goes through, the potential merger would be accretive to Pfizer’s earnings (in the first full year following the merger) and accelerate its earnings growth pace.

Given this, the healthcare ETFs having largest allocation to this drug maker would be in focus in the days ahead. These funds have not felt the pain and were modestly up on the day. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the PFE share price (see: all the Healthcare ETFs here).

iShares U.S. Pharmaceuticals ETF (IHE)

This ETF provides exposure to the pharmaceutical corner of the broad healthcare world by tracking the Dow Jones U.S. Select Pharmaceuticals Index. The fund holds 39 stocks in its basket with Pfizer taking the second position at 10.24%.

The product has $664.8 million in AUM and charges 45 bps in fees and expense. Volume is light as it exchanges about 34,000 shares a day. The fund has added 10.11% so far this year and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘Medium’ risk outlook (read: 3 Pharma ETFs Beating the Market).

Health Care Select Sector SPDR Fund (XLV)

The most popular healthcare ETF on the market, XLV follows the S&P Health Care Select Sector Index. This fund manages about $9.4 billion in its asset base and trades in heavy volume of around 8.5 million. Expense ratio came in at 0.16% annually. In total, the fund holds about 56 securities in its basket. Of these firms, PFE takes the second spot, making up roughly 8.84% of the assets.

Pharma accounts for 47% share from a sector look while biotech, healthcare providers and services, and equipment and suppliers make up for double-digit exposure. The fund gained nearly 5.2% in the year-to-date time frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Medium’ risk outlook.

iShares U.S. Healthcare ETF (IYH)

This fund provides exposure to 111 securities by tracking the Dow Jones U.S. Health Care Index. Here again, Pfizer is the second holding accounting for 8.32% of total assets. In terms of industrial exposure, Pharma takes the top spot at 49%, closely followed by biotech (20%), medical equipment (17%) and healthcare services (14%) (read: Merck (MRK) Earnings Beat Puts Healthcare ETFs in Focus).

The product has amassed nearly $2.7 billion in its asset base while charges 45 bps in annual fees. It trades in good volume of around 241,000 shares a day, suggesting a relatively tight bid/ask spread. IYH is up 5.28% year-to-date and has a Zacks ETF Rank of 3 with a ‘Medium’ risk outlook.

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ISHARS-US PHARM (IHE): ETF Research Reports
 
ISHARS-US HLTHC (IYH): ETF Research Reports
 
PFIZER INC (PFE): Free Stock Analysis Report
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
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