Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Strong Beverage Stock Earnings Lift Consumer ETFs

Published 04/22/2014, 08:52 AM
Updated 07/09/2023, 06:31 AM

The sluggish trend of carbonated beverages in the wake of rising health consciousness has been a dampener for cola giants in recent times. Still, two cola as well as food bellwethers – Coca Cola Co. (NYSE:KO) and PepsiCo (Pepsico Inc (NYSE:PEP)–drew investors’ attention because of their better-than-expected earnings. 

Q1 KO Earnings in Focus

The company’s adjusted earnings of $0.44 per share met the Zacks Consensus Estimate. A stronger dollar reduced earnings growth by 4%. On a constant currency basis, earnings grew 5% mainly aided by cost containment efforts and stronger volume gains in developing markets.
 
Net revenue slipped 4% year over year to $10.58 billion due to headwinds from currency and structural changes. However, the main cause of cheer was that revenues came ahead of the Zacks Consensus Estimate of $10.56 billion on better pricing and volume growth. However, constant currency revenues grew 2% in the quarter. 

As far as guidance is concerned, the company refrained from forecasting specific revenue or earnings figures. The structural changes (bottler merger in Brazil and the sale of a 51% stake in the Philippines bottler) accomplished in 2013 will likely mar 2014 net sales and operating income by 1%.

Q1 PEP Earnings in Focus

PepsiCo has also refreshed investors’ mood by delivering continued positive earnings surprises for four quarters in a row. This food and beverage behemoth beat the Zacks Consensus Estimate on both earnings and revenues. Its Q1 earnings of $0.81 beat the Zacks Consensus Estimate by about 8% thanks to solid margins.

Total sales of $12.62 billion, though flat year over year, beat the Zacks Consensus Estimate of $12.47 billion by 1.2%. Stronger snacks performance and improvement in Europe were the reasons behind PepsiCo’s strength. However, there was no glint in the guidance as management reiterated its previously provided outlook.

Market Impact

Quite expectedly, following this optimistic start to the year, both Coca Cola and PepsiCo traded in the green following the release of earnings. While KO added about 5% (as of April 17, 2014) since reporting earnings, PepsiCo gained less than 1% in its key trading session. The buoyancy was also felt in the ETF space, with consumer staples ETFs having notable exposure to Coca Cola and PepsiCo being favored.

Funds like Consumer Staples Select Sector SPDR (ARCA:XLP), Consumer Staples ETF (VDC) and iShares Dow Jones US Consumer Goods Sector ETF (IYK) have the biggest allocation in Coca Cola. The trio saw respectable trading in the recent past. XLP added 0.26% at the close while VDC gained 0.31% and IYK was up 0.80%. Below, we have highlighted the funds in detail.

XLP in Focus

The most popular consumer ETF on the market, XLP follows the S&P Consumer Staples Select Sector Index. The fund invests about $5.88 billion of assets in 43 holdings.

Of these firms, the in-focus Coca-Cola takes the second spot, making up roughly 9.29% of the assets while PepsiCo accounts for about 4.47% of XLP taking up the sixth position. In terms of sector exposure, the fund is skewed towards food & staples retailing which makes up for one-fourth share, closely followed by household products (20.64%) and beverages (19.55%).

The fund charges 16 bps in fees per year from investors. The fund has added 1.25% following the release of the duo’s earnings. XLP currently has a Zacks ETF Rank of 4 or ‘Sell’ rating with a ‘Low’ risk outlook.

VDC in Focus

This fund manages a $1.70 billion asset base and provides exposure to a basket of 109 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 14 bps per year from investors.

Again here, Coca-Cola is the second firm with 8.3% allocation and PepsiCo is the fourth firm with 6.8% of holding. The product is widely spread across various sectors out of which soft drinks take up 17.3% allocation.

VDC added about 1.41% in the key trading sessions last week. The fund also has a Zacks ETF Rank of 4 with a ‘Medium’ risk outlook.

IYK in Focus

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. The fund holds about 119 stocks in its basket with AUM of $447.6 million, while charging a slightly higher fee of 46 bps per year from investors.

Like the other two, Coca-Cola and PepsiCo occupy the second and fourth positions respectively in the basket with 8.3% and 6.60 of assets. IYK is also widely diversified across sectors with beverages making up more than 18.0%. 

The fund was up 2.1% in the important sessions of last week. The product has a Zacks ETF Rank of 4 with a ‘Medium’ risk outlook.

Bottom Line

After starting the winter season on a soft note, the entire space of consumer staples held up pretty well in the recent market turmoil courtesy of the sector’s defensive nature. With beverages – one of the downbeat areas of the broader consumer sector – starting the year on a positive note, the sector is expected to get further support in the second quarter.

Coming to the companies, Coca Cola currently remains out of our favor as evident from its Zacks Rank #4 (Sell) for company-specific reasons. PepsiCo holds a Zacks Rank #3 or Hold rating. So, it would be wise to bet on these beverage giants through a basket approach as it gives some shield against the risk of single-stock investing.

Original post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.