Consumer ETFs Slip on Soft Coca-Cola Earnings - ETF News And Commentary


Things are hardly falling into place for The Coca-Cola Company ( KO ). Yesterday, Coca Cola reported a downbeat fourth-quarter 2013 with earnings matching the estimate and the top line missing by a moderate margin. In addition, the performance of underlying metrics also failed to stir optimism among investors. Notably, this cola giant has now missed the revenue estimate for six straight quarters.

Q4 Earnings in Focus

The company's adjusted earnings of $0.46 per share barely met the Zacks Consensus Estimate. A stronger dollar reduced the earnings growth by 5%. On a constant currency basis, earnings grew 7% mainly aided by cost containment efforts and lower taxes.

Net revenue slipped 4% year-over-year to $11.04 billion due to headwinds from currency (by 2%) and structural changes (by 5%). To add to the concern, revenues fell short of the Zacks Consensus Estimate of $11.3 billion. However, constant currency revenues grew 4% in the quarter. Both volumes and price/mix gains were lower than the third-quarter levels.

Adjusted consolidated gross margins improved 60 basis points (bps) in the quarter to 60.8% while adjusted operating margin dropped 10 bps to 21.6% hurt by the increased marketing expenses.

As far as the outlook is concerned, there was not much spark apart from the announcement of a new restructuring plan. The company now plans to enhance its productivity and reinvestment program to generate $1 billion in productivity savings by 2016 over and above its present program of $550 million to $650 million expected to be saved annually over a four-year period from 2012 through 2015. The incremental savings will be used toward brand building through increased media investments, hopefully boosting long-term profitability.

Management expects negative currency translation to hurt first-quarter operating income by 10% and full-year operating income by 7%, indicating that currency headwinds will likely subside as the year progress.  

Market Impact

Quite expectedly, following these uninspiring numbers, Coca Cola slipped into the red in the key trading session, shedding 3.75% but recovered slightly (0.35%) in after-hours trading. The pang was also felt in the ETF space, with consumer staples ETFs having considerable exposure to Coca Cola being hit.

Funds like Consumer Staples Select Sector SPDR ( 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 sluggish trading yesterday. XLP fell 0.57% at the close while VDC dropped 0.49% and IYK lost 0.28%. Below, we have highlighted the funds in detail (read: A Comprehensive Guide to Consumer Staples ETFs ).

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 $5.36 billion of assets in 42 holdings.

Of these firms, the in-focus Coca-Cola takes the second spot, making up roughly 9.37% of the assets. In terms of sector exposure, the fund is skewed toward food & staples retailing which makes up for one-fourth share, closely followed by household products (20.98%) and beverages (20.03%).

The fund charges 16 bps in fees per year from investors. The fund returned over 13.4% in 2013 but has lost 3.21% year to date. XLP currently has a Zacks ETF Rank of 4 or 'Sell' with a 'Low' risk outlook (read: Unpopular Sector ETFs to Start 2014 )

VDC in Focus

This fund manages a $1.61 billion asset base and provides exposure to a basket of 110 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 8.6% allocation. The product is widely spread across various sectors out of which soft drinks take up 17.6% allocation.

VDC added 28.0% in 2013 but has shed 3.29% year to date. The fund has a Zacks ETF Rank of 3 or 'Hold' with a 'Low' risk outlook (see all the Top Ranked ETFs here ).

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 $413.8 million, while charging a slightly higher fee of 45 bps per year from investors.

Like the other two, Coca-Cola occupies the second position in the basket with 7.78% of assets. IYK is also widely diversified across sectors with beverages making up more than 18.0%.

The fund was up about 30% in 2013 but is down 3.25% so far this year (as of February 18, 2014). The product has a Zacks ETF Rank of 3 with a 'Medium' risk outlook.

 Bottom Line

Investors should note that the entire space of consumer staples was beaten down to start the year with freezing weather taking most of the blame, but is expected pick up pace from the second quarter. As per the Sterne Agee analyst , higher home heating bills could curb consumer spending "well into April" (read: Consumer ETFs Slip as Wal-Mart Guides Earnings Lower ).

Coming to the company, Coca Cola currently remains out of our favor as evident from its Zacks Rank #4 (Sell) for company-specific reasons. Sluggish volume trends of carbonated beverages in the wake of rising health consciousness among consumers are posing threats to most of the cola giants.

So, it would be wise to bet on Coca-Cola through a basket approach as it gives some shield against the risk of single-stock investing. So for investors interested to arrest the company's new cost savings plan, buying in the aforementioned products on their recent dips could be a better idea than just an investment in the struggling KO for now.

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ISHARS-US CN NC (IYK): ETF Research Reports

COCA COLA CO (KO): Free Stock Analysis Report

VIPERS-CONS STA (VDC): ETF Research Reports

SPDR-CONS STPL (XLP): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Earnings , ETFs

Referenced Stocks: IYK , KO , VDC , XLP

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