Strong Beverage Stock Earnings Lift Consumer ETFs - ETF News And Commentary

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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. ( KO ) and PepsiCo ( PEP ) -drew investors' attention through 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 (read: Consumer ETFs Slip on Soft Coca-Cola Earnings ).


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 ( 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 (read: A Comprehensive Guide to Consumer Staples ETF ).

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%) (read: 2 Recession Proof Sector ETFs for This Stormy Market ).

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 (see all the Consumer Staples ETFs here ).

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.

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

COCA COLA CO (KO): Free Stock Analysis Report

PEPSICO INC (PEP): 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 , PEP , VDC , XLP

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