Philip Morris Earnings Put Consumer Staples ETFs in Focus

The world’s largest publicly traded tobacco company, Philip Morris International (PM), reported upbeat second-quarter 2014 results, exceeding our estimates on both the top and bottom lines. A pickup in European sales led by favorable volume/mix in Italy and favorable pricing in Germany and Poland enabled the company to beat estimates.

Q2 Earnings in Focus

Adjusted earnings per share jumped 8.5% year over year to $1.41, beating the Zacks Consensus Estimate by 13.7%. Though revenues dropped 1.5% year over year to $7.8 billion, they came in ahead of our estimate of $7.7 billion (read: Top ETF Picks for Q2 Earnings Season).

European sales jumped 8.5% year over year. However, unfavorable currency movements and slumping volumes in Asia were the primary factors for the fall in revenue.

The company, however, is facing a tough time given the struggling macroeconomic environment in the European Union, rising illicit trade in Asia, costs related to restructuring and higher excise taxes.

In the face of a softening tobacco business, the company has been planning new investments in order to diversify its product portfolio (read: Consumer Staples ETFs in Focus on Philip Morris Stock Slide).

Last month, the company had reduced its earnings per share (EPS) forecast for 2014 from a range of $5.09 to $5.19 to a new range of $4.87 to $4.97. For 2015, Philip Morris expects adjusted earnings growth in the range of 8–10%.

ETF Impact

In spite of the company beating estimates, a muted outlook has caused its share price to trade down slightly on the day of the earnings release. Consumer Staples ETFs having sizable exposure to Philip Morris also followed a similar curve.

The weak outlook from Philip Morris is expected to put some downward pressure on these ETFs in the upcoming days as well. As a result, investors should closely monitor the following funds and stay away from them if they continue to trade lower.

Consumer Staples Select Sector SPDR (XLP)

XLP is the most popular and liquid product within the Consumer Staples equities space, having an asset base of over $7 billion. The fund tracks the S&P Consumer Staples Select Sector Index and holds a small basket of 42 stocks.

Philip Morris occupies the third spot here, having roughly 8% allocation. The fund has the largest exposure to Procter & Gamble Company, followed by Coca-Cola. The trio has a roughly 30% allocation in the fund (see all Consumer Staples ETFs here).

The fund has a nice diversification among different industries such as Food & Staples Retailing, Household Products, Beverages, Food Products and Tobacco.

The fund is one of the cheapest in the category with 18 basis points as expenses and has returned a modest 5% since the start of the year. XLP currently carries a Zacks ETF Rank #3 or Hold rating.

Vanguard Consumer Staples ETF (VDC)

VDC is the second most popular product in the space managing an asset base of $1.9 billion. The fund however has a moderate average trading volume of a little less than 80,000 shares a day.

The fund holds 109 stocks with Procter & Gamble, Coca-Cola and Philip Morris being the top three holdings. The ETF is quite concentrated among its top 10 components which together form 60% of total fund assets.

VDC has also performed on par with XLP in the year-to-date frame and currently has a Zack ETF Rank #3.

MSCI Consumer Staples Index ETF (FSTA)

FSTA tracks the MSCI USA IMI Consumer Staples Index, holding a basket of 104 stocks. The fund trades with moderate average volume of over 60,000 shares a day.

Philip Morris occupies the fourth spot here having 7.4% allocation. Like XLP, this fund too has a nice mix of the Consumer Staples sector (read: A Comprehensive Guide to Consumer Staples ETFs).

Launched last year, the fund charges 12 basis points as fees and has returned 5.3% this year.

Bottom Line

A rough consumer spending environment, foreign exchange headwinds and declining volumes have led the Consumer Staples sector to be a weak performer this year.

Investors should note that the performance of the whole Consumer Staples sector is expected to remain muted this season, with earnings estimated to grow by a modest 1.5% on 6.6% lower revenues, as per Zacks Earnings Trends.

As such, investors shouldn’t expect much from this space, with most of the Consumer Staples ETFs expected to perform in line with the markets.

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