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Coke and Pepsi Earnings Put Consumer ETFs in Focus

Zacks Equity Research

The low-carb craze may be in the best interest of a lot of people, but it is the worst nightmare for the many in the beverage industry. The rising health consciousness has been a drag for cola giants for quite some time now. Still, two cola as well as food behemoths – Coca Cola Co. (KO) and PepsiCo (PEP) – made some progress in Q2 with their better-than-expected earnings.  

Q2 will remain especially memorable for Coca Cola as the company snapped the trend of just matching the Zacks Consensus Estimate on bottom lines after four successive quarters. However, the company still needs to improve on its top line figures.

On the other hand, PepsiCo – a Zacks Rank #2 (Buy) company – carried out its winning earnings momentum and raised its full-year adjusted earnings guidance (read: Consumer Staples ETFs in Focus on Philip Morris Stock Slide).

Results in Detail

On July 22, Coca-Cola reported adjusted earnings of $0.64 per share in 2Q which beat the Consensus Estimate by a penny. Adjusted earnings nudged up 1% year over year (6% on a constant currency basis) mainly on better sparkling beverage volumes almost across the globe and price/mix gains. Sponsorship of the FIFA World Cup and marketing program in several international markets helped the company gain market share in the sparkling beverage space.  

Net revenue slipped 1% year over year to $12.57 billion due to headwinds from currency and structural changes. Excluding these effects, constant currency revenues grew 3% in the quarter. However, net reported revenue fell short of the Zacks Consensus Estimate of $12.85 billion.  

As far as guidance is concerned, the company refrained from forecasting specific revenue or earnings figures. The structural changes accomplished in 2013 will likely mar second-half 2014 net sales and operating income by 1–2% and 3%, respectively.

PepsiCo’s second-quarter 2014 core earnings per share of $1.32 (reported on July 23) breezed past the Zacks Consensus Estimate of $1.23. On a year-over-year basis, earnings grew 1% thanks to solid margins. Total sales of $16.89 billion inched up 0.5% year over year and matched the Zacks Consensus Estimate.

Enhanced beverage volumes, strong business in Frito-Lay snacks and a better show in emerging markets more than made up for the sluggishness in Mexico and Europe. Market experts like Reuters believe that the improvement in both categories – drinks and snacks – will likely help PepsiCo to defend itself from activist investor Nelson Peltz’s demand for a spilt in beverages and snacks division, due to PepsiCo’s beverage business underperforming.

The best part was the guidance of PepsiCo. Management raised its previously projected earnings for 2014 but retained the sales growth forecast (read: A Comprehensive Guide to Consumer Staples ETF).

Market Impact

Following the release of earnings, PepsiCo traded in the green, mainly to reflect the enhanced outlook. The stock was up 1.85% in the key trading session. However, KO lost about 3.75% (as of April 23, 2014) since reporting earnings. The ETF space seemed largely unaffected, with consumer staples ETFs having notable exposure to Coca Cola and PepsiCo paring little gains.

XLP in Focus

The most popular consumer ETF on the market, XLP follows the S&P Consumer Staples Select Sector Index. Of its 42 holdings, the in-focus Coca-Cola takes the second spot, making up roughly 9.27% of the assets while PepsiCo accounts for about 4.62% of XLP taking up the sixth position.

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%) and beverages (19.44%) (read: 2 Recession Proof Sector ETFs for This Stormy Market).

The fund lost about 0.3% in the last two days (as of July 23, 2014). XLP currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘Low’ risk outlook. 

VDC in Focus

This fund provides exposure to a basket of 106 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. Coca-Cola is the second company with 8.7% allocation while PepsiCo takes the third position holding 7.0%. The product is widely spread across various sectors out of which soft drinks take 17.8% allocation.

VDC lost about 0.14% following the duo’s earnings. The fund also has a Zacks ETF Rank of 3 with a ‘Low’ risk outlook (see all the Consumer Staples 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 118 stocks in its basket. Here too, Coca-Cola and PepsiCo occupy the second and third positions respectively in the basket with 7.75% and 6.73% of assets. IYK is also widely diversified across sectors with beverages making up more than 18.0%. 

The fund was down 0.02% in the last two days (as of July 23, 2014). The product has a Zacks ETF Rank of 3 with a ‘Medium’ risk outlook.

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