Coca Cola, PepsiCo Earnings Stir Up Consumer Staples ETFs

Includes: IYK, KO, PEP, VDC, XLP
by: Zacks Funds

The beverage space closed out 2014 on a sizzling note as two cola and food bellwethers - Coca Cola Co. (NYSE:KO) and PepsiCo (NASDAQ:PEP) - quenched investors' thirst with better-than-expected earnings for Q4 '14. In fact, 2014 will remain especially memorable for PepsiCo as the company beat the Zacks Consensus Estimate for both earnings and revenues in all four quarters.

On the other hand, Coca Cola managed to beat on both lines in Q4 after posting mixed results in Q3. Let's delve a little deeper.

Impressive PEP Earnings & Dividend Hike

On February 11, PepsiCo beat the Zacks Consensus Estimate for both earnings and revenues. Not only this, the food and beverage behemoth announced a 7.3% increase in annual dividend along with an authorization of a new $12 billion share buyback program.

Pepsi's fourth-quarter core earnings per share of $1.12 easily surpassed the Zacks Consensus Estimate of $1.08 by 3.7% and year-ago earnings by 6% helped by higher organic revenues, improved margins and lower taxes.

Total sales of $19.95 billion - down 1% year over year - beat the Zacks Consensus Estimate of $19.78 billion. A stronger snacks performance and improved beverage volumes in Europe and Americas were probably the reasons for the beat. However, it was adverse currency translation which weighed on total revenue growth as currency concerns ate away 6% revenue growth.

Pepsi now expects core constant currency earnings per share to increase 7% in 2015, in tune with the long-term management goal of high single-digit core constant currency earnings growth. Notably, currency is expected to mar both earnings per share and revenues by 7% in 2015.

Thanks to upbeat earnings, the PepsiCo stock was up about 2.5% in the key trading session of February 11.

Coca-Cola Too Posts Decent Earnings

On February 10, Coca-Cola reported adjusted earnings of $0.44 per share in Q4 which beat the Zacks Consensus Estimate by around 5%. Earnings declined 5% year over year thanks to a stronger dollar, which was up 5% on a constant currency basis, driven by improved organic revenues and cost-cutting efforts.

Net revenue slipped 2% year over year to $10.87 billion due to headwinds from currency and structural changes. Excluding these effects, constant currency revenues grew 4% in the quarter. The best part is that revenues beat the Zacks Consensus Estimate of $10.77 billion by 1%. An extra selling day, better sparkling beverage performance, strong price/mix gains and volume growth in North America helped the company to hold gains.

Management remains hopeful about its 2015 operations and sees this as a transition year. However, foreign exchange is expected to hurt 2015 revenues by 5% and profit before tax by 7-8%.

While an overall beat offered the KO stock about 2.8% gains in the key trading session of February 10, its shares retreated about 0.1% on February 11.

ETF Impact

The beverage earnings also put in focus several consumer staples ETFs having notable exposure to Coca Cola and PepsiCo. Funds like Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP), Vanguard Consumer Staples ETF (NYSEARCA:VDC) and iShares Dow Jones U.S. Consumer Goods Sector ETF (NYSEARCA:IYK) have large allocations in KO and PEP. Below, we have highlighted these funds in detail:

XLP in Focus

The most popular consumer ETF in the market, XLP follows the S&P Consumer Staples Select Sector Index. The fund invests about $10.2 billion of assets in 41 holdings. Of these firms, the in-focus Coca-Cola takes the second spot, making up roughly 9.21% of the assets while PepsiCo accounts for about 4.63% of XLP taking up the seventh position.

The fund charges 15 bps in fees per year from investors. The fund has added about 1.6% (as of February 11, 2015) post KO earnings. XLP currently has a Zacks ETF Rank #3 (Hold) with a 'Medium' risk outlook.

VDC in Focus

This fund manages a $2.61 billion asset base and provides exposure to a basket of 100 consumer stocks by tracking the MSCI U.S. Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 12 bps per year from investors.

Again here, Coca-Cola is the second firm with 8.0% allocation and PepsiCo is the third firm holding 6.7%. The product is widely spread across various sectors out of which soft drinks have a 17.1% allocation. VDC added about 1.6% (as of February 11) within the last two days. VDC currently has a Zacks ETF Rank #3 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 115 stocks in its basket with AUM of $516 million, while charging a slightly higher fee of 43 bps per year from investors.

Coca-Cola and PepsiCo occupy the second and third positions respectively in the basket with 7.87% and 6.91% of assets. The fund was up 1.63% (As of February 11) post the duo's earnings. The product has a Zacks ETF Rank #3 with a 'Medium' risk outlook.

Bottom Line

Though the beverage giants ended 2014 with an overall beat and started off 2015 on a refreshing note, currency concerns might surface this year. Plus, the industry fundamentals are also not great as it falls in the bottom 29% section of Zacks Industry Ranks. So, investors having high hopes on the duo might bet on these beverage giants through a basket approach as it partly shields the risk of single-stock investing.