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Soda Stocks Fizzle Despite Earnings Beat; What About ETFs?

The beverage space started 2016 on a mixed note as evident from the earnings results of two cola and food bellwethers – Coca Cola Co. (KO) and PepsiCo (PEP) – that reported this week. While Coca Cola quenched investors’ thirst with better-than-expected results, PepsiCo’s earnings topped the Zacks Consensus Estimate and sales missed.

This can be easily be termed as a decent-to-upbeat performance; but investors did not think so as Coca Cola shares tumbled about 4.8% in the key trading session on April 20, 2016, following the earnings release. PepsiCo, which reported on April 18, saw a decline of about 1.3% in share price in the last three trading days (as of April 20, 2016).

Let’s delve a little deeper and find out what went wrong.

For Coca Cola, soda volumes declined in the quarter. Sparkling beverage volumes remained flat compared with 3% growth in the fourth quarter of 2015. However, the decline was made up by the volume growth (up 7%) in still beverages to a large extent.

Moreover, European volumes declined 1% against 3% growth in the previous quarter. Notably, Europe is the company’s third biggest market, as per Reuters. Among the developing countries, double-digit growth in India and 5% growth in Mexico was offset by declines in Brazil, Russia and China. The company saw 2% decline in volumes in China against a 1% increase in the last quarter. The company reiterated its previously issued 2016 guidance.

Notably, PepsiCo also maintained its full-year outlook despite earnings beat, faced issues in its carbonated drink segment and was hurt by the dollar strength just like Coca Cola. In 2016, the adjusted constant currency earnings per share of Coca Cola are expected to rise 4–6%. However, the guidance includes a 3–4% negative impact from structural changes. And Pepsi expects core constant currency earnings per share (excluding Venezuela deconsolidation) to increase 8%.

Market and ETF Impact

Reiteration in outlook despite the beat by both lines; more downbeat full-year constant currency earnings guidance provided, and sales volume decline in some key markets might have hit the KO stock hard. In fact, harder than PEP which could not even beat the top line estimate.

PEP currently has a Zacks Rank #2 (Buy) and KO has a Zacks ETF Rank #3 (Hold). Both belong to a sector which is in the top 36% of the Zacks Industry universe. Investors can take the decision on the basis of Zacks Rank, or they can also take a look at the ETFs having notable exposure to Coca Cola and PepsiCo. The basket approach often covers up the weakness of any particular stock by the strength in other stocks.

Funds like Consumer Staples Select Sector SPDR (XLP), Vanguard Consumer Staples ETF (VDC) and iShares Dow Jones US Consumer Goods Sector ETF (IYK) have large allocations in KO and PEP. However, these ETFs were also muted on April 20, 2016 (read: Will Consumer Staples ETFs Continue to Shine in 2016?).

XLP in Focus

The in-focus Coca-Cola takes the second spot, making up roughly 9.58% of the assets while PepsiCo accounts for about 4.56% of XLP taking up the seventh position. XLP currently has a Zacks ETF Rank #3 (Hold) with a ‘Medium’ risk outlook.

VDC in Focus

Coca-Cola is the second firm with 8.9% allocation and PepsiCo is the fourth firm holding 6.8%. The product is widely spread across various sectors out of which the soft drinks segment has an 18.3% allocation. VDC currently has a Zacks ETF Rank #3 with a ‘Medium’ risk outlook.

IYK in Focus

Coca-Cola and PepsiCo occupy the second and fourth positions respectively in the basket with 7.25% and 6.85% of assets. The product has a Zacks ETF Rank #3 with a ‘Medium’ risk outlook (see all the Consumer Staples ETFs here).

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COCA COLA CO (KO): Free Stock Analysis Report
 
PEPSICO INC (PEP): Free Stock Analysis Report
 
SPDR-CONS STPL (XLP): ETF Research Reports
 
VIPERS-CONS STA (VDC): ETF Research Reports
 
ISHARS-US CN NC (IYK): ETF Research Reports
 
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