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Consumer ETFs Slip On The Coca-Cola Company Earnings

February 19th, 2014

ETFsThings are hardly falling into place for The Coca-Cola Company (KO). Yesterday, Coca Cola reported a downbeat fourth-quarter 2013 with earnings matching the estimate and the top line missing by a moderate margin. In addition, the performance of underlying metrics also failed to stir optimism among investors. Notably, this cola giant has now missed the revenue estimate for six straight quarters.

Q4 Earnings in Focus

The company’s adjusted earnings of $0.46 per share barely met the Zacks Consensus Estimate. A stronger dollar reduced the earnings growth by 5%. On a constant currency basis, earnings grew 7% mainly aided by cost containment efforts and lower taxes.

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Net revenue slipped 4% year-over-year to $11.04 billion due to headwinds from currency (by 2%) and structural changes (by 5%). To add to the concern, revenues fell short of the Zacks Consensus Estimate of $11.3 billion. However, constant currency revenues grew 4% in the quarter. Both volumes and price/mix gains were lower than the third-quarter levels.

Adjusted consolidated gross margins improved 60 basis points (bps) in the quarter to 60.8% while adjusted operating margin dropped 10 bps to 21.6% hurt by the increased marketing expenses.

As far as the outlook is concerned, there was not much spark apart from the announcement of a new restructuring plan. The company now plans to enhance its productivity and reinvestment program to generate $1 billion in productivity savings by 2016 over and above its present program of $550 million to $650 million expected to be saved annually over a four-year period from 2012 through 2015. The incremental savings will be used toward brand building through increased media investments, hopefully boosting long-term profitability.

Management expects negative currency translation to hurt first-quarter operating income by 10% and full-year operating income by 7%, indicating that currency headwinds will likely subside as the year progress.

Market Impact

Quite expectedly, following these uninspiring numbers, Coca Cola slipped into the red in the key trading session, shedding 3.75% but recovered slightly (0.35%) in after-hours trading. The pang was also felt in the ETF space, with consumer staples ETFs having considerable exposure to Coca Cola being hit.

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 sluggish trading yesterday. XLP fell 0.57% at the close while VDC dropped 0.49% and IYK lost 0.28%. Below, we have highlighted the funds in detail (read: A Comprehensive Guide to Consumer Staples ETFs).

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 $5.36 billion of assets in 42 holdings.

Of these firms, the in-focus Coca-Cola takes the second spot, making up roughly 9.37% of the assets. 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 (20.98%) and beverages (20.03%).

The fund charges 16 bps in fees per year from investors. The fund returned over 13.4% in 2013 but has lost 3.21% year to date. XLP currently has a Zacks ETF Rank of 4 or ‘Sell’ with a ‘Low’ risk outlook.

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NYSE:IYK, NYSE:VDC, NYSE:XLP


 

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