After Weak Procter & Gamble Co Earnings, How Are Consumer ETFs Looking?

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January 30, 2015 4:48pm NYSE:IYK NYSE:VDC

ETFsOne of the most famous names in the consumer products world – Procter & Gamble (NYSE:PG) – let investors down on January 27, 2015 by missing the Zacks Consensus Estimate for both earnings and sales in second-quarter fiscal 2015 — for the second successive quarter.

In addition, the cut in fiscal 2015 outlook to reflect currency issues also dampened investors’ mood.

Procter & Gamble’s 2Q15 Earnings in Focus

The consumer staple giant’s 2Q15 adjusted earnings of $1.06 per share (excluding restructuring charges) fell short of the the Zacks Consensus Estimate of $1.14 by 7% and decreased 8% from the year-ago earnings hurt by steeper-than-expected currency concerns.  Excluding currency headwinds, earnings increased 6% in the quarter buoyed by productivity savings that compensated for sluggish margins.

Net sales were down year over year to $20.16 billion due to a 5% headwind from currency and, to add to the concern, missed the Zacks Consensus Estimate of $20.70 billion. With around 60% of the company’s business generated outside North America, a strong dollar marred the value of international sales.  However, organic revenues (excluding the impact of acquisitions, divestitures and foreign exchange) grew 2% on pricing gain that allayed weaker volumes.

Added to the miss on both lines, analysts and investors zeroed in on the disappointing guidance by the company.  Management essentially reiterated its currency neutral organic sales and core earnings per share guidance, though a higher-than-expected adverse impact from currency forced management to slash its net sales and earnings projection.

Net revenue growth is now expected to decline in the range of 3–4% instead of the prior expectation of it being flat to up in a low single-digit range. The company expects core earnings per share to be flat or to decline in a low single-digit range versus the prior expectation of a mid single-digit rise.

Management expects doubling of the negative currency translation to core earnings per share and predicts currency impacts to hurt core earnings per share by 12%. Excluding currency headwinds, management expects double-digit core earnings per share growth.

Consumer ETF impact

Thanks to a downbeat earnings release, shares of PG hurtled down about 4.4% (as of January 29, 2015) since it reported Q2 earnings. The pain also carried over into the ETF world, with consumer staples ETFs being the hardest hit. Many of the key funds in this segment have a double-digit allocation to the consumer product giant, suggesting that the performance of the fund is highly dependent on P&G’s performance.

And, since many smaller companies in the sector were also impacted by PG’s weakness, they too had a tough time, leading to sluggish trading overall for the segment. In particular though, poor trading was seen in the following three ETFs, as these have the biggest allocation to Procter & Gamble:

Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP)

The most popular consumer ETF on the market, XLP, follows the S&P Consumer Staples Select Sector Index. The fund invests about $9.87 billion of assets in 39 holdings. Of these firms, the in-focus P&G takes the first spot, making up roughly 13% 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 beverages (20.6%) and household products (20.3%). The fund charges 16 bps in fees per year from investors. The fund has returned about 1% so far this year but lost about 2.6% in the last five trading sessions (as of January 29, 2015).

Vanguard Consumer Staples ETF (NYSEARCA:VDC)

This fund manages a $2.58 billion asset base and provides exposure to a basket of 100 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 12 bps per year from investors.

Again here, P&G is the top firm with 12.1% allocation. The product is widely spread across household products, soft drinks, packaged foods & meat and tobacco, as each makes up a double-digit allocation in the fund.

VDC was flat in the year-to-date frame (as of January 29, 2015) but retreated 2.5% in the last five trading sessions.

iShares Dow Jones US Consumer Goods Sector ETF (NYSEARCA:IYK)

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. The fund holds about 116 stocks in its basket with AUM of $568 million while charging a slightly higher fee of 43 bps per year from investors.

Like the other two, the stock under consideration occupies the top position in the basket with 11.1% of assets. Food Beverage Tobacco makes up around 50% of IYK. The fund is down about 0.2% so far this year and lost 2% in the last five trading sessions.

Bottom Line

Currency woes and slowing global growth were all around P&G earnings and outlook. And this concern is not specific to P&G only; it is spelling troubling for the entire consumer goods industry having exposure all over the world.

So investors are advised to take a closer look at the currency movement before investing in such companies or relevant ETFs, and make sure to watch for any change in guidance as we move further into 2015.

However, investors should also note that organically P&G came out with decent numbers suggesting that the underlying operating environment is not worsening in true sense. So, the firm may turn around on its own strength once the ascent in the greenback evens out. Thus, the recent dip in P&G shares can open up a buying opportunity to risk-loving investors who are expecting a potential comeback of the company.

This article is brought to you courtesy of Zacks.

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