Procter & Gamble’s Blockbuster Earnings Bode Well For Consumer Staples ETF

From Zacks: One of the most famous names in the consumer products world – Procter & Gamble (PGFree Report) – gave investors sweet surprises on January 20, 2017 by beating the Zacks Consensus Estimate for both earnings and sales in second-quarter fiscal 2017. In addition, the company’s projection on organic sales contained an upbeat tone.

This positive news came at an awful time for the consumer staples space with most ETFs carrying a sell or strong sell rating. Let’s delve a little deeper and see if PG’s strong numbers can do any good to the sector.

Procter & Gamble’s 2Q17 Earnings in Focus

The consumer staple giant’s 2Q17 adjusted earnings of $1.08 per share beat the Zacks Consensus Estimate of $1.06 by 1.9%. The bottom line also increased 3.8% from the prior-year quarter on higher margins. Currency-neutral core EPS improved 9%.

P&G’s reported net sales of $16.86 billion beat the Zacks Consensus Estimate of $16.8 billion by 0.3%. The top line, however, remained unchanged year over year. Foreign exchange had a negative impact of 2% on sales (read: ETFs & Stocks Unfazed by Softer December Retail Sales).

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 2% on the back of a 2% increase in organic volumes. All the five business segments recorded positive organic sales growth.

Core gross margin expanded 70 bps to 51.5% as productivity cost savings and higher volume benefits were offset by headwinds like unfavorable mix and commodity cost increases.

Management expects organic sales growth of about 2–3% compared with 2% projected earlier for fiscal 2017. However, the company now expects the combined foreign exchange headwind and minor brand divestitures to hurt sales by about 2–3% (predicted 1% earlier). Hence, P&G expects all-in sales growth to remain flat for fiscal 2017.

Consumer ETF Impact

Thanks to an upbeat earnings release, shares of PG notched up about 3.3% in the key trading session of January 20, 2017 on over two times higher trading volumes. The gain also reflected in the ETF world, with consumer staples funds being benefited moderately. 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.

Let’s take a look at the following three ETFs with a solid allocation to Procter & Gamble (read: Consumer Staples ETF Investing 101):

Consumer Staples Select Sector SPDR Fund ((XLPFree Report) )

The most popular consumer ETF on the market, XLP, follows the S&P Consumer Staples Select Sector Index. The fund invests about $8.29 billion of assets in 37 holdings. Of these firms, the in-focus P&G takes the first spot, making up roughly 13% of the assets. The fund has returned about 0.7% on January 20, 2017 (see all consumer staples ETFs here).

Vanguard Consumer Staples ETF (VDCFree Report)

This fund manages a $4.0 billion asset base and provides exposure to a basket of 103 consumer stocks. The product charges a low fee of 10 bps per year from investors. Here too, P&G is the top firm with 10.5% allocation. VDC advanced about 0.6% on January 20, 2017.

iShares U.S. Consumer Goods ETF (IYKFree Report)

This ETF tracks the Dow Jones U.S. Consumer Goods Index, giving investors exposure to the broad consumer staples space. The fund holds about 117 stocks in its basket with AUM of $542.3 million. Like the other two, the stock under consideration occupies the top position in the basket with 10.5% of assets. The fund gained over 0.7% on January 20.

Bottom Line

Even though PG had a favorable day, its impact on the rest of the consumer staples market wasn’t as solid as some might expect. Yes, all of the major consumer staples ETFs were up, but their gains were not profuse.

After all, the wind is not in favor of the sector. With bond yields rising, its high-dividend appeal continues to fade. Consumer staples had a morbid good run in the last one month, but if PG’s outlook is any guide, the sector has still something to offer. However, to come to any conclusion, we need to keep a track on earnings of other staples giants (read: Consumer ETFs in Focus as Wal-Mart Misses Q3 Revenue).

The Consumer Staples Select Sect. SPDR ETF (NYSE:XLP) was unchanged in premarket trading Wednesday. Year-to-date, XLP has gained 2.32%, versus a 1.82% rise in the benchmark S&P 500 index during the same period.

XLP currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #2 of 46 ETFs in the Consumer-Focused ETFs category.


This article is brought to you courtesy of Zacks Research.