Sizzling Q2 earnings from the beverage giant PepsiCo (NYSE:PEP) petered out on the stock exchange yesterday. Despite beating on both lines and raising the guidance, the beverage bellwether failed to quench investors’ thirst due to prospective strength in the greenback.
With around half of its revenues originating outside the U.S. border, Pepsi’s sales and profits are highly vulnerable to currency headwinds. And as the Fed likely to hike rates sometime later in 2015, depreciation of many foreign currencies against the U.S. dollar will likely hit the company in the second half.
Impressive PEP Earnings & Guidance hike
On July 9, PepsiCo beat the Zacks Consensus Estimate for both earnings and revenues. Not only this, the food and beverage behemoth raised the previously issued 2015 constant currency earnings guidance backed by the strong first-half performance and upbeat business outlook expected for the rest of the year.
Pepsi’s second-quarter core earnings per share of $1.32 easily surpassed the Zacks Consensus Estimate of $1.23 by 7.3%. Earnings were, however, flat year over year as currency headwinds took a bite out of sales.
Total sales of $15.92 billion – down 6% year over year – beat the Zacks Consensus Estimate of $15.81 billion. It was adverse currency translation which weighed on total revenue growth as currency concerns ate away 10% from revenue growth. However, negative currency translation was lower than 11% expected previously.
Excluding the impact of FX and acquisitions (1%), revenues increased 5% on an organic basis as higher price/mix gains made up for softer volumes. Effective net pricing gain of 5% (which was higher than 4% in the past quarter) was probably the reason for the beat as volumes underperformed.
Pepsi now expects core constant currency earnings per share to increase 8% in 2015, up from 7% guided earlier. The target is in tune with the long-term management goal of high single-digit core constant currency earnings growth.
However, the negative point was that the currency is expected to mar both earnings per share and revenues by 11% and 9% in 2015, respectively. In February, the company expected a 7% adverse impact on earnings. The PepsiCo stock was down about 1.1% in the key trading session of July 9, though it added about 0.5% after hours.
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 (ARCA:XLP), Vanguard Consumer Staples (NYSE:VDC) and iShares US Consumer Goods (NYSE: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 PepsiCo takes the seventh spot, making up roughly 4.63% of the assets (read: 2 Recession Proof Sector ETFs for This Stormy Market).
The fund charges 15 bps in fees per year from investors. The fund has added about 0.1% post PEP earnings. XLP currently has a Zacks ETF Rank #3 (Hold) with a ‘Medium’ risk outlook (read: ETF Asset Report of 1H: Currency Hedging Tops; US Flops).
VDC in Focus
This fund manages a $2.52 billion asset base and provides exposure to a basket of 101 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.
PepsiCo is the third firm holding 6.9%. The product is widely spread across various sectors out of which soft drinks have a 17.6% allocation. VDC added about 0.04% on July 9. 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 114 stocks in its basket with AUM of $639 million, while charging a slightly higher fee of 43 bps per year from investors.
PepsiCo occupies the third position in the basket with 6.81% of assets. The fund was down 0.2% on July 9. The product has a Zacks ETF Rank #3 with a ‘Medium’ risk outlook (see all the Consumer Staples ETFs here).