PepsiCo Q2 Earnings Aid Staples ETFs, Are Gains Transitory?


PepsiCo Inc. (PEP) reported its second-quarter 2018 results on Jul 10 before market open and shares jumped about 4.8% in the key trading session. Earnings topped estimates thanks to solid Frito-Lay snacks growth, which made up for the struggling North America Beverages segment.

Core earnings per share (EPS) of $1.61 beat the consensus mark of $1.51 per share by 6.6% and increased 8% year over year. Notably, this marked the ninth consecutive quarter of positive earnings surprise. Investors should note that the earnings outperformance came despite rising trucking and commodity costs (read: Will Consumer ETFs Lose Momentum on Trump Tariffs?).

Net revenues of $16,090 million increased 2.4% from the year-ago level. Foreign exchange (Fx) had one percentage point positive impact on revenue growth. However, reported revenues lagged the Zacks Consensus Estimate of $16,125 million.

There were also bright points in the report. First, North American beverage organic revenues fell less (down 1% in Q2) than in Q1 (when it was down 2%). Second, Frito-Lay organic revenue growth was 4% in Q2, up from 3% in Q1. Management plans to return $7 billion to its shareholders through dividends worth $5 billion and share repurchases worth $2 billion.

ETF Impact

The consumer staples ETFs having notable exposure to PepsiCo also seemed to have benefited on Jul 10 (see all Consumer Staples ETFs here).

Consumer Staples Select Sector SPDR Fund (XLP)

The most-popular consumer ETF on the market, XLP, follows the S&P Consumer Staples Select Sector Index. Of its 32 holdings, the in-focus PepsiCo takes the third spot, making up roughly 9.60% of the fund.

In terms of sector exposure, the fund is skewed toward beverages (26.19%) which makes up for one-fourth share, closely followed by Household Products (20.73%) and Food & Staples Retailing (19.99%). The fund was up about 1.2% but has a Zacks Rank #5 (Strong Sell).

Vanguard Consumer Staples ETF (VDC)

This fund provides exposure to a basket of 98 consumer stocks. PepsiCo takes the third position holding 8.0%. The product is widely spread across various sectors, of which soft drinks take 20.7% allocation. The fund has a Zacks Rank Zacks Rank #5 but advanced about 1% on Jul 10 (read: FIFA Frenzy Puts Spotlight on These Stocks and ETFs).

iShares U.S. Consumer Goods ETF (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 108 stocks in its basket. Here too, PepsiCo occupies the third position in the basket with 7.10% of assets. IYK is also widely diversified across sectors, with food beverage tobacco making up more than 46%. The fund has a Zacks ETF Rank #4 (Sell) and added about 0.8% on Jul 10 (read: 3 Momentum ETFs & Stocks to Buy as Trade Fears Fade Out).

Are These Gains Fleeting?

PepsiCo belongs to a bottom-ranked Zacks industry (bottom 3%) and sector (bottom 6%). This staples segment might be on a tear lately due to its defensive nature amid trade tensions but consumer staples normally underperforms in a rising rate environment, which we are witnessing in the United States currently. If the impact of the trade spat is priced in at the current level, we do not see much room for consumer staples growth (read: Should You Steer Clear of These Sector ETFs for Now?).

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