PG's Sluggish 3Q14 Revenues Weigh on Defensive ETFs

The Consumer Staples sector has been in the news to start this year thanks to investors’ tendency to move to safety as worries hit the momentum stock space. Now, with the 1Q earnings season underway, we would like to see how the sector will behave ahead. What will drive the staples stocks in the coming months – growth story in the underlying stocks or just a ‘safety’ tag attached to the sector?

Recently, one of the sector giants, Procter & Gamble (PG), dished out a mixed-bag quarter performance in its latest earnings announcement. Let’s delve a little deeper and see if there is any opportunity in the consumer staple sector and the related ETFs:

Procter & Gamble's 3Q14 Earnings in Focus

The consumer staple giant’s 3Q14 adjusted earnings of $1.04 per share grew 5.0% year over year despite steeper negative currency translation and beat the Zacks Consensus Estimate by $0.02. Excluding currency headwinds, earnings increased 17% in the quarter buoyed by overhead cost savings and lower taxes that compensated for flat net sales and lower gross margins.

The core effective tax rate declined 250 basis points year over year catapulting $0.03 per share earnings benefit. Excluding this, earnings per share might have missed the consensus estimate (read: A Comprehensive Guide to Consumer Staples ETFs).

Net sales were flat year over year at $20.56 billion due to a 3% headwind from currency and to make things worse, slightly missed the Zacks Consensus Estimate of $20.67 billion. With about three-fifths of the company’s business generated outside North America, a strong dollar marred the value of international sales. However, organic revenues grew 3.0% on volume expansion and pricing gain.

Guidance wise, P&G seems to be a bit cautious as despite an otherwise decent earnings beat, it retained its full-year earnings guidance in the range of 3–5% which was actually tapered from the 5% to 7% range given in February 2014.

Market Impact

Without a tweak in guidance, a sales miss, and a marginal beat in earnings left the P&G stock in a standstill. Moreover, its slim earnings beat came at the cost of a steep slash in tax rate which dampened investors’ mood.

As a result, P&G shares lost 0.31% in the key trading session and 0.01% in after hours trading. The sluggish sentiment was also felt in the ETF space as well, with consumer staples ETFs having notable exposure to P&G being scathed, while it could also impact the outlook for these sector ETFs too (read: 2 Recession Proof Sector ETFs for This Stormy Market).

P&G has sizable exposure (more than 10%) in consumer staples funds like Consumer Staples Select Sector SPDR Fund (XLP), Vanguard Consumer Staples ETF (VDC) and iShares Dow Jones US Consumer Goods Sector ETF (IYK). XLP lost 0.16% at the close but gained 0.34% in after hours, VDC shed about 0.08% and IYK was off 0.38% in the key trading session of P&G.

In short, P&G has been a core component of these aforementioned ETFs. While we believe P&G is at present a wait-and-see stock, some other holdings of these ETFs like the beverage sector hold promise.

However, investors should note that consumer staples ETFs have been better-off amid recent market turmoil. So, any weakness in P&G could open up doors for some opportunity gains out of those ETFs (read: Strong Beverage Stock Earnings Lift Consumer ETFs).

Below, we have highlighted the funds in detail:

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 $6.0 billion of assets in 44 holdings. Of these firms, the in-focus P&G takes the top spot, making up roughly 13.31% of the assets.

The fund charges 16 bps in fees per year from investors and has gained 2.02% year-to-date. XLP currently has a Zacks ETF Rank of 4 or ‘Sell’ rating with a ‘Low’ risk outlook.

VDC in Focus

This fund manages a $1.72 billion asset base and provides exposure to a basket of 109 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. The product charges a low fee of 14 bps per year from investors.

Again here, P&G is the first firm with a 12.0% allocation. VDC has added about 1.95% year-to-date. The fund also has a Zacks ETF Rank of 4 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 119 stocks in its basket with AUM of $456.4 million, while charging a slightly higher fee of 45 bps per year from investors.

Like the other two, P&G occupies the first position in the basket with 11.2% share. The fund was up 1.07% year-to-date. The product has a Zacks ETF Rank of 4 with a ‘Medium’ risk outlook (see all the Consumer Staples ETFs here).

Bottom Line

Having said this, we would like to note investors should closely monitor the movement in these funds as these are sell-rated now and could catch the opportunity from any surge in the underlying stocks’ prices, or avoid these if the stocks pull them down in the coming months.

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