The first half of the year sizzled for the beverage space as two cola as well as food bellwethers – Coca Cola Co. (KO) and PepsiCo (PEP) – quenched investors’ thirst with better-than-expected earnings. However, the scenario changed as Coca Cola disappointed investors in Q3 though PepsiCo managed to maintain its winning trend.

KO Earnings Disappointment

The company’s adjusted earnings of $0.53 per share beat the Zacks Consensus Estimate by just a penny. A stronger dollar curtailed earnings growth by 6%. On a constant currency basis, earnings grew 6% mainly aided by cost containment efforts.

Net revenue was flat at $11.98 billion due to headwinds from currency and structural changes. Revenues fell shy of the Zacks Consensus Estimate of $12.14 billion on lower pricing and volume. However, constant currency revenues nudged up 1% in the quarter.

In North America, both still and sparkling beverages declined 1% in the quarter. Notably, a sluggish trend in carbonated beverages in the wake of rising health consciousness has been a dampener for cola giants in recent times.

This is not the end, though as guidance came as the real blow in the story. Though the company refrained from forecasting specific revenue or earnings figures, it expects 2014 earnings per share growth rate to be below the long-term range of a high single-digit increase.

Quite expectedly, after such downbeat guidance, Coca Cola traded in the red following the release of earnings on October 21 before the market opened. Shares were down about 6% in the key trading session.

PEP Earnings Impress

On October 9, PepsiCo beat the Zacks Consensus Estimate for both earnings and revenues on stronger developing and emerging market performance and increased pricing. Not only this, but the food and beverage behemoth enhanced its 2014 earnings guidance for the second time this year.

Pepsi’s third-quarter 2014 core earnings per share of $1.36 easily surpassed the Zacks Consensus Estimate of $1.29 by 5.4% and year-ago earnings by 10% helped by higher organic revenues and improved margins.

Total sales of $17.22 billion, up 2% year over year, beat the Zacks Consensus Estimate of $17.10 billion.
Stronger snacks performance and improvement in developing markets were behind PepsiCo’s strength. Pepsi now expects core constant currency earnings per share to increase 9% year over year, up from 8% expected earlier.

Although the PepsiCo stock went up 1.2% following the earnings release, the shares are trading flat since October 9.

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 (XLP), Consumer Staples ETF (VDC) and iShares Dow Jones US Consumer Goods Sector ETF (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 $8.1 billion of assets in 40 holdings. Of these firms, the in-focus Coca-Cola takes the second spot, making up roughly 9.5% of the assets while PepsiCo accounts for about 4.79% of XLP taking up the seventh position (read: 2 Recession Proof Sector ETFs for This Stormy Market).

The fund charges 16 bps in fees per year from investors. The fund has added about 0.4% on October 21 and 0.1% following the release of PepsiCo’s earnings. XLP currently has a Zacks ETF Rank #4 (Sell) rating with a ‘Low’ risk outlook (read: Consumer Staples ETF Investing 101).

VDC in Focus

This fund manages a $2.06 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 14 bps per year from investors.

Again here, Coca-Cola is the second firm with 8.7% allocation and PepsiCo is the third firm holding 7.2%. The product is widely spread across various sectors out of which soft drinks have an 18.3% allocation. VDC added about 0.5% on October 21 and 0.2% since October 9.

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 115 stocks in its basket with AUM of $516 million, while charging a slightly higher fee of 43 bps per year from investors.

Like the other two, Coca-Cola and PepsiCo occupy the second and third positions respectively in the basket with 8.63% and 7.12% of assets. IYK is also widely diversified across sectors with beverages making up more than 19%.

The fund was up 0.8% on October 21 and 0.7% since PepsiCo’s earnings. The product has a Zacks ETF Rank #4 (Sell) with a ‘Medium’ risk outlook (see all the Consumer Staples ETFs here).

Bottom Line

Coming to the companies, Coca Cola currently remains out of our favor as evident from its Zacks Rank #4 (Sell) for company-specific reasons. PepsiCo holds a Zacks Rank #3 or Hold rating. So, it would be wise to bet on these beverage giants through a basket approach as it partly shields the risk of single-stock investing (read: 2 Promising ETFs and Stocks from Q3's Hot Sector).

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