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Inside the Q1 Earnings Strength of Staples ETFs and Q2 View

Sanghamitra Saha

Consumer staples, a non-cyclical sector, is likely to be less hammered in any economic downturn. The sector has already emerged as a true safe haven amid the coronavirus-triggered lockdowns that put a hold on non-essential items while people only stocked up groceries, healthcare and essential products. Fears of supply disruption led consumers to indulge in panic buying amid the pandemic.

This has given a boost to the consumer staples stocks in the past three months. Consumer Staples Select Sector SPDR Fund XLP has lost 9.7% in the past three months (as of May 2, 2020) against 12.9% losses in the S&P 500 (read: Beat Virus With 2 Sector ETFs & Stocks That Survived 2008 Crisis).

Against this backdrop, below we highlight a few staples stocks’ Q1 earnings that would help investors understand their prospects in Q2 (see all consumer staples ETFs here).

Procter & Gamble Company PG – In mid-April, the consumer-products behemoth reported mixed third-quarter fiscal 2020 results. Core earnings of $1.17 per share rose 10% year over year and outpaced the Zacks Consensus Estimate of $1.12. The company reported net sales of $17.21 billion, up 5% year over year and in line with the Zacks Consensus Estimate. Currency fluctuations also hurt the top line by two percentage points. U.S. sales surged 10%, which marked its biggest increase in decades due to consumers’ panic buying of essentials (read: Staples ETFs to Gain from Upbeat PG Earnings & Dividend Hike)

PepsiCo Inc. PEP– In late April, it reported strong first-quarter 2020 results, wherein earnings and sales surpassed estimates. Despite a strong first-quarter performance, the company expects uncertainty across its geographies due to the coronavirus outbreak. Consequently, it withdrew guidance for 2020. However, it expects to maintain a strong balance sheet, increased cash generation and ample liquidity to invest in its business and reward shareholders.

Coca-Cola Company KO – In mid-April, Coca-Cola came out with quarterly earnings of 51 cents per share, beating the Zacks Consensus Estimate of 44 cents per share. Revenues of $8.60 billion surpassed the Zacks Consensus Estimate of $8.40 billion. Coca-Cola is also investing in e-commerce to support retailers and meal delivery services. Though the company did not provide guidance, it mentioned expected currency headwinds.

Mondelez International Inc. MDLZ – In late-April, the company reported first-quarter 2020 results, with earnings and sales surpassing the Zacks Consensus Estimate for the third and sixth successive time, respectively. The company witnessed increased consumer demand for its snacks in developed markets, majorly in North America during March. However, emerging markets have posed challenges amid COVID-19.

Altria Group Inc. MO – In April-end, Altria reported first-quarter 2020 results, wherein both top and bottom lines increased year over year and beat the Zacks Consensus Estimate, backed by strength in both smokeable and oral tobacco product segments. However, management withdrew its 2020 earnings guidance. Altria borrowed the entire $3 billion under its revolving credit facility. Additionally, management suspended the company’s share buyback plan of $1 billion, which had a balance of $500 million.

Philip Morris PM – In mid-April, Philip Morris’ first-quarter 2020 results came in upbeat, wherein both top and bottom lines grew year over year and surpassed the Zacks Consensus Estimate. The company issued guidance for the second quarter, which is likely to bear the largest quarterly brunt of coronavirus this year.

Colgate-Palmolive Company CL – Its first-quarter 2020 results beat on both lines. It also withdrew guidance but expects a mid-single-digit negative impact related to foreign exchange on net sales for 2020.

ETF Impact

The afore-mentioned stocks have considerable exposure in ETFs like XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Goods ETF IYK. The future performance of staples stocks would be moderate as most are going to face negative currency translations.

Cigarette makers will likely witness a rough Q2 as some cigarette production facilities have been affected by government-imposed shutdowns or production limitations. Overall, if there is a flare-up in risk-off sentiment, staples stocks may outperform the broader market. Otherwise stocks are likely to underperform the S&P 500 index.