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Why P&G Weighs on Staples ETFs Despite Beating Estimates

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One of the most famous names in the consumer products world – Procter & Gamble (PG - Free Report) – came up with a beat on both line in results for the third quarter of fiscal 2018. The consumer behemoth also announced a big-ticket acquisition of Merck's Consumer-Health Unit as well as the terminated a joint venture with Teva Pharmaceutical Industries.

Such a volley of good news should boost the stock of P&G, but in reality, shares fell about 4.2% due to about loss of market share in its core business, per CNBC. Margin pressure was pronounced in the earnings report.

Let’s delve a little deeper into the results and assess what could be done with P&G shares in the coming days (read: 3 Staples ETFs & Stocks to Buy on Retail Sales & Geopolitics).

Procter & Gamble's 3Q18 Earnings in Focus

P&G’s fiscal third-quarter core earnings of $1.00 per share beat the Zacks Consensus Estimate of 98 cents by 2%. The bottom line increased 4% from the prior-year quarter. Currency-neutral core earnings per share (EPS) also improved 1%. The upside was primarily driven by increased net sales and a lower core effective tax rate.

Reported net sales of $16.3 billion topped the Zacks Consensus Estimate of $16.2 billion and grew 4% from the year-ago level, thanks to strong sales from its beauty, and fabric and homecare business lines. Foreign exchange had a 4% positive impact on sales.

On the flip side, organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 1% (versus 2% growth seen in the preceding quarter). Pricing had a 2% negative impact on sales. P&G’s Gillette shaving business continues to face pricing pressure from U.S. retailers. The brand has been facing steep competition from the likes of Dollar Shave Club and Harry’s have due to the latter’s less expensive products.

Core gross margin dropped 110 basis points (bps) to 49.4%, as productivity savings and higher sales were more than offset by headwinds like higher commodity costs and unfavorable pricing impacts.

Outlook

The company has lifted its core EPS growth projection to 6-8% (versus 5-8% expected earlier).But it maintained its projection for the year and expects organic sales growth in the range of 2-3% for fiscal 2018.

Acquisition Details

P&G announced to buy the consumer-health business of Germany-based Merck KGaA for approximately 3.4 billion euro ($4 billion). Per the terms, P&G will also acquire a 51.8% stake in India-listed Merck Ltd. The deal is expected to close during the 2018/19 fiscal. The acquisition will help P&G to solidify its consumer healthcare business.

Consumer ETF Impact

The loss in PG and Philip Morris (PM - Free Report) shares is reflected in the ETF world, with consumer staples funds being hurt. Many of the key funds in this segment have a double-digit allocation to the consumer product giant P&G, suggesting that the performance of the fund is highly dependent on the company’s performance. Let’s take a look at the following three ETFs with a solid allocation to Procter & Gamble (read: Consumer Staples ETF Investing 101):

Consumer Staples Select Sector SPDR Fund (XLP - Free Report)

The most popular consumer ETF on the market, XLP, follows the S&P Consumer Staples Select Sector Index. The fund invests about $7.56 billion of assets in 34 holdings. Of these firms, the in-focus P&G takes the first spot, making up roughly 1.4% of the assets. The fund lost 2.9% on Apr 19 (see all consumer staples ETFs here).

Vanguard Consumer Staples ETF (VDC - Free Report)

This fund manages a $3.79 billion asset base and provides exposure to a basket of 99 consumer stocks. The product charges a low fee of 10 bps per year from investors. Here too, P&G is the top firm with 10.4% allocation. VDC retreated about 2.7% on Apr 19.

iShares U.S. Consumer Goods ETF (IYK - Free Report)

The fund holds about 107 stocks in its basket with AUM of $468.4 million. Like the other two, the stock under consideration occupies the top position in the basket with 9.12% of assets. The fund shed about 2.9% on Apr 19.

Bottom Line

Even though acquisition announcement should bode well over the long term, the near-term prospect of P&G doesn’t appear to be smooth. Plus, the Zacks Industry Rank of Procter & Gamble is in the bottom 8%. The VGM Score of the stock is D. Investors should also keep in mind that the wind is not in favor of the broader sector. The Zacks Sector Rank is in the bottom 44%. So, it is better to stay away from the consumer space at this moment.

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