Thursday’s ETF To Watch: PowerShares Food & Beverage ETF (PBJ)

by on May 26, 2011 | ETFs Mentioned:

The past few months have been somewhat difficult for food producers as rising commodity prices have greatly impacted the bottom lines of many firms. Fortunately, the recent commodity sell-off and strong performances out of a variety of markets have reignited interest in this traditionally safe sector as a way to play the equity markets with lower levels of risk. This trend has allowed Campbell Soup to beat quarterly profit expectations despite general market concerns when it reported earnings earlier in the week. However, while the EPS may have beaten estimates, many analysts were not sold on the company’s earnings quality and still have concerns over the firm’s ability to maintain high margins and sales growth in emerging markets, casting doubts over other firms in the sector that also need to expand aggressively in developing nations in order to keep investors happy [see Commodity Surge Could Sink Consumer Staples ETFs]. While further data on this front has been scarce, investors could get some clues from the sector later today when a similar staple product company gives its earnings report; H.J. Heinz Co. (HNZ).

The Pittsburgh, PA based firm is expected to post earnings of 72 cents a share on revenues of $2.87 billion. This compares pretty favorably with the year ago period in which the company earned 60 cents a share on sales of $2.72 billion. Beyond top line revenue growth, analysts are also likely to take a closer look at how the company is performing in emerging markets, an increasingly critical area for the firm. HNZ expects roughly 20% of sales will come from developing nations in the 2012 fiscal year and it has made several key acquisitions in these markets as of late including a stake in a Brazilian food maker, and a purchase of a food product company in China as well. As a result, any updates on these acquisitions could have a heavy impact on the company’s stock price and could potentially signal how other American food companies will fare in emerging nations as well [see all the ETFs in the Consumer Staples ETFdb Category].

Due to this important earnings report, investors should look for the PowerShares Dynamic Food & Beverage ETF (PBJ) to remain in focus throughout today’s trading session. PBJ tracks the Dynamic Food & Beverage Intellidex Index which is comprised of stocks of U.S. food and beverage companies. The benchmark is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. Although the fund doesn’t allocate its top holding to HNZ, the product still affords the company 4.7% of the fund, a sizable chunk considering the ETF only holds 30 securities in total. Should HNZ be able to surprise investors on the upside with its report or issue strong guidance based on its international acquisitions, PBJ could rise ahead of the broad market today. If, however, it appears as though Heinz is having trouble integrating the new firms into its brand or if commodity prices eat into EPS, it could spell bad news for the food and beverage sector sending PBJ lower on the day [also see Global X Debuts Global Food ETF].

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Disclosure: long PBJ, photo is courtesy of Joey Gannon.