Pepsi Bottling Doesn't Wobble
By
Ryan Fuhrmann, CFA
April 25, 2008
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Pepsi Bottling Group (NYSE: PBG) bills itself as the world's largest bottler for PepsiCo (NYSE: PEP). As impressive as that sounds, manufacturing, selling, and distributing beverages isn't that sexy. It's very capital intensive, and Pepsi Bottling is tied primarily to the stale growth in North America. Despite all that, the firm has proven itself a steady grower, and first-quarter results kept it on target for the year.
Total sales advanced 7.5% to $2.7 billion, which is just about the same rate Pepsi Bottling has grown the top line over the past three years. High single-digit expansion is certainly nothing to brag about, but I found it somewhat impressive given that Pepsi just reported negative volumes in its Americas segment, which was mostly because of tougher trends here in the U.S. The majority of Pepsi Bottling's sales stemmed from the U.S. and Canada, accounting for 83% of total revenue, where it saw a 5% increase in quarterly sales and a modest 2% bump in volumes for the quarter. Sales and case increases were led by robust growth in Europe and Mexico, which each make up about 17% of total sales.
Overall operating income fell 10% on charges from a Russian joint venture and a surprise hit from foreign exchange. Raw material costs also increased, but "significant cost productivity gains" helped Pepsi Bottling post flat earnings of $0.12 per share.
If the company hits the high end of its full-year guidance of $2.38, earnings will grow about 8%. That's still not too shabby given the challenging American trends that Pepsi, archrival Coca-Cola (NYSE: KO), and Cadbury Schweppes' (NYSE: CSG) Dr. Pepper and 7-Up brands are seeing.
Similar to my Foolish colleague Matthew Reilly's take on rival Coke's relationship with Coca-Cola Enterprises (NYSE: CCE), I can't see going with Pepsi Bottling over Pepsi itself. Pepsi owns a 35% stake in the bottling group and all of its class B shares. Going with Pepsi gets you plenty of exposure to its most important domestic bottler, plus the more appealing profitability that goes with keeping the lower margin business of bottling operations off the books and the ability to focus more purely on faster-growing global markets.
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