Coke vs. Pepsi: The Battle for Sweeter Numbers

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In the Cola Wars, the big question has always been about which tastes better: Coke or Pepsi.

Opinions may differ on that one (although the correct answer is "Coke"). But there's no room for argument as to which company turned in the better results this week. This round goes to Coca-Cola (NYSE: KO), hands down:

• Volume sales of the sugary syrup that goes into making Coke's heavenly beverage increased 3% in the third quarter of 2008, and revenues grew 9%.
• Meanwhile, earnings per share rocketed 14% year over year, to $0.81.

Contrast that with PepsiCo's (NYSE: PEP) results:

• Volume shipped increased only 2% year over year in Q3, while revenues increased 11%.
• Meanwhile, earnings per share declined 6% to $0.99.

The contrast is stark, and Mr. Market quickly made known his opinion of the relative results. Since reporting earnings Tuesday morning, Pepsi's already down more than 10%. Coke, on the other hand, jumped on the news and has since receded in the midst of the volatile markets.

Belated apologies ...
... for the crack about Coke tasting better than Pepsi. I know -- opinions differ, and that's why both Coke and Pepsi sell so well around the world. But if both products remain popular, how is it that Coke fares so much better than its archrival? Let's start with the similarities.

In their reports, both companies say they are taking "productivity initiatives" to save roughly $400 million or more each in annual pre-tax costs. Both explain the move as being in response to "challenging" conditions in the U.S. market, while emphasizing emerging markets as key to growth -- in part because a weak U.S. dollar continues to boost foreign revenues and profits.

However, Pepsi sees currency exchange rate fluctuations from those emerging markets hurting its profits in Q4, while Coke "continues to expect at least a mid-single-digit favorable currency impact on full year 2008 operating income." Furthering the contrast, Pepsi goes to great pains in its report to explain how much better its results would look but for "Mark-to-Market Net Losses on Commodity Hedges." Here, I fear Pepsi has been caught by surprise by the marked downturn in commodities prices -- a development that has helped destroy market capitalization at agro-dependent enterprises from Monsanto (NYSE: MON) to Intrepid Potash (NYSE: IPI), Mosaic (NYSE: MOS), and PotashCorp (NYSE: POT)).

In contrast, the only time Coke mentions hedging is in that line about how hedging its currency position will preserve its profits (at least through year's end.) And therein, I suspect, lies the answer to our question. While the specifics remain unclear, Coke appears to be hedging currency, and perhaps commodity, risks better than Pepsi has done.

Liked your first bottle of cola commentary? Down another one (or three):

• Pepsi's Bigger, but Coke's Smarter
• This Just In: Upgrades and Downgrades
• PepsiCo: The World in 1 Company
• Pepsi Aces Pop Quiz