Pepsi Bottling's Earnings Refresh Investors

Pepsi Bottling Group (NYSE:PBG) quenched investors' thirst for a solid earnings report yesterday by sharing some nice second-quarter numbers. Let's have a look at this case of statistics.

Net income for the second quarter was $142 million ($0.53 per diluted share) vs. $131 million ($0.47 per diluted share) earned in the second quarter of 2003. Net revenues came in at $2.675 billion against last year's $2.532 billion, a respectable if not overwhelming increase of 5.6%.

The company was satisfied with its pricing power this quarter; this is crucial not only for the Pepsi bottler but also Coca-Cola (NYSE:KO) and its major bottler Coca-Cola Enterprises (NYSE:CCE). Inflation in the core cola categories must occur to compensate for the difficulty these companies have experienced the last few years in terms of volume growth. Some have speculated that the influence super retailerWal-Mart (NYSE:WMT) exerts on its vendors is part of the problem (and I would tend to agree with such an assessment); some have dubbed it "The Wal-Mart Effect." (That should be the title of a horror movie.)

Volume growth this time around also was rather lackluster. Case volume across the globe grew by 2%. Europe was a nice segment for the Pepsi Bottling Group, seeing a 10% jump in this metric. Mexico, however, declined 7%; PBG faces ongoing problems in this territory.

Let's look at all this from the viewpoint of an individual investor. Let's say you're new to stocks, you want a consumer blue chip with brand power, and you're thinking you'd like exposure to the beverage industry. OK, it's between Coca-Cola and PepsiCo (NYSE:PEP). You've tried the new concoctions C2 and Pepsi Edge and, for the heck of it, say you like Pepsi better and decide to go for some equity in this brand (this of course is only a philosophical example; make sure you watch out for brand bias).

You then pause and ask yourself: "Self, do I go for Pepsi Bottling Group or PepsiCo?"

Well, I suppose this reasoning could be debated, but I personally prefer (and own) shares of Coca-Cola -- as in KO, not CCE -- because of the higher capital requirements involved in maintaining a bottling company. Coca-Cola itself tends to have higher margins because it sells the concentrates to its bottler and doesn't make the actual product; its biggest concern is marketing the liquid. Pepsi Bottling Group reported capital expenditures of $270 million against operational cash flow of $313 million for the first two quarters of its fiscal year -- that's quite a chunk.

Of course, that is a simplistic overview of the situation. In fact, the situation is much more convoluted because complex relationships exist between bottlers and the companies that sell the high-margin concentrated syrups to the bottling concerns, including equity ownership stakes that require involved accounting analysis. As many have pointed out, if the bottling groups don't do well, the concentrate supplier will feel it. Nevertheless, my personal choice was to own shares in Coca-Cola, not Coca-Cola Enterprises.

Here is a good article that, while a bit old, still provides some good information on Coke and its relationship to its bottlers: Coke's Bottling Woes.

Fool contributor Steven Mallas owns shares of Coca-Cola but none of the other companies mentioned.