On a micro level, the events of the past two weeks illustrate how Pepsi (NYSE:PEP) and Coca-Cola (NYSE:KO) have taken divergent paths. First, Coke released a surprisingly grim outlook, cautioning that flat worldwide unit case volume growth would leave second-half results below expectations. Management cited a number of reasons for the adverse operating conditions, running the gamut from "environmental legislation" to "retail de-stocking" to "unseasonably cool and rainy weather in the highly-profitable Northern European markets."

The dour news sank Coke's stock to 19-month lows, and as Rick Aristotle Munarriz recently noted, to within shouting distance of levels not seen since 1995. Meanwhile, while Coke has been mired in profit warnings, management shake-ups, and analyst downgrades, Pepsi has quietly put together another solid quarter. This morning, the company posted a 35% rise in net income to $1.36 billion, on revenues that climbed 6.3% to $7.26 billion. Excluding a tax gain, earnings jumped 14% to $0.66, a penny ahead of estimates.

While a 4% drop in carbonated soft-drink volume drove overall North American beverage volume 1% lower, the noncarbonated beverage volume rose 5%. Sales of Gatorade X-Factor, Propel Fitness Water, and a new line of Tropicana juice drinks were particularly brisk. Segment operating margins expanded 100 basis points, resulting in an 8% increase in operating profits to $542 million.

International operations were even stronger, as both carbonated and noncarbonated beverage volumes improved by double digits. Year to date, overseas snack volumes and beverage volumes have risen 9% and 12%, respectively. Quarterly operating profits in the international segment soared 29% to $370 million (with currency fluctuations taking a fractional bite out of the bottom line) on an 11% rise in revenues.

Frito Lay's revenues grew 5% to $2.3 billion, but a waning public appetite for salty snacks has forced Pepsi to consolidate by shuttering four facilities, scaling back the workforce by a few hundred positions. The company expects to record a pre-tax $160 million fourth-quarter charge related to the closings. Despite the charge, Pepsi raised its 2004 forecast by $0.06 to $2.35.

While Coke's fortunes are largely tied to a carbonated beverage market that is stuck in the doldrums, Pepsi has a far more diversified revenue stream. With 200 new products launched last year alone, Pepsi is clearly the leader in product innovation. Furthermore, only 37% of the firm's sales are derived from beverages, with the rest coming from Quaker Foods and Frito Lay, which has a stranglehold on the salty snack market.

Consumers are increasingly washing down those snacks with noncarbonated drinks, where Pepsi maintains a decided advantage. It has done a better job of keeping its finger on the collective pulse of the consumer, and was much quicker to jump into the faster-growing noncarbonated market. This subcategory now represents 30% of Pepsi's overall beverage sales, a number that continues to rise steadily.

We may never see an end to the cola wars, but for now at least, Pepsi's tactics appear to be paying off.

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Fool contributor Nathan Slaughter owns none of the companies mentioned.