These Two Global Soft Drink Leaders will Benefit Shareholders in the Long Run

Coca-Cola (KO 0.01%) has always been a favorite investment of legendary investor Warren Buffett. However, like many companies, Coke could not escape from the volatility of the stock market. Since the middle of May, Coke has dropped from around $43 per share to $38 per share. Recently, the company reported growing quarterly profit and volume, which could be considered good news for investors. More importantly, Coke also mentioned that it was on track to double its system revenue since 2010.

Decent volume growth but negative currency impact
In the third quarter of 2013, Coca-Cola reported decent comparable revenue growth at 4% and operating income growth of 8%, excluding the impact of currency exchange and the de-consolidation of the Phillipines and Brazillian bottling operations in 2013  . The legendary Coca-Cola brand stayed strong, leading to the 2% increase in global volume growth. Consequently, the company delivered as many as 181 billion servings this quarter.  However, its operating income dropped by as much as 12% mainly due to the declining value of currencies in many emerging economies. In the fourth quarter, the company expected that the currency exchange would have a 5%-6% negative impact on its comparable operating income .

The growth in volume is definitely a positive sign. The global volume increase of the Coca-Cola brand means that Coca-Cola is still able to thrive among the increasing world population. The company believes in the huge potential of the emerging markets as the middle class is growing quite rapidly. CEO and Chairman Muhtar Kent mentioned that very healthy growth will be supported by one billion new members of the middle class by 2020.

PepsiCo's shareholder value could be unlocked by business separation
While Coca-Cola is on track to deliver its 2020 Vision of doubling its system revenue, the No.2 global leader in soft drinks PepsiCo (PEP +0.00%) could unlock shareholder value by separating its beverage and snack segments. The soft drink business is strong and sustainable, but it is not growing as fast as PepsiCo's snacks . In the third quarter, while the snack business experienced 3% organic volume growth, the organic volume growth of PepsiCo's beverages was only 1%. The business separation idea was from activist investor and large PepsiCo shareholder Nelson Peltz. He thought that it would be best for PepsiCo to acquire Mondelez International (MDLZ 0.01%), and then spin off the beverage business.

Mondelez owns the leading positions in chocolate, powdered beverages and biscuits sales around the globe. In the second quarter, its two biggest categories, biscuits and chocolate, experienced strong topline growth of 8% and 6%, respectively. Looking forward, the company is transitioning itself into a category-led organization to serve the purposes of process simplification, cost reduction and margin improvement. On a constant currency basis, Mondelez expects as much as 14%-18% growth in EPS for the full year. 

The combination of Mondelez and PepsiCo would create a global snack leader, delivering as much as $6 billion in cost and revenue synergies. Nelson Peltz suggested that the price tag for Mondelez could be around $35 per share in an all-stock deal. Taking into account $3.7 billion of cost synergies and Mondelez margin improvement, the deal could be worth around 8.6 times 2013 EBITDA, or earnings before interest, taxes, depreciation and amortization. Nelson Peltz thought that if his ideas were implemented, PepsiCo's implied value per share could range from $136-$175 by the end of 2015. 

My Foolish bottom line
Both Coca-Cola and PepsiCo, with their global leading positions in the soft drink market and their strong presences in emerging economies, will continue to benefit shareholders over the long run. I think PepsiCo will rise much higher in the near future if it implements Nelson Peltz's ideas for corporate restructuring.