On the surface, the results look poor. Volume case sales, as forecast, were flat from the same quarter a year ago. But a year ago, the company was riding the strong surge provided by Pepsi Vanilla and Tropicana juice drink innovations. Net income, down 22%, is suffering from ongoing raw materials cost pressures.
Related and significant, Pepsi Bottling experienced higher revenue per case, a favorable trend. The question remains, will price increases stick when economic conditions or perceived inflation turn downward?
So, given the poor start, why should investors believe the company's reaffirmed 2005 earnings guidance of $1.76 to $1.84 a share (up from $1.73 last year) -- besides the company's conservative first-quarter guidance?
Take a look around your local Kroger
The real twist of good fortune is citrus-based and coming soon -- Pepsi Lime and Diet Pepsi Lime. While Pepsi is trailing Coca-Cola
PepsiCo's innovations also include a reformulation of Pepsi One using Tate & Lyle's Splenda to get a full-flavor cola taste with only one calorie: This should (hopefully) provide a niche for Pepsi in the recent trend toward low-calorie products. And, on the marketing front, Pepsi will be riding one of the strongest brand names ever into theaters this summer, News Corp.'s
So, the combination of the product and marketing leads this observer to expect that Pepsi Bottling is being conservative with its 2005 earnings projection -- just as it was with first-quarter numbers.
It is also reassuring that Pepsi Bottling expects free cash flow -- net cash minus capital expenditures -- of about $500 million. That's great for shareholders because it provides the financial flexibility to buy back shares (the company has purchased 88 million since 1999), increase dividends, make acquisitions, reduce debt, or all of these. And if earnings guidance proves, once again, to be conservative, free cash flow would only increase.
As I pointed out yesterday, Pepsi Bottling compares favorably with its prime competitor on a fundamental basis, Coca-Cola Bottling