Soda makers PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO) wouldn't be in business without their bottlers. The big boys merely come up with the formulas -- the bottlers must manufacture, sell, and distribute the final products, fighting to claim maximum shelf space for their respective brands. While it's more profitable to sell the syrup, investors shouldn't overlook the rest of the business chain.

Pepsi's largest bottler, Pepsi Bottling Group (NYSE:PBG), saw its stock rise 6.5% yesterday on strong second-quarter earnings. Revenues were up 7%, and net income rose 4.2% over the second quarter of 2004. Diluted earnings per share came in even stronger, up 11% sequentially, boosted by the company's ongoing share buybacks.

Management repurchased 4.5 million shares during the quarter; it's now purchased 92.4 million shares since announcing the program in 1999. The company also raised 2005 diluted earnings guidance to between $1.82 and $1.88, which excludes the favorable effect of a 53rd operating week. If the company achieves the midrange of that guidance, its forward P/E for fiscal 2005 earnings is 16 -- much less than Coke's 20 or Pepsi's 21.

The lower P/E reflects bottlers' different business fundamentals. They need more infrastructure and raw materials to turn plain syrup into a finished product. They also need a sales and distribution force to get their soda to millions of thirsty consumers, which requires large numbers of employees and extensive capital expenditures such as trucks, vending machines, and warehouses.

All of these extra requirements and costs create lower margins. Pepsi Bottling Group had a net profit margin of 4.2% in fiscal 2004, compared with Pepsi's 14.4%. Coke's main bottler, Coca-Cola Enterprises (NYSE:CCE), fared even worse. In fiscal 2004, its net profit margin of 3.3% was dwarfed by its parent company's 22%. Even after proceeds from property and equipment were added back, Pepsi Bottling Group reported higher capex than depreciation in each of the past five years. Coke, a pure-play syrup dealer, has done exactly the opposite. Growing a bottler's infrastructure requires large capital investments and drains its ability to generate free cash flow.

The bottlers shouldn't be ignored, though. Few businesses can outshine PepsiCo or Coca-Cola. As the bottlers' P/Es indicate, the market seems to have factored in the inequalities of their business. Of the two major bottlers, however, Pepsi Bottling Group appears to be the superior investment. It has a more manageable debt level and strong free cash flow. If the company can keep a lid on ongoing capital expenditures and avoid overleveraging itself with acquisitions, it will have plenty of future cash to divvy out to shareholders. That's exactly the kind of refreshment investors need.

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At the time of publication, Fool contributor Matt Thurmond owned no financial position in any companies mentioned in this article.