In the spotlight – Pepsi Bottling Group

The largest bottler of PepsiCo beverages, Pepsi Bottling Group (PBG), this week released its full-year results, likely the last for the firm as an independent company. Michelle Russell examines the market reaction.

The bottler of Pepsi-Cola, Mountain Dew and Aquafina water, is being acquired, along with PepsiAmericas, by PepsiCo Inc, in a deal worth US$7.8bn that is expected to complete by the end of the current quarter.

Perhaps that is one reason why PBG's full-year results had little impact on its stock or that of PepsiCo on Tuesday (2 February). The bottler's share price crept up 0.2%.

"We don't view the results as material one way or another for PBG or PEP," JPMorgan analyst John Faucher told Reuters. "While the numbers are less than spectacular, consensus is somewhat limited right now, and we would not expect PBG to post very strong numbers before the PEP deal closes."

The bottler reported full-year profits ahead of guidance, despite a slip in sales.

Net profits for the 12 months to the end of December 2009 more than tripled to US$612m. The figure follows profits of $162m in 2008, when more than $400m in one-off impairment charges damaged earnings and saw the bottler slip to a loss in the fourth quarter. It swung back to profits of $90m in the fourth quarter of 2009.

The better-than-anticipated profits performance came despite a 1% fall in like-for-like net sales for the year, to $13.2bn. Including currency fluctuations, sales fell 4%.

Volume sales fell by 3% for the year, reflecting 2% falls in the US and Canada, 4% in Mexico and 8% in Europe.

The continued drop in volumes for the firm remains a concern given that the firm was cycling a weak fourth quarter in 2008, the Toronto Star wrote.

Stephen Mallas, of Blogging Stocks, also raised concern over volumes, adding that he wasn’t “100% keen” on the PepsiCo acquisition.

“I would never want to see Coke combine forces with Coca-Cola Enterprises; I like the model of keeping the bottler and the seller of syrup separate,” he said.

“PepsiCo's North America beverages volumes are more than a year into mid single-digit declines, with profit trends worse than that,” said Stifel Nicolaus analyst Mark Swartzberg.

“We have modelled continued volume and profit declines in 2009 and 2010, but declines could be greater than expected.”

Ilene Gordon, CEO of syrup and glucose manufacturer Corn Products International, this week also predicted that soft drink volumes in the US may drop by 1% to 2% this year.
Volume, Mallas believes, is “key” to a beverage business, and in some cases, “ultimately more important” than net income.

He questioned the motive for buying shares in PBG.

“PepsiCo shareholders are surely interested in the health of the bottling entity. Those who don't own the bottler along with the soda marketer (and I would have to assume that most investors aren't dual owners) will soon be owning both,” Mallas said, adding: “So, for that reason alone, there's really no compelling argument to purchase shares of the bottler, unless there's some thesis of arbitrage behind it.”

PBG shares dropped $0.55 or –1.46% to $37.23 at 4.38pm ET on Thursday.

All eyes will be on the integration of PBG into the PepsiCo fold over the next 12 months.