In the Spotlight: Coca-Cola Co, PepsiCo in 2010
Coca-Cola and PepsiCo both recorded healthy full-year results
While Coca-Cola's hefty climb was a result of a non-cash gain related to the purchase of Coca-Cola Enterprise's North American operations, the market nonetheless showed its appreciation of the results with an increase in share price for both firms. Coca-Cola rose 2.6% to US$63.54 per share yesterday (10 February), while PepsiCo gained 2.1% to $63.05.
Both results met analysts expectations, but whether it was red or blue that won the year, is questionable.
Coca-Cola saw net profits soar to $11.81bn in 2010 and operating profits rise by 3% to $8.45bn. Sales for the year increased by 13% to $35.12bn.
Bernstein Research analyst Ali Dibadj believes that the soft drink giant's results were driven by "solid volume growth, greater-than-expected revenue realisation, and slightly lower taxes, all offset versus weaker margins".
Morningstar analyst Philip Gorham, meanwhile, said that, while there was "a surprise drop" in Coca-Cola's volumes in China, he was "not concerned" given that the company is leveraging strength in developed markets to invest in growth in emerging markets.
Analysts were equally pleased with PepsiCo's results. The snacks and soft drinks giant saw profits climb in 2010 to $6.32bn. Operating profits rose by 4% to $8.33bn, while sales in the period increased by 34% to $57.84bn.
Dibadj described the results as "solid", while Gorham said PepsiCo is on track to meet its estimate of "mid-to-high single digit earnings growth" in 2011.
"Although Pepsi is still slightly underperforming Coca-Cola in some key markets, we still believe that the market valuation gap between the two rivals has grown too wide, and that Pepsi's stock offers double-digit upside," Gorham said. He added that fourth quarter sales growth of 37% year-over-year was driven primarily by the bottler acquisitions but also by volume growth in emerging markets.
However, despite the optimism, both analysts noted a number of issues for both firms.
Gorham noted that, while Coca-Cola has said it expects to achieve $110m to $140m in operating cost synergies from the bottler acquisitions in 2011, "the firm's exposure to commodity costs will provide a headwind in the second half of the year".
Dibadj also highlighted concerns over commodity cost inflation for Coca-Cola. "North American pricing was modestly positive in the quarter, and Coca-Cola did pleasingly confirm that pricing will be up in 2011," Dibadj said. "From a broader perspective, though, we wonder to what degree this is driven by near-term commodity inflation, or is in fact a sign of more structural change in the US industry as the major concentrate companies integrate their bottlers?"
For PepsiCo, Dibadj pointed to the firm's warning of a "potentially difficult pricing environment, particularly in beverages", especially in North America.
"[This] came to us as somewhat of a disappointment, especially after Coca-Cola's earnings discussion where pricing was expected to be positive," Dibadj said. "However, we do not believe that this is the start of a pricing war- something we see as the biggest and most deleterious risk for the industry - but simply companies in a fairly consolidated sector jockeying for optimal position to raise prices without forfeiting share or volume."
Gorham noted that PepsiCo faces a struggle to maintain profitability in 2011, with the firm also becoming more exposed to commodity costs following the closure of the bottler deals.
"With the costs of sweeteners at multi-year highs, margin pressures are likely to remain until consumers become willing and able to bear the burden of rising costs," he added.
Indeed, PepsiCo's CFO, Hugh Johnston, told analysts yesterday (11 February) that the company expects a "highly competitive environment" in 2011, with commodity costs remaining a "major headwind" for the firm.
Nonetheless, Gorham believes that, while PepsiCo is facing challenges in the form of rising costs and a highly competitive environment, there is "upside" to the firm's equity.
"With the stock trading at around 14 times our estimate of 2011 earnings per share," Gorham said, "we think the market is too fixated on the inevitable road bumps that Pepsi will face in the near term, and missing the competitive advantages that the firm holds through brand power, scale and distribution in its snacks portfolio."
The same sentiment was echoed by Reuters, which noted that, while Coca-Cola produced the better results, PepsiCo looks "the sweeter choice for investors".
"Coca-Cola produced a bubblier fourth-quarter to sate investors but it may yet lose the Pepsi value challenge," Reuters' Lisa Lee wrote in a blog. "Along with topping the expectations of analysts, Coke can claim a broader international reach and a bigger market share. But, PepsiCo is better diversified and has the more realistic outlook on commodity prices, which should in turn give its shares more fizz."
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