Pepsi Bottling 2Q Profit Rises 9.5 Percent

Pepsi Bottling Group Inc. (PBG) reported higher-than-expected profit Tuesday, helped by cost controls and price increases, and raised its full-year forecast, sending its shares up more than 4 percent.

The largest bottler of PepsiCo Inc. (PEP) beverages said net income increased 9.5 percent to $162 million, or 70 cents per share, in the second quarter ended June 16 from $148 million, or 61 cents per share, a year earlier.

Analysts on average were expecting 63 cents per share from the company, which operates in North America, Russia, Spain, Turkey and Greece.

Revenue rose to $3.36 billion from $3.14 billion.

Worldwide sales by volume were up 1 percent as growth in Europe helped offset a decline in Mexico and flat results in the United States.

European volume rose 6 percent, driven by a 20 percent increase in Russia, while volume rose 3 percent in Canada and fell 2 percent in Mexico.

Margins at Pepsi Bottling have been under pressure for some time as it faces soaring prices for the aluminum used in cans and the high fructose corn syrup used as a sweetener. But the company said strong price increases more than offset a 6 percent rise in costs of the sweetener and the soft drink concentrate it buys from PepsiCo.

Pepsi Bottling also benefited from cost controls, which helped it keep selling, general and administrative expenses in the United States flat, driving U.S. operating profit up 10 percent.


The company, based in Somers, New York, raised its earnings per share forecast for the full year to a range of $2.02 to $2.07 from a prior outlook of $1.90 to $1.98.

Aside from the immediate market reaction to the raised forecast, Morgan Stanley analyst William Pecoriello said a bigger gain in Pepsi Bottling shares would hinge on whether Wall Street thinks continued fiscal discipline could push profit above the top end of management's new range.

"A key issue will be whether Pepsi Bottling can maintain such strong cost controls on U.S. (expenses) in terms of further upside to our third-quarter and fourth-quarter earnings estimates," Pecoriello said.

Goldman Sachs analyst Judy Hong raised her 2007 earnings estimate and her 12-month price target after Tuesday's news, but also expressed caution.

"The only factor that could mitigate investor enthusiasm is that the second-quarter upside and higher full-year guidance is largely cost-control driven rather than indicative of better top-line growth," Hong wrote in a research note.

The company said it expects 2007 volume to grow about 1 percent to 2 percent worldwide, and be flat to up 1 percent in the United States and Canada.

Pepsi Bottling, which is 44 percent owned by PepsiCo, said it expected net revenue per case to grow 4 percent on a worldwide basis.

The company said it would record a noncash benefit of about $45 million in the third quarter due to the reversal of net tax contingencies related to the expiration of the statute of limitations for an audit of its 2001 and 2002 tax returns. The impact is not included in its earnings forecast.

"Pepsi Bottling remains our favorite bottling stock based on its continued demonstrated ability to manage through difficult operating conditions, and its valuation remains ... below Coca-Cola Enterprises Inc. (CCE)" the largest bottler of Coca-Cola Co. (KO) drinks, Goldman's Hong wrote.

Pepsi Bottling shares were up $1.45, or 4.2 percent, at $35.88 in morning New York Stock Exchange trade.

At Monday's close, the stock, which traded at 17.5 times estimated earnings for the current fiscal year, had gained 6.4 percent over the last year. By contrast, CCE had risen 16.5 percent and had a trading multiple of 19.5, according to Reuters data.

Both bottlers underperformed the Standard & Poor's 500 Index , which gained about 20.8 percent over the same period.