Pepsi bottler fizzing with profit

Pepsi Bottling Group today reported a slightly higher quarterly profit, helped by better pricing and volume growth.

But concerns about the likely effect of rising costs on its earnings outlook pushed the stock to its lowest level in nearly three months.

UBS beverage analyst Kaumil Gajrawala said investors wanted to know how costs of raw materials, such as plastic for bottles, aluminum for cans and high-fructose corn syrup, would affect 2007 results. The company could only say it is still making plans.

"I think people are going to need more visibility for next year, and that's part of the reason the stock is down," Gajrawala said.

On a conference call, Chief Financial Officer Alfred Drewes acknowledged that market volatility had created uncertainty about costs of plastic bottles and the sweetening syrup.

"Over the next several weeks, we will be working with our global procurement team to finalize our raw material costs" for the upcoming year, Drewes said.

Chief Executive Eric Foss, in his first earnings call since taking the top spot in July, said quarterly operating profit was hurt by higher-than-expected fuel costs.

Like many other companies struggling with higher costs, Pepsi Bottling, the largest bottler of PepsiCo Inc. drinks, has been trying to raise prices to protect its margins.

"While higher input costs are not new and Pepsi Bottling manages this aspect of its business better than the competition in our view, we do not see big opportunities for margin improvement," wrote Deutsche Bank analyst Marc Greenberg in a research note.

Greenberg cut his rating on the stock to "hold" from "buy," saying that while Pepsi Bottling was "the most consistent performer in the bottling space," the cost pressure and narrow upside to his price target of US$37 warranted the downgrade.

Pepsi Bottling shares, which are currently trading at 18.5 times full-year earnings estimates, were down 6.4 per cent at US$32.98 ($51.57) on the New York Stock Exchange, where the stock earlier sunk as low as US$32.50.

The Somers, New York-based company said net income rose to US$207 million, or 86 cents per share, in the third quarter, ended Sept. 9, from US$205 million, or 82 cents a share, a year earlier.

Excluding a gain of 5 cents per share from income tax law changes, it earned 81 cents per share, in line with the average forecast among analysts polled by Reuters Estimates.

The bottler, which is about 43 per cent owned by PepsiCo, the world's No. 2 soft-drink company, said quarterly revenue rose 7.6 per cent to US$3.46 billion.

The company said sales by volume, a key gauge of performance in the beverage industry, rose 2 per cent worldwide and 2 per cent in the United States and Canada, its biggest markets. Net revenue per case rose 4 per cent worldwide and 3 per cent in the United States.

In the United States, sales of noncarbonated beverages grew strongly, helped by new flavors of Lipton Iced Teas, Aquafina sparkling water, and SoBe Life Water. The company also said energy drinks and bottled Starbucks Frappuccinos did well.

Bottlers and soft-drink companies are trying to woo consumers who are moving away from sugary soft drinks to diet versions or healthier low- or no-calorie beverages such as water and orange juice with reduced sugar.

Pepsi Bottling forecast full-year operating income to grow 6 per cent to 8 per cent, excluding stock option expenses.

Including stock option expenses of 18 cents per share, but excluding the one-time tax law gain in the third quarter, the company forecast full-year earnings of US$1.85 to US$1.88 per share, compared with an earlier forecast US$1.82 to US$1.88.

- REUTERS