PepsiCo (PEP) recently reported earnings for the second quarter of 2010. The company posted stellar growth in its beverage business revenues, driven by the August 2009 acquisition of its two largest bottlers, Pepsi Bottling Group and PepsiAmericas . Pepsico competes with The Coca-Cola Company (KO) and others in the non-alcoholic beverage business.
PepsiCo’s snacks and beverages businesses also saw high growth in developing economies, while growth for the Quaker brand was subdued. Based on the above trends, we have updated our price estimate for PepsiCo’s stock from $65.49 to $67.28.
Although rising beverage revenue is certainly good news, there’s a risk that integrating the less-profitable bottling business could erode Pepsico’s gross margins. Our analysis follows below.
Per-Case Revenues Soar
Pepsico’s revenue per case rose sharply in the second quarter, driven by the integration of bottlers within PepsiCo’s overall business. The integration has allowed PepsiCo to convert a greater proportion of its volume sales into finished products that sell for a higher price. We estimate an average jump of 70% in revenue per case for PepsiCo’s beverages in 2010. The chart below shows revenue per case for the Pepsi brand in the US. You can modify the chart to create your own forecast for the impact of per-case revenues on Pepsico’s stock price.
We expect PepsiCo to gain more value in the form of additional profits and synergies of integration realized from the bottlers acquisition.
Beverage Margins Could Decline
However, the bottling integration could potentially put pressure on Pepsico’s gross beverage margins. Although bottlers earn much more than concentrate sellers in terms of revenues for the final product, they typically have lower margins because their cost of goods is higher.
We currently estimate that beverage gross margins will decline only slightly, because we expect increased efficiencies realized from the bottlers acquisition to partially offset the margin declines. However, Pepsico’s stock could face a downside of nearly 2% if margins decline more than we forecast.
You can modify the forecast below to see how a decline in Pepsi brand’s gross margins would impact PepsiCo’s stock. The impact of the decline could be deeper than this chart suggests, given that the integration of the bottling business affects all of PepsiCo’s beverage brands.
Disclosure: No positions