By Ryan Fuhrmann, CFA
Most investors and consumers can effortlessly list off their favorite Pepsi(NYSE: PEP) products, which may include its well-known namesake soft drink, Mountain Dew, Lipton Ice Tea, or even Tropicana Orange Juice. But some may be less familiar with the company that bottles most of Pepsi’s tantalizing drink products: Pepsi Bottling Group(NYSE: PBG). Pepsi reports results on Thursday (check out Stephen Ellis’ Foolish Forecast), but Pepsi Bottling reported results today. So is the separate bottling company worthy of its own investment consideration?
First, a quick overview of second-quarter results. Pepsi Bottling reported that worldwide net revenue per case, an important industry metric, rose 4% and its earnings came in above analyst expectations. As a result, the stock popped nearly 5%. Investors liked the current quarter plus the fact that management increased full-year guidance to $1.82-$1.88. This figure includes employee stock options and represents a forward P/E of about 18.
Over the longer term, Pepsi Bottling has done an excellent job of leveraging slower sales growth into double-digit earnings growth that has averaged almost 20% on average over the past five years. A current dividend yield of nearly 1.4% is also comforting, but with its current P/E multiple and strong stock performance year to date, most good news is probably already priced into the shares.
Pepsi Bottling also has a fair amount of debt on its balance sheet — to the tune of nearly 70% of total capital. Its stable cash flow production allows it to carry a higher debt load, but the interest expense is high and a good chunk of operating cash flow is eaten up by capital expenditures and the purchase of other bottlers. And while return on equity statistics are impressive at around 23% on average over the past five years, the high level of debt reduces return on capital to about 8.3% on average over the same time frame.
Additionally, the business model is capital intensive with razor-thin margins. To illustrate, the company owns most of its nearly 100 bottling facilities worldwide, it operates approximately 40,000 vehicles to deliver soft drinks, and net margins run near 4% versus a market average over 10%. This partially explains why Pepsi spun Pepsi Bottling off as a separate publicly traded company back in 1999 but maintains an overall 47% voting interest in the bottler. In other words, Pepsi owns just enough to maintain control but not enough to have to consolidate Pepsi Bottling’s lower margins, high fixed costs, and assets into its own financial statements. The same goes for the relationship between Coca-Cola(NYSE: KO) and its own bottler, Coca-Cola Enterprises(NYSE: CCE), though the ownership structure percentages and certain other minor details are different.
Overall, Pepsi Bottling has been a strong performer, but I can’t think of many reasons why you would want to own it over Pepsi. By purchasing shares of Pepsi you gain significant exposure to the bottling operations because of Pepsi’s significant ownership stake. But you also gain the added benefit of owning the higher-margin, less capital-intensive, and faster-growing businesses that include salty snack maker Frito Lay. For Fools, that may be the best way to bottle your Pepsi and drink it too.
Coca-Cola is aMotley Fool Inside Valueselection.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further.The Fool has an ironclad disclosure policy.