Pepsic (PEP US) Q3 beats estimates; A positive for Dr Pepple Snapple (DPS US) and a negative for Crown Holdings (CCK US)

PEP reported Q3 earnings on Friday which beat sales, EPS and operating margin expectations by 1%, 5% and 120bps respectively. The company also gave a modest upgrade to FY 2014 EPS guidance. Of particular note was the performance of PEP’s Beverages (Americas) division, where price and margin trends remain on a strongly upward path – a trend that QMGI data suggests will continue through the final quarter.

Chart 1:  PEP margins vs sector (red line = consensus)

Chart 1: PEP margins vs sector (red line = consensus)

The read across here is very strong for DPS – a stock that we have had a positive view on since June (when shares were $59.78). QMGI data shows that sales across the US soft drink and beverage industry growing at +16.5% yoy with margins expanding at +770bps – driven by strong pricing and improving cost efficiency (ie not volume). The current consensus view on DPS is that sales will grow by less than 1% this year and margins by +179bps. We therefore highlight the likelihood that consenus estimates will be beaten/increased and flag upside potential in PEP shares – an opportunity for investors to buy into amid current market pull back.

On the flipside, we see the lack of volume growth as a negative for the likes of CCK – an name that we have been negative on since June (when shares were $49.20). See margin expectations in Chart 2 below.

CCK margins vs sector (red line = consensus)

CCK margins vs sector (red line = consensus)

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