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.
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.