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Soft drinks
Lower input costs could be
Santa's helper
Marc Greenberg, CFA
Research Analyst
(+1) 203 863-2355
marc.greenberg@db.com
Andrew Kieley, CFA
Research Analyst
(+1) 212 250-7817
andrew.kieley@db.com
Category declines & COGS tailwinds
Two issues currently dominate investment considerations for US beverage
companies and bottlers. Category weakness is deepening into 4Q as prices rise
and consumers step away -- private label is gaining ground fast. On the other
hand, relief on input costs in 2009 looks increasingly likely, which should benefit
gross margins and perhaps relax pricing.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
PepsiCo (PEP.N),USD52.71 Buy
PepsiAmericas (PAS.N),USD17.56 Buy
Companies featured
Coca-Cola Company (KO.N),USD44.22 Hold
2007A 2008E 2009E
EPS (USD) 2.70 3.13 3.30
P/E (x) 19.9 14.1 13.4
EV/EBITDA (x) 14.1 10.1 9.1
PepsiCo (PEP.N),USD52.71 Buy
2007A 2008E 2009E
EPS (USD) 3.38 3.67 3.88
P/E (x) 20.2 14.4 13.6
EV/EBITDA (x) 12.8 9.0 8.9
Dr Pepper Snapple Group (DPS.N),USD15.25 Hold
2007A 2008E 2009E
EPS (USD) 1.99 1.83 1.73
P/E (x) – 8.3 8.8
EV/EBITDA (x) – 6.4 6.1
Coca-Cola Enterprises (CCE.N),USD10.38 Hold
2007A 2008E 2009E
EPS (USD) 1.39 1.25 1.22
P/E (x) 16.5 8.3 8.5
EV/EBITDA (x) 7.9 – 5.8
Pepsi Bottling Group (PBG.N),USD18.54 Hold
2007A 2008E 2009E
EPS (USD) 2.20 2.22 2.39
P/E (x) 16.0 8.3 7.8
EV/EBITDA (x) 7.1 7.0 4.9
PepsiAmericas (PAS.N),USD17.56 Buy
2007A 2008E 2009E
EPS (USD) 1.64 1.92 2.02
P/E (x) 16.4 9.1 8.7
EV/EBITDA (x) 8.3 6.0 5.5
Global Markets Research Company
The volume picture is weak
We revisit our November report (“Always Low Prices”) on the risk of a “price
first” strategy by soft drink bottlers, damaging category relevancy and volume
growth in a period of higher consumer sensitivity. The most recent IRI scan data
shows the negative effects, and portrays a worsening trend. CSD sales, the
industry’s core key profit driver, are weakening, and on the non-carb side, growth
in previously dependable growth categories (tea, energy) is disappearing.
Highlighting the impact of economic weakness, private label sales have surged
since September, while consumers are fleeing super-premium products en masse.
COGS looking better
As volumes weaken, the most likely potential offset in 2009 is lower input costs.
The sharp two-year rise in prices of energy, sweetener and packaging appears to
be moderating. This may provide a windfall to bottler margins, relaxing the need
for pricing, and renew category growth. Our bottler margin estimates remain
conservative at this point, but given the timing lag associated with commodity
costs, the benefit would take a few quarters to materialize.
Companies: Modest expectations for CCE, lowering 4Q estimates
Based on weak US retail volume/mix indicators for 4Q (as well as negative
currency trends), we are slightly lowering 4Q estimates for CCE, PBG, DPS.
Despite upside to our price targets we remain concerned about weak near-term
fundamentals in terms of declining LRB demand, incursion of private label
products and increasing promotional spending. These factors overwhelm potential
commodity cost savings, which are more likely to be a benefit to 2H09. We have
slightly lowered targets on PBG ($28 to $27) and DPS ($24 to $22). Maintain our
below-consensus 4Q estimates for PAS. In terms of CCE’s Dec. 18 update, we
have modest expectations given weak performance trends. We believe there is
some potential upside to cost savings goals, but also further impairment charges
to come. [See pages 22-25 for details of estimate and target changes.]
Valuation & risks
We value beverage companies using 10-year DCF models and apply target
valuation multiples (EV/EBITDA, P/E, FCF yield) as sanity checks against our DCFs.
Key risks to our expectations for beverage companies include better volume
growth, pricing and input costs on the upside, and on the downside, volume
deterioration, margin weakness, adverse currency or commodity costs. This note
contains estimate and PT changes, summary on page 3.
Table of Contents
Santa’s Beverage List ........................................................................ 3
10 things to check twice before buying soft drink shares:........................................................3
Volume growth? Have a lump of coal.............................................. 8
Pressure on soft drinks intensifies ............................................................................................8
Retail data shows weakening trend ..........................................................................................8
CSDs: Flat sales, and losing volume…private label gaining......................................................9
Tea: No longer a growth story ................................................................................................11
Water: Commoditized .............................................................................................................12
Juice: Flat sales…harvesting pricing.......................................................................................14
Energy – Key growth category hits a wall ...............................................................................15
Super-premium: – Abandon ship! ...........................................................................................17
Section Summary: Change needed.........................................................................................18
Input costs: Saving grace?.............................................................. 19
Commodity costs receding.....................................................................................................19
Bottler estimates.....................................................................................................................21
Companies: Lowering estimates.................................................... 23
CCE: Lowering estimates, modest expectations for update call ............................................23
PBG: Lowering 4Q on US volume, currency..PT $28 to $27...................................................24
DPS: Lowering 4Q on weaker mix, currency..PT $24 to $22..................................................25
PAS: Maintain below-consensus 4Q estimate ($0.31) ............................................................26
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