When Peter Lynch advised that an investor should invest in something he knows and this is extremely boring; we believe it is safe to say he was talking about PBG. The Pepsi Bottling Group is the world’s largest manufacturer, seller, and distributor of Pepsi-
Cola beverages. This description places them in a mature and cyclical industry. In fact their motto is “We Sell Soda”. This motto is directly translated into their business plan as they follow a niche in only selling soda but are very diversified in the types of soda they sell.
PBG became a publicly traded company in 1999 through one of the largest initial public offerings in the history of the New York Stock Exchange. PBG generates nearly $12.7 Billion in annual sales during fiscal year 2006, approximately a 7% gain over the previous year. PBG operates in the United States, Canada, Greece, Mexico, Russia, Spain and Turkey. PBG consolidated its reportable income into three segments due to economic similarities as well as similarity across products, manufacturing and distribution methods, types of customer and regulatory environments. These segments are the U.S. and Canada Segment, Europe (Spain, Russia, Greece, and Turkey), and Mexico.
PBG accounts for more than one-half of the Pepsi-Cola beverage sales in North America, and about 40% of the Pepsi-Cola system volume worldwide. PBG has a sales force of more than 30,000 customer representatives who sell and deliver nearly 200 million eight-ounce servings of Pepsi-Cola beverages per day. PBG’s focus is on
superior sales execution, customer service, merchandising, and operating excellence.
1 PBG 10 K & www.pbg.com
As the preceding chart demonstrates PBG generated $12.7 billion in sales during their 2006 fiscal year with approximately 78% of their sales in the U.S. & Canada segment, 12% in Europe, and the remaining 10% in Mexico.
USA & Canada Europe Mexico Manufacturing Facilities Owned 50 14 28
Leased 3 1 3
Joint-Venture Operated 4 - -
57 15 31 Total Distribution Facilities Owned 241 12 90 Leased 57 53 93 298 65 183 Total
The preceding chart and map demonstrate the level of saturation PBG have found in the USA and Canada. However, there is still a lot of room left for growth in the international scene. For example, of PBG’s manufacturing facilities in Mexico, 70% are
the result of the recent acquisition of BEPUSA in 2006. PBG should be able to take better advantage of this acquisition in the future as management gains more experience in the northwestern area of Mexico. This can be verified as PBG saw double digit sales st year of ownership in BEPUSA. growth during the 1
In addition to their 103 manufacturing facilities and 546 distribution facilities
PBG also own or lease 44,000 vehicles, more than two million coolers, soft drink dispensing fountains and vending machines. This large number of distribution vehicles bodes well for the PBG’s corporate philosophy of “Full Speed Ahead” and enhances their
direct store distribution center. In an industry with fierce competition and slim margins PBG has a definite edge with its abundance of manufacturing and distribution facilities.
US & Canada
Pepsi AMP Trademark Dr Pepper
Diet Pepsi Mountain Dew Code Lipton
Wild Cherry Pepsi Sierra Mist SoBe
Pepsi Lime Sierra Mist Free SoBe No Fear
Jazz by Diet Pepsi Aquafina Starbucks Frappuccino?
Pepsi ONE Tropicana Twister? Dole
Mountain Dew Tropicana juice
Diet Mountain Dew Mug Root Beer
Pepsi Tropicana Fruko
Pepsi Light Aqua Minerale Yedigun
Pepsi Max Mirinda Tamek
7UP IVI Lipton
Pepsi Mirinda Aguas Frescas
Pepsi Light Manzanita Sol Electropura mr 7UP Squirt e-pura
KAS Garci Crespo Jarritos
___________________________Customers___________________________ Large Chain SuperCenters Mass Chain Drug Club Foods Stores Merchandisers Stores Stores Military Bases Small Independently Food Service
owned shops Businesses
A quick look of the products available in each “segment” shows that while the US
& Canada markets are heavily saturated there is still plenty of room for growth in Europe
2 PBG 10-K
John T. Cahill , 49 , was appointed Executive Chairman of the Board in July 2006. Mr. Cahill
served as our Chairman of the Board since January 2003 and Chief Executive Officer since September 2001. Previously, Mr. Cahill served as our President and Chief Operating Officer from August 2000 to September 2001. Mr. Cahill has been a member of our Board of Directors since January 1999 and served as our Executive Vice President and Chief Financial Officer prior to becoming President and Chief Operating Officer in August 2000. He was Executive Vice President and Chief Financial Officer of the Pepsi-Cola Company from April 1998 until November 1998. Prior to that, Mr. Cahill was Senior Vice President and Treasurer of PepsiCo, having been appointed to that position in April 1997. In 1996, he became Senior Vice President and Chief Financial Officer of Pepsi-Cola North America. Mr. Cahill joined PepsiCo in 1989 where he held several other senior financial positions through 1996. Mr. Cahill is also a director of the Colgate-Palmolive Company.
Eric J. Foss , 48, was appointed President and Chief Executive Officer and elected to our Board in July 2006. Previously, Mr. Foss served as our Chief Operating Officer from September 2005 to July 2006 and President of PBG North America from September 2001 to September 2005. Prior to that, Mr. Foss was the Executive Vice President and General Manager of PBG North America from August 2000 to September 2001. From October 1999 until August 2000, he served as our Senior Vice President, U.S. Sales and Field Operations, and prior to that, he was our Senior Vice President, Sales and Field Marketing, since March 1999. Mr. Foss joined the Pepsi-Cola Company in 1982 where he held a variety of field and headquarters-based sales, marketing and general management positions. From 1994 to 1996, Mr. Foss was General Manager of Pepsi-Cola North America’s Great West Business Unit. In 1996,
Mr. Foss was named General Manager for the Central Europe Region for Pepsi-Cola International, a position he held until joining PBG in March 1999. Mr. Foss is also a director of United Dominion Realty Trust, Inc. and on the Industry Affairs Council of the Grocery Manufacturers of America.
Yiannis Petrides , 48, is the President of PBG Europe. He was appointed to this position in June 2000, with responsibilities for our operations in Spain, Greece, Turkey and Russia. Prior to that, Mr. Petrides served as Business Unit General Manager for PBG in Spain and Greece. Mr. Petrides joined PepsiCo in 1987 in the international beverage division. In 1993, he was named General Manager of Frito-Lay’s Greek operation with additional responsibility for the Balkan countries. In 1995, Mr. Petrides was
appointed Business Unit General Manager for Pepsi Beverages International’s bottling operation in Spain.
High costs of raw materials have been squeezing the margins for PBG recently. This can be reflected as their costs of goods sold have risen from 50.8% in 2003 to 53.2% over the trailing twelve months. PBG has done a great job of not letting this hit their bottom line as their net profit margin has managed to hold steady near 4% and maintained a ROE over 25% during fiscal year 2006. While PBG expects to see the price of concentrate rise an additional 4% in 2007 their biggest competitor, Coca-Cola, expects to see an even larger increase to 6-7%. With the pricing of concentrate being cyclical in nature it is appropriate to believe PBG will have even larger profit margins in the future.
An aging population has led to more discretionary income being available and as a whole the population is spending more time away from home. During the fiscal 2005 year more “food” money was spent dining out in the USA and Canada than on traditional
3 PBG 10-K 4 PBG 2005 Year End Report
“food” items. To combat this has begun to concentrate on restaurants, Supercenters, the travel and leisure category, and dollar stores. By doing so PBG hopes to give their products substantially more exposure.
; No Customer accounted for more than 10% of Revenue
; Pepsi-Cola Inc. supplies advertising expense, R&D, and brand awareness
; Direct Store Distribution System business model – Speed is essential
; Direct Delivery System – Speed to Market, Flexibility & Reach
; Already repurchased 119 million shares from 1999-2006 with plans to buy back
150 million total shares
; Provide lots of options for consumers with nearly 40 different products available
; 2005 launch of proprietary handheld computer software. Uses historical sales
data and anticipating market conditions to decrease occurrences of “Out of Stock”
； Master Bottling Agreement - Depend on Pepsi-Cola Inc. for concentrates
； Pepsi-Cola Inc. must approve manufacturers of raw materials to be bought
by PBG ndrd； Seasonal – 65% of sales on average occur during the 2 and 3 quarter. rdth75% of cash flows are recognized in the 3 and 4 quarters.
； Highly competitive market
; Mexico after acquisition of BEPUSA have already recognized double digit sales
o Recently joined a joint venture with PR. Beverages Ltd.
o Energy Drink phenomenon – SoBe Adrenaline Rush – More SoBe energy
drinks sold in Russia than anywhere else outside US
o Introduced Tropicana juices to Russian market in 2005. Have already
seen 70% sales increase.
； Bottle & Can Legislation
o Certain states and provinces prohibit the sales of certain beverages
in non-refillable containers unless a deposit/levy is charged for the
； School Sales Legislation; Industry Guidelines
o Child Nutrition Act passed in 2004 limits what beverages may be
sold in schools
； Changing Consumer Trends
； Changes in Relationship with Pepsi-Cola Inc.
o Depend on Pepsi-Cola Inc. for concentrate, certain funding, and
various services/’ have 44.4% of voting stock
___________________Porter’s 5 Forces______________
Powerful Suppliers – Strong
PBG depends on PEP for concentrates and PEP must approve all purchases of raw materials made by PBG.
Powerful Buyers – Weak
No customer accounts for more than 10% of PBG’s sales. PBG has a diversified group of customers spanning most of the globe.
Competition – Strong
PBG operates in one industry: carbonated soft drinks and other beverages and as such PBG experiences very strong competition from COKE. Pepsi Co currently has anywhere from 21-37% of the market share in the US. In addition to this Pepsi-Cola products represent a market share of 38% (Canada), 25% (Russia), 19% (Turkey), 12% (Spain), and 9% (Greece).
Substitutes – Average
PBG’s motto is “we sell soda”. As such a consumer could always choose to drink tap water. However, if one is to choose a bottled beverage there is a high probability that it will have been produced by PBG. The Pepsi-Cola products are among some the world’s most recognized brand names. Currently PBG produces the leading bottled water brand in the US (Aquafina), the leading jug water in Mexico (Electropura), and the leading bottled tea (Lipton) in Russia, Turkey, and Greece.
Barriers to Entry – Strong
The carbonated soft drink industry is very mature and well saturated. It would take a very large capital outlay to purchase the manufacturing facilities, distribution centers, and delivery vehicles that are needed to compete.
5__Ownership Information and Activity___
Shares Outstanding 236.00 Mil Total Positions 312
Institutional 56.30 New Positions 47
Top 10 Institutions 30.70 Soldout Positions 37
Mutual Fund 15.85 Net Position Change 12
5%/Insider 43.48 Buyers 164
Float (%) 56.52 Sellers 152
PBG is held by a relatively large number of institutions (56.3%) signaling that it may already be fairly valued. On the positive side PBG has a large number of insider owners (43.48%) and have seen a positive net position change between buyers and sellers (12).
Current Month Last Month Two Months Ago Three Months Ago
Strong Buy 3 4 3 3
Buy 2 2 2 2
Hold 10 9 10 10
Sell 1 1 1 1
Strong Sell 0 0 0 0
Analyst have maintained a static opinion towards PBG over the past 3 months with the only notable exception of a decrease from strong buy recommendation of 4 last month to 3 this month.
Coca-Cola Bottling Co. Consolidated (COKE)
Last Trade $58.92 Market Cap $516.23 M P/E (TTM) 31.19 PEG N/A Dividend 1.00 Beta 1.07
Coca-Cola Bottling Co. Consolidated engages in the production, distribution, and marketing of carbonated and noncarbonated beverages, primarily products of The Coca-Cola Company. The company?s products include carbonated soft drinks, bottled water, teas, juices, isotonics, and energy drinks. It holds bottle contracts and allied bottle contracts under, which it produces and markets in certain regions carbonated soft drink products. The company also distributes and markets under noncarbonated beverage contracts products. Its soft drink products are sold and distributed through retail stores and other outlets, including food markets, institutional accounts, and vending machine outlets. The company operates within the Eastern United States.
Coca-Cola Enterprises Inc. (CCE)
Last Trade $20.11 Market Cap $9.65 B P/E (Forward) 14.92 PEG 2.08 Dividend .24 Beta .96
Coca-Cola Enterprises, Inc. engages in the manufacture, distribution, marketing, and sale of nonalcoholic beverages. The company offers its products principally under Coca-Cola classic, Sprite, Dasani, POWERade, Coca-Cola, Diet Coke/Coca-Cola light, Fanta, Schweppes, and Sprite. It also purchases and distributes various noncarbonated beverages, such as isotonics and juice drinks in finished form. The company sells its products through wholesalers and retailers primarily in North America, the Great Britain, continental France, Belgium, the Netherlands, Luxembourg, and Monaco.
Coca-Cola FEMSA S.A.B. de CV (KOF)
Last Trade $34.73 Market Cap $6.40 B P/E (TTM) 14.69 PEG 1.24 Dividend .34 Beta 1.82
Coca-Cola FEMSA, S.A.B. de C.V. operates as a bottler of Coca-Cola trademark beverages in Latin America. The company produces, markets, and distributes Coca-Cola, Sprite, Fanta, Lift, and other Coca-Cola trademark beverages; proprietary brands; and brands licensed from third parties. Its primary products comprise colas, flavored soft drinks, water, and beverages in other categories, such as juice drinks and isotonics. Coca-Cola FEMSA operates in Mexico, Central America, Colombia, Venezuela, Argentina, and Brazil.
____________Financial Ratio Analysis_____________
Profitability 2006 2005 2004 2003 COKE CCE KOF Industry Ratios
Gross Margin 51.60% 52.69% 53.58% 54.73% 43.86% 39.48% 47.70% 40.48%
EBITDA Margin 13.09% 14.07% 14.47% 14.85% 10.42% 13.03% 20.78% 25.42%
Net Profit Margin 4.10% 3.92% 4.19% 4.05% 1.15% -5.76% 8.45% 12.00%
-ROE 25.30% 22.80% 23.40% 22.40% 20.41% 13.19% 33.28% 22.48%
Return on 4.38% 4.04% 4.23% 3.60% 1.71% -4.92% 6.57% Investment
In a mature industry such as soft drink bottling, the ability to maintain profitability in the face of competition is key. PBG’s margins have been gradually declining over the last few years, reflecting both competitive pricing pressures and rising raw material costs. These pressure affect all companies in the soft drink industry, however, and PBG still compares favorably in most measures with its closest competitors. CCE took a non-recurring charge that gave it a net loss last year, thus its net profit margin is negative. By comparing its gross margin with PBG’s, we can still see that PBG retains
an advantage. The notable exception in this data is KOF, which boasts higher EBITDA and net profit margins. This is primarily due to the fact that KOF operates only in Latin America, whereas PBG still earns a large majority of its income in the United States. The difference in profitability reflects the difference in the competitive environments the two companies operate in.
PBG’s Return on Investment has steadily risen as the company delivers more earnings per dollar of total invested capital. While PBG’s net profit margin has been
fluctuating, its return on equity has risen fairly steadily, outperforming its competitors. The following in-depth analysis using the DuPont Model further breaks down this metric.
Total Asset Equity ROE Net Profit Margin Return on Equity Turnover Multiplier
2006 25.09% 4.10% 1.07 5.72
2005 22.77% 3.92% 1.03 5.64
2004 23.44% 4.19% 1.01 5.54
2003 22.13% 4.05% 0.89 6.14
COKE 21.16% 1.15% 1.03 17.86
CCE -25.12% -5.76% 0.85 5.13
KOF 12.57% 8.45% 0.74 2.01
As shown, steady rises in Total Asset Turnover and the Equity Multiplier have gradually increased PBG’s ROE, which is higher than any comparable competitors.
2006 2005 2004 2003 COKE CCE KOF Liquidity Ratios
Current 1.34 0.93 1.29 1.23 1.56 0.97 0.92
Quick 1.08 0.75 1.02 1.08 1.04 0.76 0.46
PBG’s current and quick ratios reflect a reasonable level of liquidity, particularly given the stable nature of their business. By comparing PBG with its competitors, we can see that current and quick ratios around 1 are fairly standard for the industry. PBG has the highest quick ratio of the companies seen here, which means less of its current assets are tied up in inventory than companies like COKE, which actually has a higher current ratio and a lower quick ratio. It should also be noted that PBG’s liquidity situation has improved markedly since 2005.
Debt Management 2006 2005 2004 2003 COKE CCE KOF
Debt Ratio 0.57 0.57 0.56 0.60 0.63 0.56 0.41
LT Debt/Equity 2.28 1.93 2.30 2.39 9.20 2.04 0.46
Interest Coverage 3.82 4.17 4.28 4.00 1.79 -2.35 3.80
Equity Multiplier 5.72 5.64 5.54 6.14 17.86 5.13 2.01
Managing debt is a key to the soft drink bottling industry, since profitability and financial success hinge on the use of debt to finance growth. Although PBG shows a high level of debt, it is almost exactly in line with the levels at comparable Coca-Cola bottlers.