Coca-Cola, PepsiCo Thirst for Oil Dividend
February 06 2016 - 5:59AM
Dow Jones News
By Mike Esterl
Coca-Cola Co. and PepsiCo Inc. will reveal this week whether
Americans are spending more freely on soda and potato chips, as
consumers pocket savings at the gas pump.
But in reporting their fourth-quarter results, the globetrotting
U.S. companies are also expected to take a hit from
foreign-exchange rates in overseas economies like China, whose
weakness helped trigger crude oil's freefall.
Coke and PepsiCo command big shelf space in U.S. convenience
stores at gas stations, just steps from where drivers are filling
up for less. Last month, oil prices fell below $30 a barrel for the
first time since 2004. Gasoline prices have fallen 50% over the
past 18 months and are below $2 a gallon in most states.
Soda-industry leader Coke, which also sells Dasani water and
Minute Maid juice, is set to report year-end results Tuesday.
PepsiCo, whose brands include Lay's and Doritos chips and Gatorade
sports drinks, reports Thursday.
In a sign of an oil windfall, non-alcoholic beverage sales rose
5.5% in the fourth quarter at U.S. convenience stores, faster than
at supermarkets, according to a survey by Wells Fargo.
Convenience-store owners expect soda sales to rise 3.8% this year
and sales of bottled water, energy drinks and iced teas each to
grow at least 7%.
It isn't just convenience stores that are getting a lift. U.S.
salty-snack sales across all types of retailers rose 4.5% in the
four weeks ended Jan. 23, including a 4.1% rise for PepsiCo
products, according to Morgan Stanley. Beverage companies also have
raised prices aggressively in recent months, stabilizing their
intake from U.S. soda sales after a two-year downturn.
But accelerating U.S. sales are no sure thing.
Personal-consumption growth slowed to 2.2% in the fourth quarter,
down from 3% in the third quarter, as the U.S. economy expanded
just 0.7%. The U.S. personal-savings rate also rose to its highest
level since 2012, as some consumers chose not to spend extra money
in their pockets.
Mark Sutton, chief executive at International Paper Co., which
makes boxes for e-commerce and takeout containers for restaurants,
said Wednesday that lower gasoline prices haven't boosted
consumption as the company had expected.
"We thought we'd see more consumer demand, but it looks like the
consumer is saving a little more and buying expensive things like
automobiles and going out less to restaurants," Mr. Sutton said in
an interview.
But Donnie Smith, chief executive of meat processor Tyson Foods
Inc., told analysts Friday that consumers were relishing lower gas
prices, as both food-service traffic and spending per visit
increased in the past quarter.
History shows a mixed bag. When fuel prices fell in past years,
U.S. consumer sentiment typically improved but overall consumption
dropped, according to Bernstein Research. And while beverage sales
often grew, food sales often slackened.
The picture is bleaker for Coke and PepsiCo in foreign markets,
which generate about half of their revenue. Russia and Brazil are
mired in recession, consumer demand remains tepid in Europe and
Japan, and growth is slowing in China, the world's second-largest
economy.
Both companies' fourth-quarter results also will again show the
effects of translating their overseas revenue and profit into a
strengthening dollar. Coke warned in November that currency
fluctuations would subtract 7 percentage points from growth in
revenue and 13 percentage points from operating income in the
fourth quarter.
CLSA brokerage last month cut its 2016 earnings-per-share
estimate for PepsiCo to $4.68 from $4.85, estimating exchange rates
would have a negative impact of 5.5 percentage points on revenue,
up from its earlier estimate of 2 percentage points. It cut its
2016 estimate for Coke to $1.91 from $1.95, raising the negative
impact on revenue of foreign currencies to 2.7 percentage points
from 1.4 percentage points.
Overseas turmoil has sent many sector investors into the arms of
Dr Pepper Snapple Group Inc. The company, which is the
third-largest U.S. non-alcoholic beverage company by sales behind
Coke and PepsiCo, derives about 90% of its revenue in the U.S.
Shares of Dr Pepper Snapple, which reports its quarterly results on
Feb. 17, have risen 15% over the past year, compared with 0.6% at
PepsiCo and 1.4% at Coke.
Analysts surveyed by Thomson Reuters expect Coke to report
adjusted fourth-quarter earnings of 37 cents a share, down from 44
cents a year earlier. Revenue likely dropped to $9.89 billion from
$10.87 billion, according to the consensus estimate. PepsiCo is
expected to report adjusted earnings of $1.06 a share, down from
$1.12, with revenue dropping to $18.53 billion from $19.95
billion.
The Week Ahead looks at coming corporate events.
Write to Mike Esterl at mike.esterl@wsj.com
(END) Dow Jones Newswires
February 06, 2016 05:44 ET (10:44 GMT)
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