The Pepsi Bottling Group, Inc. (PBG) continues to execute well in a difficult soft drink environment. Despite flat volume growth in the U.S. due to the maturing carbonated beverages category, net revenues increased 4% in 2007 driven by net price per case gains. However, operating profit in Mexico continues to decline due to soft volume and higher costs. Since the stock is in the middle of historical valuation range, the Hold recommendation is maintained. Management provided the outlook for 2008.
PBG expects to achieve top-line growth of about 6% to 7%, driven by volume growth in the range of 2% to 3% and net revenue per case growth of 3% to 4%. In addition, due to the high-cost environment, the company expects cost of goods sold per case to grow in the 5% to 6% range. Gross profit is expected to increase approximately 2%. The reported operating profit is expected to grow in the range of 4% to 6% for the year. Selling, distribution and administration expenses are expected to increase in the range of 4% to 5%.
Earnings for 2008 are expected to be in the range of $2.30 to $2.38 per diluted share. Operating free cash flow is expected to be at least $620 million. Company also expects to increase pricing by 3% to 4% with about 75% in a direct price increase and 25% through a positive mix shift. Pepsi Bottling Group's stock has traded in a wide P/E multiple range of 12 to 27 over the last five years. However, during times of low single-digit volume growth, the P/E range has been between 12 and 19. The target price is based on a 16 P/E on trailing 12-month earnings; therefore, the target price is $35.25.
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