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Rexam PLC (ADR) (REXMY): Can Profits Be Canned From a Mediocre Guidance?

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Rexam PLC (ADR) (OTCMKTS:REXMY)Company guidance need not be that rosy to whet investor interest. Take the case of Rexam PLC (ADR) (OTCMKTS:REXMY). Share prices of this beverage-can manufacturer were, for the most part, eking out incremental advances following its June 25 warning of lower-than-expected first-half profit. The apparent contrarian investing at play here looks founded on a sound footing.

Also listed on the London Stock Exchange, Rexam PLC (ADR) (OTCMKTS:REXMY) disclosed “disappointing” volume growth in South America and Europe in April and May. With its performance continuing strong in North America, the company still anticipates an improvement in its full year results over 2012, although at a level likely to be lower than previous estimates.

Sole focus on cans

Rexam PLC (ADR) (OTCMKTS:REXMY), one of the top global manufacturers of beverage cans, appears to have drawn positive market sentiment from the sale that the company has initiated on its manufacturing rigid plastic packaging for healthcare applications division. This initiative will result in a sharper focus on beverage can production, particularly with Rexam PLC (ADR) (OTCMKTS:REXMY)’s new presence in emerging markets. Based in Dubai, this sector not only has plants in India, Egypt, and Turkey, but also a joint venture in South Korea.

Deployment of the proceeds from the healthcare packaging unit is still being decided. The company, however, said progress has been good in its pursuit of beverage can opportunities in the faster-growing markets in the Middle East, Central America, and Southeast Asia.

Taking the path where more colas sell

Recent gains in the emerging markets by the top customers of Rexam PLC (ADR) (OTCMKTS:REXMY) in the beverage industry also portend the tailwinds for the company. That beverage consumption is growing exponentially with the rising disposable income in these markets was evident in the first quarter results of The Coca-Cola Company (NYSE:KO), a major Rexam customer.

Coke’s international business registered a robust 5% year-over-year volume growth for the quarter, driven by gains in key emerging markets such as Thailand and India, which registered increases of 18% and 8%, respectively. A 15% volume growth was likewise registered for The Coca-Cola Company (NYSE:KO) in the Middle East and Africa.

PepsiCo, Inc. (NYSE:PEP), another Rexam PLC (ADR) (OTCMKTS:REXMY) customer, also had an earnings beat in the first quarter, boosted by the beverage sales in its combined Asia, Middle East, and Africa segment. The global snack and beverage firm’s EPS for the quarter rose 12% year over year to $0.77, which is well ahead of the Wall Street consensus forecast of $0.71.

Where the consumer clout is

Increasing penetration level in emerging markets is critical for mass consumer companies like PepsiCo, Inc. (NYSE:PEP) and Coke. It is estimated that 86% of the world’s consumers are in the developing economies like those in Asia, Africa, and South America, and consumer spending is rising much faster in these regions than in the mature markets of the West.

The Coca-Cola Company (NYSE:KO), hence, has adopted disciplined marketing strategies focused on increasing brand value in order to achieve higher volumes and increase market share in emerging markets. The headway Coke has achieved was manifested in its No. 1 ranking in 2013 as the most chosen consumer brand, propelled by a 7% gain (up 230 million) in its consumer reach points in emerging markets where it reaches 37% of households.

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