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The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS): How to Weatherproof These Soda Stocks

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Markets took a bit of a tumble on July 16 after The Coca-Cola Company (NYSE:KO) came out with not-so-impressive earnings for the second quarter. While volumes increased, revenue dropped off, causing a drop in share price, as well as a reported 3% EPS drop. Company executives would be quick to blame global macroeconomic trends for the downturn, which is a good excuse given the still hairy situation across the globe for investors, but there was also another problem The Coca-Cola Company (NYSE:KO) experienced, and what PepsiCo, Inc. (NYSE:PEP) will experience as well: the weather.

Cold weather, cold stocks

The Coca-Cola Company (NYSE:KO)According to the company’s earnings reports for the second quarter, poor weather in North America and Europe were the main reason why revenue was down. For the quarter, revenue was down 3% across the board, with a similar drop in earnings-per-share. Net operating revenue fell 3% to $12.74 billion, with net income taking a similar drop to $2.67 billion year-over-year. The biggest hit to the company, unsurprisingly, was in Europe, with a 4% revenue decrease for the quarter, but North America took a hit as well.

In both of these locations, the weather over the last two quarters has hurt more than the macroeconomic conditions of the world (though those are problems in their own right). Europe came out of one of the coldest winters and springs on record, and North America, particularly the Northeastern U.S. and the big urban markets, being pummeled by record snowstorms. Needless to say, in these kinds of conditions, cold beverages don’t do nearly as well as they would in the hot summer months.

Net Income Coke Pepsi
2nd Q 2013 2.67B 2.03B
1st Q 2013 1.751B 1.075B
4th Q 2012 1.866B 1.661B
3rd Q 2012 2.311B 1.902B
2nd Q 2012 2.788B 1.488B
1st Q 2012 2.054B 1.127B
4th Q 2011 1.654B 1.415B
3rd Q 2011 2.221B 2B
2nd Q 2011 2.797B 1.885B

(Sources: Yahoo! Finance, Coca-Cola, PepsiCo, July 29, 2013)

If we consider that the “cold” months are represented by a company’s first and fourth quarter earnings, and the “warm” months are represented by the second and third quarter earnings, we can see that there is a connection between weather and these soda companies’ performances for the most part.

It should be noticed though that The Coca-Cola Company (NYSE:KO) has a wider reach than PepsiCo, Inc. (NYSE:PEP), and many cold weather quarters are balanced out by strong performances in Southeast Asia, which saw over 17% revenue growth per country this quarter. PepsiCo, Inc. (NYSE:PEP) also had strong growth from Southeast Asia, up 6% for that area year-over-year. However, even PepsiCo, Inc. (NYSE:PEP)’s diverse brand that includes food options like Frito Lay didn’t completely insulate the company from a bad quarter in the US and Europe. In the US, sales drop 6% from last year, while Europe only saw a 1% increase in sales compared to last year.

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