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

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

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.

(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.

Smaller soda companies hit as well

In some instances like this, you might think that it pays off to be a smaller company with less of a global brand than PepsiCo, Inc. (NYSE:PEP) and The Coca-Cola Company (NYSE:KO), but when dealing with conditions like weather, it hurts across the board. This turned out to be true for Dr Pepper Snapple Group Inc. (NYSE:DPS).

Although small by globalized industry standards (owing to little presence outside of North America), Dr Pepper Snapple Group Inc. (NYSE:DPS) felt the effects of a cold America as well, and without the safety cushion of a growing Southeast Asian thrist for soda, losses couldn’t be hidden. Net sales decreased 1% year-over-year last quarter, with a 3% earnings-per-share drop year-to-date from $1.31 per share to $1.27 per share, and a $23 million drop in net income as well. The main reason for this drop was a 4% sales decrease in the US and Canada, offset somewhat by a strong Latin American performance with drinks like Squirt and Aguafiel.

A strictly regional company may insulate Dr Pepper Snapple Group Inc. (NYSE:DPS) from the ravages of Europe, where the economic climate remains poor for numerous international companies, but it also leaves the company with a lack of diversity in terms of a customer base, which stunts sales growth and influence in new markets, and in the case of weather, left little cover from a true winter of discontent.

Heat waves help sell sodas

From an investment standpoint though, if one looks to get into the soda business, knowing how to weatherproof your investment can pay off big time. PepsiCo, Inc. (NYSE:PEP) managed to beat second quarter estimates thanks to its Frito Lay division, but it still lagged in soda sales, the same as The Coca-Cola Company (NYSE:KO).

Fortunately for both companies, the summer so far has been a scorcher, at least for North America. The Northeastern US has had two heat waves in July, defined as at least three straight days of 90 degree temperatures, and this may continue into August. These companies perform their best in hot conditions, so buying right after earnings would be a good investment. Even better, as long as a similar winter doesn’t happen, the gains from a strong third quarter would be pretty much locked in for the future.

So rather than bundling up in your existing investments, shed some layers and get into these soda stocks, which unlike most of us, don’t have lazy summer days.

John McKenna has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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