Will Rising Costs Dent Leading Drink-Makers Balance Sheets?

With earnings season ramping into gear, the companies behind two of the world’s most popular brand names, Pepsi-Co (NYSE:PEP) and Coca-Cola (NYSE:KO) are due to report their second quarter results this week. Will the disparate nature of the consumer goods products exact a harsh outcome on the companies’ fortunes? Some speculation among analysts points to less optimistic scenario, citing balance sheets at Pepsi and Coke that are under fire from surging raw materials costs.

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Rising commodities (NYSE:RJI) costs via exploding demand in emerging market nations have sent prices of raw materials commonly used in product packaging, such as Aluminum, up 13% this year. Both companies had been reluctant to translate the higher production costs into price hikes for consumers (Coke more so) but have since relented, announcing plans to jack up soft drink prices later this summer. The street.com reports that Coke (NYSE:KO) has seen costs of golds sold increase 55% in the first half of 2011, due largely to costlier aluminum and volatile energy prices. Pepsi had reportedly been “better able to manage the risk of rising commodity costs” than its chief rival, with its own costs of good sold rising by a lesser mark of 22%.

S&P analyst Ether Kwon takes note of these concerns, but still maintains an upbeat outlook for KO in the second half of the year, “We see growth accelerating in the second half of 2011 on cost savings and reversal of negative impact of marketing expenses related to bottler acquisition,” Kwon noted. “We are positive about KO’s broad international footprint and strong free cash flow generation.”

It seems as though investors are not quite in accord, with KO trading down -0.76%, and PEP down -0.86%, ahead of their respective earnings reports tomorrow morning and Thursday.

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