Bottling Good, Homebuilding Bad

The Pepsi Bottling Group (PBG) easily exceeded second-quarter expectations yesterday. The company earned 70 cents per share, seven cents above expectations. Notably, in the 30-day period prior to the earnings report, the quarterly consensus estimate had been revised upwards by five cents per share. Revenues rose 7%, reflecting higher per case revenues and a slight increase in physical case volume.

Cost of goods sold rose 6%. Higher concentrate and sweetener costs were the main culprits behind the increase. Reading behind the lines, corn syrup was more expensive. I bring this up because it is another sign that ethanol production has far reaching consequences beyond just energy. Fortunately for PBG shareholders, the higher costs were passed on to consumers resulting in a slight improvement in gross margins.

The even better news for PBG shareholders is the company raised its full-year guidance. PBG expects profits to be in a range of $2.02 to $2.07 this year, up from prior guidance of $1.90 to $1.98 per share. Brokerage analysts had been forecasting $1.97 per share; revisions by two analysts yesterday have pushed the consensus estimate up to $2.05 per share.

Brokerage analysts seem to expect fellow bottler Coca-Cola Enterprises ( CCE - Analyst Report ) to also provide a bullish outlook when it reports on July 26. During the past 30 days, and before PBG’s report, about half of the covering analysts raised their projections for full-year earnings. The current consensus estimate calls for CCE to earn $1.25 this year.

Coca-Cola Enterprises is Zacks #1 Rank (“strong buy”) and Pepsi Bottling Group is a Zacks #2 Rank (“buy”) stock. Both are classified in Beverages-Soft Drinks. This group contains two other Zacks #1 Rank stocks, Mexico-based bottler Coca-Cola Femsa ( KOF - Snapshot Report ) and Australian-based bottler Coca-Cola Amatil ( CCLAY ) . Investors should note that that CCLAY is thinly traded.

The outlook for home improvement retailers is not getting any better. Yesterday, Home Depot ( HD - Analyst Report ) cut its full-year profit guidance, again. HD expects profits to be in a range $2.30 to $2.36 per share. In May, the company predicted profits would total $2.36 per share. In February, the company forecasted earnings of $2.54 to $2.68, though this estimate did include an 18-cent contribution from HD Supply, which is now being sold.

Equally telling is the company’s same-store sales forecast. Home Depot now expects total retail sales to be down 1-2% this year. In February, it predicted that sales would be up 0-2%. The company has also lowered the number of new stores it plans to open, 108 versus 115. The forecast for same-store sales remains unchanged with an expectation of a mid-single digit decline.

Compounding matters were statements by Standard and Poor’s and Moody’s that they were putting hundreds of mortgage back securities – many of which are investment grade - on watch for potential downgrades. Both agencies are worried about losses in the mortgages that back those securities. Many of the securities being monitored are investment grade.

Throwing even more salt on the wound were two warnings from homebuilders. D.R. Horton ( DHI - Analyst Report ) and The Ryland Group ( RYL - Snapshot Report ) . DHI preannounced fiscal third-quarter sales of $2 billion, nearly a 50% drop from a year prior. The number of homes sold plunged 40%. RYL said second-quarter sales declined 16.6%, with preliminary closings plunging 35.3%

The housing correction is continuing and despite calls to the contrary, an end to the slump does not appear to be in sight. This is why Building Product-Retail/Wholesale contains four Zacks #4 Rank (“sell”) stocks, including Lowe’s ( LOW - Analyst Report ) . Home Depot is currently a Zacks #3 Rank (“hold”) stock, but this may reflect that the fact that not all of the covering analysts have reacted to yesterday’s announcement.

Con-way ( CNW - Snapshot Report ) recently cut its full-year guidance. The company now expects to earn between $3.25 and $3.45 this year, down from its prior projection of $3.60 to $3.90 per share. CEO Douglas Stotlar observed that “pricing pressure has intensified across the board” in the less-than-truckload freight market. Nearly all of the covering brokerage analysts cut their forecasts in response, causing the consensus estimate to fall 29 cents to $3.42 per share.

There are three factors adversely affecting the trucking industry. The first is, obviously, fuel costs. The second is the number of trucks on the road. Many trucking companies bought new trucks last year ahead of the new environmental regulations that went into effect this year. Since a new truck is a somewhat of a sunk cost (the money has been spent on purchasing the vehicle regardless of whether it is driven or not), trucking companies are eager to keep the wheels rolling. More supply without a corresponding increase in demand places downward pressure on prices. The third factor is the ongoing competition from railroads. Higher fuel costs make it more efficient to ship by train than by truck, especially for long distances.

CNW is a Zacks #5 Rank (“strong sell”) and is classified in Transportation-Trucking. This group contains two other Zacks #5 Rank stocks, Pam Transportation ( PTSI ) and YRC Worldwide ( YRCW - Snapshot Report ) , and 10 Zacks #4 Rank (“sell”) stocks.

Zacks Premium and ZacksElite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA is a senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com

*A small portion of the estimates reflect FY08 earnings estimates for companies whose fiscal years end at a month other than December 2007 or January 2008.