PBG Guidance Upped for Buyout?

Pepsi Bottling Group (PBG) raised guidance for full-year 2009 earnings for the second time this year.

Initially, Pepsi Bottling Group raised expectations for annual earnings to the range of $2.20 to $2.30 per diluted share concurrent with the first quarter's earnings report on April 22nd. Previous guidance was $2.15 to $2.25. Now, management sees full-year earnings to be in the range of $2.30 to $2.40, up $0.10 on both ends of the previous guidance range.

The company also raised second quarter earnings guidance by $0.05. Pepsi Bottling Group now expects to report diluted earnings per share between $0.70 and $0.74 for the second quarter. The decline in commodity costs, the recent weak dollar and better-than-expected domestic CSD (carbonated soft drink) performance are the main drivers of management's change in guidance.

Along with improving conditions, Pepsi Bottling Group's management is also motivated to issue higher earnings guidance to fend off (or at least motivate a higher) offer from PepsiCo (PEP - Analyst Report), which currently stands at $29.50 per share, $4.67 below yesterday's close.

Interestingly, almost at the close, PepsiCo issued at statement that the company has "a track record of being a disciplined buyer and will maintain that disciplined approach in this transaction." In other words, PepsiCo is posturing itself that the takeover bid will not be raised.

We are maintaining our price target of $38 and our $2.32 earnings estimate for Pepsi Bottling Group, having already incorporated our expectation of less than an $0.18 per share negative impact from foreign currency translations in 2009, which was part of management's previous guidance. Also, the positive earnings developments are counterbalanced by PepsiCo's indication that a higher offer should not be expected.

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