Coca-Cola Co. (KO), the world’s biggest soft drink maker, released better-than-expected third-quarter results yesterday (Wednesday), attributing the upside surprise to its worldwide growth.

Overall, the company posted a 13% gain in profits, a 19% jump in net revenue and a 15% increase in earnings per share.

Other highlights from its quarterly report include:

• A 24% increase in net revenue growth in Eurasia (Russia, India, Turkey, Pakistan and Eastern Europe).
• 28% net revenue growth in Latin America.
• And 21% net revenue growth in North America, despite a 1% decline in soda consumption.

"Once again, this strong performance was led by our international business," Neville Isdell, Coca-Cola’s chairman and chief executive officer, said in a company statement. "Emerging market growth, combined with sequential improvement in North America, resulted in our third consecutive quarter of 6% unit case volume growth."

Coke shares jumped $1.33 each, or 2.3%, to close at $59.09, after setting a new 52-week high of $59.43 yesterday. The stock is at its highest point in six years. Before yesterday, Coke shares had climbed 20% for the year, eclipsing the 15%-advance for archrival PepsiCo Inc. (PEP), Bloomberg News reported.

Contradictions Over Costs

But beneath Coke’s results are some interesting trends, which hint at a possible shift in the competitive landscape a few years in the future.

Coke gets 70% of its sales outside North America.

Net revenue growth in its "Pacific" region (China, Japan, and Philippians) was a meager 6%, despite a 20% increase in unit case volumes to China. The company said slow growth in the region is "partially offset by unfavorable country mix," but the numbers say that demand wasn’t as high as the company expected.

Adding to the pain, U.S. futures for corn – a primary ingredient in soda sweeteners – are up 27% from a year ago, according to Reuters. This especially hurts Coca-Cola because 80% of its revenue comes from soda sales. Only 20% of the sales of rival PepsiCo Inc. (PEP) come from soda, Bloomberg reports.

Coke Chief Financial Officer Gary Fayard told analysts and journalists on a conference call that the company sees a moderation in such commodity costs as corn syrup and aluminum that affect beverage companies.

"We believe the worst is behind us," Fayard said.

 However, many experts would disagree with that assessment, predicting instead that demand from China, India and other growing markets around the world will keep commodities demand – and long-term prices – on an upward trajectory.

Indeed, while Coke yesterday said raw materials prices would be flat to slightly down this year, Pepsi last week actually predicted that raw materials prices would be higher. However, Pepsi’s mix of raw materials does differ a bit, including grains for Quaker oatmeal, and cooking oils for its salty snacks, for instance.

Battleground Asia

Coke brought Isdell out of retirement three years ago to jump-start growth, and the company has been making some moves away from its long-too-predictable game plan. The company introduced its highly successful Coke Zero soda, and in an effort to reduce its sweet tooth – its high reliance on soda sales for revenue – Coke bought Vitaminwaters-maker Glaceau for $4.1 billion.

But it’s no surprise that China will real battleground between Coca-Cola and Pepsi. And Pepsi’s bold move to "go red" in China is paying off. Pepsi introduced a red soda can that looks strikingly like Coke’s, which could cause brand confusion in the still-nascent soda market of China, giving Pepsi a chance to gain ground.

Last week, Pepsi announced a 17% gain in net profit  - both larger than Coke’s and more closely linked to China’s soaring growth rate. Also, Pepsi has a broader platform of products (from soda to juice to snacks) that could open up more revenue streams and help protect the company from some of the escalating cost of corn (although that’s a key ingredient in some of its snacks, too).

Coca-Cola can still boast better name recognition around the world, but Pepsi is only 15% smaller than Coca-Cola in terms of market capitalization. It also has a better EPS, forward P/E and dividend than Coca-Cola. If the companies’ numbers continue, especially in Asia, Pepsi might be able to mount a serious charge and wrest away a chunk of Coca-Cola’s overseas market share over the next few years.

Could it actually overtake its larger and better-known rival? That’s a very tall order. And only time will tell.

But that would definitely be some tough new reality for Coca-Cola to swallow. And don’t expect that a "spoonful of sugar" – or even a shot of high fructose corn syrup – will help that bitter medicine go down.

News and Related Story Links:

• Bloomberg:
  Coca-Cola Net Beats Estimates on Asia, Latin America.

• Reuters:
  Weak US ethanol profits could lead to more delays.

• Money Morning:
  Pepsi ‘Goes Red’ in China.

• Money Morning:
  Pepsi’s Stellar 3Q Gains Fueled By International Growth and Falling Dollar.

Heineken NV (HINKY.PK) has entered into talks with Carlsberg A/S (CABHF.PK) regarding a joint takeover bid for Scottish & Newcastle PLC. The two companies have not made any formal approach, but have said any takeover offer would be in cash. The unexpected announcement came in a joint statement released Wednesday, according to the AFP news service.

"Carlsberg and Heineken confirm that they are in discussions regarding the formation of a consortium to make an offer for the entire issued share capital of Scottish & Newcastle," the statement said.

Scottish and Newcastle, whose brands include Fosters lager and Strongbow cider, said it was confident in its future as an independent group. S&N officials are reportedly "furious" over the reported takeover bid, which would result in the company being split up between the two suitors, and said in response that "the proposed break-up bid from Heineken and Carlsberg, the company’s joint venture partner in BBH (Baltic Beverages Holding), is unsolicited and unwelcome."

Scottish and Newcastle has been the subject of takeover speculation all year long.

Carlsberg, the largest Nordic brewer, and Scottish and Newcastle are currently partners in the BBH joint venture.  Baltic Beverages owns Russia’s largest brewer with a 38% market share, and other interests based in France and Greece. Its revenue grew 36% in the first half to $856 million, while operating profit soared 48%.

If the takeover is successful Carlsberg will take complete control of BBH, and the French and Greek operations, while Heineken would get the U.K. and European brands. The statement didn’t specify who would get S&N’s Asian assets.

Analyst Richard Withagen at SNS Securities told the AFP news service that the Heineken-Carlsberg takeover was a smart move.
"I think from a strategic point of view it’s obviously a good deal for Heineken and Carlsberg," Withagen said, "Heineken would gain market leadership in the UK and become the number two in Belgium and Portugal, and a leading market player in Finland."

In addition to advancing in Belgium and Portugal, a successful deal would give Heineken the top spot in the U.K. where it currently commands less than 1% of the  market.

The takeover would also help the two companies to keep pace with SABMiller and Molson Coors (TAP) who recently joined forces. That brewery union could save as much as $500 million a year in manufacturing and shipping costs and provide the combined entity with 30% of the U.S. beer market.

News and Related Story Links:

• Money Morning Investment Analysis:
  Thirsty for Profits? Ten Ways to Play the Worldwide Beer Market.

• AFP:
  Scottish and Newcastle snubs possible bid from Carlsberg, Heineken.

• Bloomberg:
  Carlsberg, Heineken in Talks for Scottish & Newcastle.

• The Financial Times:
  Carlsberg, Heineken Poised For S&N Bid.

• The Physics Factbook:
  Volume of World Beer Consumption.

The Challenger Wine Trust  has agreed to lease two vineyards at Griffith, New South Wales, to global beverages firm Foster’s Group Ltd. (FBRWY.PK), the leading alcohol company in both Australia and the Pacific region.

The Cocoparra and Woods Vineyards had previously been leased to Cranswick Estates, a fully-owned subsidiary of West Australian-based winemaker Evans & Tate Ltd, which is now under receivership.

CWT said the Foster’s lease closely followed the remaining balance of the prior Evans and Tate lease, including the initial term expiring in 2013, as well as the subsequent dual  five-year options to renew. Once the lease was executed, Foster’s occupies nearly 4% of CWT’s portfolio.

"This is a fantastic outcome for CWT. Not only have we negotiated a new lease to a high-quality tenant in FGL, we have been able to secure a rental income in fiscal 2008 that ensures no lost income for CWT on these properties," CWT fund manager Nick Gill told The Brisbane Times newspaper.                                  
                                                                                                                                                                
The Gnangarra vineyard at Manjimup, Western Australia, is the only vineyard previously leased to Evans & Tate in the CWT portfolio that has yet to be leased anew. CWT said talks were continuing with a number of parties to either lease or purchase the vineyard.

Foster’s Group Ltd. (FBRWY.PK) is only quoted on the U.S. Pink Sheets. As well as beer, it has a substantial wine operation. And as most folks know, being aware of the brand, Foster’s Lager has good market penetration across the English-speaking world.

With sales of $4 billion, it has a P/E of 17 and has recently been growing around 12% per annum, giving it a PEG ratio of 1.4. Its market capitalization is $13 billion, so there’s plenty of liquidity internationally, preventing a “pink sheet” investment from getting out of line with its underlying value.

News and Related Story Links:

• The Brisbane (Australia) Times:
  Challenger leases vineyards to Foster’s.

• Money Morning Investment Report:
  Thirsty for Profits? Ten Ways to Play the Worldwide Beer Market.

SAB Miller PLC (SBMRY) and Molson Coors Brewing Co. (TAP) agreed on Tuesday to merge their U.S. brewing operations, creating a worthy rival for Anheuser-Busch Cos. Inc. (BUD). The deal also highlights the fact that – pretty well throughout the world (well, may be not in Moslem countries) – beer is one whale of a business: After all, SAB got to be big enough to merge with Miller from a base in South Africa, not one of the world’s wealthier markets.

I thought it might be interesting to look at the eight foreign beer companies that have ADRs outstanding, which a U.S. investor might buy, perhaps making a pick or two as to which has the thirstiest and fastest growing base of consumers, and that’s also selling at a reasonable price.

Generally, once the plant itself has been paid for, a brewery that has a dominant position in a local market is essentially a license to print money – indeed, several breweries have been used as the nexus for major local conglomerates, because of their reliable cash flow. On the other hand, there are limits to economies of scale – there are no brewing equivalents of General Motors Corp. (GM) or Microsoft Corp. (MSFT).

To get revenue and earnings growth, population growth is important. But so is “emergence:” While beer sales increase slowly in a wealthy market like the United States or Holland, they may grow much more rapidly in countries like India and China, in which a new middle class is emerging.

The first of the foreign brewers, alphabetically, is Compania Cervecerias Unidas SA (CU) of Chile. CU produces and distributes beer in Chile and Argentina, having its own flagship brand, Cristal, as well as distributing Heineken and several other international brands. However, with sales of $1.1 billion it appears limited to those two markets, which have a combined population of only 56 million people. If I was more bullish on the economic and political prospects of Argentina and Chile, I would be more bullish on CU, but with a Price/Earnings ratio of 20 and a PEG (Price/Earnings to Growth Rate) ratio of 2.1, it seems fully valued.

Companhia de Bebidas das Americas (AMBEV) (ABV), is Brazil’s largest brewer, operating in 14 Latin American countries. It’s also active in soft drinks, bottling and distributing Pepsi Cola outside the U.S. market. It’s a much larger company than CU – as you’d expect, since Brazil has a population of 190 million – has sales of $10.3 billion, and has more room to grow given its presence in Latin America’s middle-income emerging markets. Unfortunately, it’s very high-priced, with a P/E of 32 and a PEG of 2.4. A pity – beer companies do especially well in countries with hot climates!

Foster’s Group Ltd. (FBRWY.PK) is the leading alcohol company in Australia and the Pacific region, alas only quoted on the Pink Sheets. As well as beer, it has a substantial wine operation. And as most folks know, being aware of the brand, Foster’s Lager has good market penetration across the English-speaking world.

With sales of $4 billion, it has a P/E of 17 and has recently been growing around 12% per annum, giving it a PEG ratio of 1.4. Its market capitalization is $13 billion, so there’s plenty of liquidity internationally, preventing a “pink sheet” investment from getting out of line with its underlying value.

Heineken NV (HINKY.PK) of the Netherlands is a gigantic company, so why it’s too cheap to list itself properly – and not just on “Pink Sheets” – I don’t know. It claims to be the world’s most valuable beer brand, and is distributed worldwide. Heineken has a market capitalization of $14 billion and a P/E ratio of 18, but is only growing at about 6%, albeit in euros, which gives you an additional kicker when the dollar is weak, as it is now. Since its home EU market is huge, but relatively slow growing, I would generally recommend Foster’s instead.

Kirin Holdings Co. Ltd. (KNBWY.PK) is the largest brewer in Japan, again listed only on the Pink Sheets. It has operations across East Asia, but is growing relatively slowly at about 6%, since its home market has slow population growth and is already rich. It has a market capitalization of $13 billion, and a P/E ratio of 27 – relatively high, as is typical of Japanese companies. However, since the yen looks likely to be strong and it does not export heavily from Japan, it may be worthwhile as a currency play.

SABMiller PLC (SBMRY.PK) is listed only on the pink sheets, in spite of owning Miller Brewing Co. It’s now a British company, with important operations in the United States, Eastern Europe, and all across Africa, particularly in South Africa. At $45 billion, its market capitalization is much larger than its competitors, but its P/E ratio is at a nose-bleed-high of 27. While there are prospects for long-term growth in Eastern Europe and Africa, the U.S. beer market looks pretty mature, so you’re paying 27 times earnings for its ability to do merger and acquisition deals. Maybe not.

San Miguel Corp (SMGBY.PK) is the largest brewer in the Philippines (population 91 million, growing at 1.8%, emerging market, hot climate) and also has beverage and packaging businesses, with operations throughout Southeast Asia. Beer represents 25% of sales and 49% of operating income. It has a market capitalization of only $4 billion, so with only a pink-sheet listing, it may be somewhat illiquid. However, with sales of $5.7 billion and a P/E ratio of about 16, it seems to be quite a good value, provided you’re prepared to live with the Philippine country risk and the dangers of its two-tier share structure, which might produce a conflict of interest between its controlling shareholders and outside investors.

Tsingtao Brewery Ltd., (TSGTY.PK) is China’s largest domestic brewer, and the best known internationally. It has sales of $800 million and a market capitalization of $5 billion on Hong Kong (its A shares in Shanghai are quoted at double the price of its Hong Kong H shares). Regrettably, even the H shares have a P/E ratio of 60. Despite the allure of 1.3 billion thirsty Chinese, and even though the share price is up 178% in the last year, the stock seems a bit rich.

However, Anheuser-Busch (BUD) owns 27% of Tsingtao and is on a P/E ratio of 20, so you may prefer to invest in it by that means.

In summary, beer companies are generally highly valued in today’s market. That’s not surprising: Their steady cash flow and recession-proof operations make them valuable properties, especially if their market has reasonable growth prospects. However at multiples of 25, 32 or even 60, they are overpriced. I would recommend the two companies with reasonable multiples and good growth prospects: Fosters and (more hesitantly, because of its home) San Miguel.