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Coca-Cola Jumps as Pepsi Hikes Syrup Prices

Coca-Cola (KO) shares jumped 8% Monday after Pepsico (PEP), the soft drink company's only major competitor, told analysts it would raise syrup prices in near-perfect lock step with Coke.

Coke shares gained 4 7/8 to close at 65 3/8, while shares of Pepsi gained 1 13/16 to 36 5/16.

Profits have been flat at both companies recently. Analysts said that Coke's 7% syrup price increase, announced to its bottlers last week, had caused uncertainty in the soft drink sector.

"What's Pepsi going to do?" said Ann Gurkin, analyst for Davenport & Co. "Is Pepsi going to try to grab up market share?"

The answer came Friday, when Pepsi told its bottlers it would raise syrup prices 6.9%.

If any uncertainty about the soft drink market was left on Wall Street Monday, Merrill Lynch apparently dispelled it. The firm released a research report raising its rating from hold to buy. Merrill cited improving economic conditions in worldwide markets, as well as increasing sales volumes and better inventory management on the part of bottlers.

Gurkin, who has buy ratings on both Coke and Pepsi, said the price increases indicate that both companies have decided to focus on growing profits, not market share.

"It's the bottlers we really like," she said. Gurkin rates both Coca-Cola Bottling Group (CCE) and Pepsi Bottling Group (PBG) buys. Her firm doesn't do underwriting. Shares of the Coke bottlers, which are responsible for about 70% of domestic Coke sales, gained 5/8 to 22 9/16, while shares of the Pepsi bottlers, which handle more than 50% of domestic sales, gained 15/16 to 17 7/16.

World market conditions aside, Coke has a long way to go to improve its penetration of world markets, said Brian Eisenbarth, analyst for Collins & Co. Raising prices could push up profits, but doing so also carries risks, he said.

"The only risk in doing that is that you could have a falloff in volume, but volumes are pretty flat anyway," said Eisenbarth, whose firm hasn't done underwriting for any of the soda companies. Pepsi's announcement partially allayed that concern, he added. He rates Coke a hold and Pepsi a buy.

"We haven't heard anything from Cadbury (CSG) yet," he said jokingly, referring to the maker of Dr. Pepper. "They're next. That would be the third shoe."

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