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We reaffirm our Neutral recommendation on Molson Coors Brewing Company (TAP - Analyst Report) due to mixed second quarter results.

Why the Reiteration?

On Aug 6, Molson Coors reported its second quarter 2013 results. The company’s sales in the second quarter increased 17.9% year over year owing to the addition of the StarBev operations (Jun 2012), which also boosted worldwide beer volumes. However, sales missed the Zacks Consensus Estimate by 1.7%. We believe that the sales miss was due to weak consumer demand and poor weather conditions in the second quarter of 2013. The company’s sales volumes improved overall due to StarBev acquisition but organically, it declined in all the three markets of U.S., Canada and U.K., due to poor weather conditions.

Earnings of $1.51 per share improved 9.4% and beat the Zacks Consensus Estimate by 8.6%, driven by higher sales on account of the StarBev acquisition. Lower tax rate in Canada and improved performance in Europe and International businesses also boosted earnings. The company was able to gain market share in its key brands in core markets, despite weak consumer demand and poor weather across all markets.

The acquisition of StarBev has significantly enhanced the company’s portfolio of premium brands, despite a sluggish European economy. It has also created opportunities for the company in Central Europe to extend its key brands, taking advantage of the attractive beer market. Also, with economic recovery underway in the U.S. and China, the company expects increased consumer spending.

Overall, we are encouraged with the company’s strong brand portfolio and its growing market share from product innovation. The company has a strong product pipeline ahead and plans to introduce new non-beer drinks as well as premium beer products in the second half of 2013. Molson Coors is also focusing on the potential growth opportunities in the U.S. beer market.

The company has undertaken aggressive cost-saving initiatives and achieved $200 million of cost savings through its synergy program named Resources for Growth Two (RFG2) since 2010.

Other than this, the company liquidated its under-performing China joint venture, restructured its Coors Light business in the rest of China, improved performance in Japan, and integrated the Central Europe license and export business in 2012. These initiatives are expected to improve the efficiency of the organization and generate additional resources to invest in brands and innovation.

However, management continues to expect weak consumer demand in the coming quarters due to ongoing macro-economic headwinds. We also note that Molson Coors has been posting sluggish sales volume trends in the U.S., U.K. and Canada for the past three years. The company is making efforts to revive its volumes and has been investing in brand marketing. The acquisition of the StarBev business also has the potential to boost volumes. However, we still await a substantial improvement in these markets.

Moreover, the acquisition of StarBev has tightened the company’s liquidity position and has restricted use of cash for share buybacks. Molson Coors prefers to pay its debt (taken for acquiring StarBev) by the next 2-3 years instead of buying back shares.

Molson Coors holds a Zacks Rank #3 (Hold). Other beverage companies that are worth considering are Boston Beer Co (SAM - Analyst Report), Constellation Brands Inc (STZ - Analyst Report) and Diageo PLC (DEO - Analyst Report). While Boston Beer and Constellation Brands hold a Zacks Rank #1 (Strong Buy), Diageo carries a Zacks Rank #2 (Buy).

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