Molson Coors Tapped Out

Higher input costs are compressing Molson Coors Brewing Company’s (TAP - Analyst Report) overall gross margin and smoking bans are negatively impacting the U.K. operations. Of particular concern is the cost rationalization moves by the major brewers that are expected to result in the loss of the positive pricing trends enjoyed by the industry for the last two years. Therefore, a Sell rating is initiated.

The company still lacks the scale to compete effectively with its major U.S. competitor Anheuser Busch (BUD). The joint venture with SABMiller should produce a more competitive brewer with greater scale, resources, and distribution synergies from the optimization of production and distribution networks, along with the elimination of duplicate corporate and marketing functions.

In recent years, beer volume sales in the U.K. have been shifting from on-premise (pubs and restaurants) to off-premise (retail stores). In addition, the smoking bans in pubs and restaurants across the U.K. (enacted in 2007) are accelerating this trend. The margins on off-premise sales are lower than on-premise sales. Hence, the company’s profitability will be adversely impacted.

The cost rationalization at Anheuser-Busch along with joint venture between Molson Coors and SABMiller may spark more intense competition resulting in the loss of the positive pricing trends enjoyed by the industry for the last two years. At the current P/E of 18.3, we do not expect Molson Coors’ stock to outperform. The target price of $47.50 represents a 16 P/E multiple on trailing 12-month earnings.

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