Molson Coors Misses

Molson Coors Brewing Co. (TAP - Analyst Report) reported adjusted earnings of $1.14 per share in the third-quarter 2011, lagging the Zacks Consensus Estimate of $1.25. The earnings also missed the prior-year quarter earnings of $1.28.

Including special one-time items, Molson Coors reported earnings of $1.05 per share, down 23.9% from $1.38.

Molson Coors’ earnings were negatively impacted by continuing weak economic conditions, high unemployment among core beer consumers and commodity inflation in the quarter. Despite these challenges, Molson Coors continued to focus on its growth strategies of maximizing profitable growth opportunities in the core markets, expanding into new and emerging markets, and looking for M&A opportunities to generate shareholder value.

Revenues and Operating Profits

Net sales climbed 9.1% to $954.4 million in the quarter from $875.0 million in the year-ago period. It also surpassed the Zacks Consensus Revenue Estimate of $946 million.

Molson Coors generated a gross profit of $403.9 million, 3.3% higher than the profit generated in third-quarter 2010. Gross margin was 42.3% in the reported quarter, down 540 basis points from the prior-year quarter.

Total worldwide beer volume decreased 0.8% in the quarter to 13.13 million hectoliters in the third-quarter of 2011.

During the quarter, Molson Coors incurred special charges and other non-core items of $5.6 million pretax, which was driven by one-time employee-related expenses in the U.K. and a $3.0 million unrealized mark-to-market loss on aluminum hedges in cost of goods sold.

Segment Details

Canada: Molson Coors’ Canada segment‘s net sales surged 10.9% to $598.9 million from the previous year. Sales volume was slightly up to 2.5 million hectoliters in the quarter. Net sales per hectoliter increased 4.0% in local currency equally due to continued positive pricing and the addition of contract brewing sales to North American Breweries.

United Kingdom: Molson Coors’ United Kingdom segment’s net sales inched up 4.4% to $327.2 million from the previous year. Net sales per hectoliter of owned brands increased 5% in local currency, driven by the impact of positive sales mix in the quarter, especially the addition of the Modelo brands. However, net pricing declined 1% from the last year.

International and Corporate: The segment’s net sales surged to $31.5 million from $21.8 million in the previous year. International business volume was 50.3% higher in the quarter, primarily due to the addition of the Si’hai brands in China and the Modelo brands in Japan, along with growth of Carling in Europe and Coors Light in Latin America and China.

Other Financial Updates

The company exited the year with cash and cash equivalents of $987.2 million as of September 24, 2011. Long-term debt was $1.9 billion.

In the third quarter 2011, Molson Coors deployed cash to repurchase 6.3 million Class B Common shares for $271 million. This is equivalent to repurchasing approximately 23% of the total program authorization of $1.2 billion of the company’s Class B common stock, with an expected program term of three years.

Further, in the third quarter 2011, Molson Coors delivered $18 million of Resources for Growth Two (RFG2) cost reductions. MillerCoors achieved $27 million of synergies in the quarter to complete its three-year synergy program.

MillerCoors also delivered incremental cost savings of $738 million in synergies and other costs savings since operations began on July 1, 2008. Molson Coors receives 42% of these synergies and incremental cost savings.

Molson Coors’ effective tax rate was 14% in the quarter on a reported basis and 16% on an underlying basis.

The company estimates its effective tax rate for fiscal 2011 to be in the range of 12% - 16% on an underlying basis and in mid-single digits for the fourth quarter 2011, assuming there are no further changes in tax laws.

Recommendation

We remain encouraged by the restructuring initiatives taken by the company to reduce overhead costs and boost profitability. The initiatives include closure of underperforming breweries and efforts to improve efficiencies in finance, administration and human resource activities.

Further, the announcement of a new share repurchase program will strengthen the company’s balance sheet. Moreover, it signifies that Molson Coors has substantial cash generation capability.

However, the seasonal nature of business and increased competition from Anheuser-Busch InBev (BUD - Snapshot Report) are concerns for Molson Coors.

Currently, Molson Coors has a Zacks #3 Rank, implying a short-term Hold recommendation. On a long-term basis, the company maintains a Neutral recommendation on the stock.

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