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Molson Coors Remains Neutral

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We are maintaining a Neutral rating on Molson Coors Brewing Company (TAP - Analyst Report) following the appraisal of first quarter 2012 results.

Molson Coors posted first-quarter 2012 adjusted earnings of 47 cents per share, which surpassed the Zacks Consensus Estimate and prior-year quarter earnings of 43 cents. Earnings were positively impacted by solid pricing, sales growth, cost reduction initiatives, favorable foreign currency movements and lower shares outstanding.

We are encouraged by the company’s strong portfolio of more than 65 well-established brands, including Coors Light, Molson Canadian, Miller Lite and Carling, as well as craft and specialty beers like Blue Moon, Creemore Springs and Cobra. In addition, the company has grown its portfolio through brand innovations which have resulted in positive beer pricing in both the U.S. and Canada.

Molson Coors has undertaken restructuring initiatives to reduce overhead costs and boost profitability. The initiatives include closure of underperforming breweries and efforts to improve efficiencies in finance, administration and human resources.

In 2011, Molson Coors achieved $107 million of cost savings through these initiatives, including 42% of savings contributed by its subsidiary MillerCoors. Through the three-year synergy program named Resources for Growth Two (RFG2) cost reductions, Molson Coors delivered $126 million of cost reductions ($60 million achieved in 2011).

The company also focuses on expanding its portfolio through acquisitions. In early 2011, the company acquired the Sharp's Brewery and Doom Bar brands, which added to the U.K. segment’s portfolio. Most recently in April, Molson Coors agreed to acquire the East European brewer StarBev L.P. from private equity group CVC Capital Partners Limited.  

The deal, which is expected to consummate by the end of June 2012, is expected to enhance Molson Coors’ portfolio with premium brands of StarBev and accelerate its expansion to the emerging markets of Czech Republic, Hungary, Romania and Bulgaria. Moreover, StarBev is also expected to improve the beer volumes of Molson Coors, which have been on a decline since the past few years.

However, Molson Coors has been facing the burden of rising costs of materials and other expenses. The company anticipates higher brewery, marketing, and pension costs in 2012. Further, the company expects its marketing, general and administrative expense to shoot up in 2012, leading to stressed margins and profitability.

Moreover, the continuing global economic downturn has compelled customers to reduce discretionary spending and pushed them towards lower priced brands in preference over premium ones. This is especially a matter of concern for the company as its business strategy is focused toward premium and above-premium offerings. We therefore remain on the sidelines on the stock.

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