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Mark Vickery

Molson Coors' EPS Beats, Rev Misses

TAP BUD

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Molson Coors Brewing Company (TAP - Analyst Report) reported adjusted earnings of $1.37 per share in the third quarter of 2012, exceeding earnings of $1.14 in the year-ago quarter by 20.0%. The results beat the Zacks Consensus Estimate of $1.34 per share.

Though the company has been facing challenging market conditions, Molson Coors’ earnings were positively impacted by strong sales growth driven by improved performance in the U.S. segment and addition of Central Europe in the reported results.

In addition, Molson Coors continues to focus on its strategy of maximizing profitable growth opportunities in the core markets and expanding into new and emerging markets.

Revenues and Operating Profits

Net sales, including excise tax, grew 7.0% to $1.195 billion in the quarter compared with $0.954 billion reported a year ago. It, however, lagged the Zacks Consensus Estimate of $1.252 billion. Total worldwide beer volume increased 30.8% in the quarter to 17.2 million hectoliters in the third quarter of 2012.

Underlying (excluding special and other non-core items) pre-tax income increased 21.2% year over year to $305.6 million in the third quarter of 2012, despite the impact of unfavorable foreign exchange.

Segment Details

The company operates through the following geographical segments.

Canada: Molson Coors’ Canada segment net sales declined to $580.1 million (including excise tax) from $598.9 million in the year-ago period. Sales volume decreased 4.1% to 2.4 million hectoliters in the quarter. The segment reported underlying (excluding special and other non-core items) pretax income of $150.7 million, down 7.1% from the prior-year quarter. Improved pricing and cost reductions more than offset the lower volume, higher-cost products, pension expense and foreign currency headwinds.

United States (MillerCoors): The segment includes the operations of its subsidiary, MillerCoors, a joint venture with SABMiller. Molson Coors has a 42% share in MillerCoors and income from the joint venture is reflected as equity income for Molson Coors.

Molson Coors’ underlying U.S. segment pretax income increased 16% to $139.9 million in the quarter.

MillerCoors’ net sales climbed 2.0% to $1.99 billion in the third quarter of 2012. Sales volume declined 1.5% to 19.8 million hectoliters in the quarter from 20.1 million hectoliters in the prior-year period.

United Kingdom: Molson Coors’ United Kingdom segment net sales slipped 4.2% to $313.5 million (including excise tax) from the prior-year period. Sales volume declined 3.2% to 2.14 million hectoliters in the third quarter of 2012. The segment reported underlying (excluding special and other non-core items) pre- tax income of $10.1 million, down 63.1% from the prior-year quarter, due to volume decline and increase in pension cost offset by cost saving initiatives.

Central Europe: Molson Coors’ Central Europe segment includes the newly-acquired nine breweries of Molson Coors Central Europe (known as StarBev prior to the acquisition) in June.

Molson Coors’ Central Europe segment reported net sales of $264.2 million (including excise tax) in the third quarter of 2012, down 14% from the prior-year quarter. Sales volume declined 1.4% to 4.18 million hectoliters in the quarter. The segment reported underlying (excluding special and other non-core items) pretax income of $79.8 million, down 2.2%, due to foreign currency headwinds.

International: The segment’s net sales surged 38.3% to $43 million in the quarter. Sales volume increased to 0.364 million hectoliters from 0.254 million hectoliters in the previous-year quarter.

The segment reported underlying (excluding special and other non-core items) pretax loss of $7.7 million, wider than a loss of $7.2 million in the prior-year quarter, due to incremental brand investments, partially offset by volume growth in Europe and Latin America, including Central Europe export results this year. The Central Europe export business contributed underlying pretax income of $2.8 million in the third quarter.

Our Recommendation

Overall, we are encouraged with the company’s strong brand portfolio, continuous innovation and cost-saving initiatives. Moreover, we believe that the company’s acquisition of the Central Europe business is significant because it brings on board StarBev’s flagship brand Staropramen and helps it to expand in untapped markets. However, the company’s susceptibility to the global economic downturn predominantly in mature and low-growth markets, coupled with currency headwinds undermine its growth prospects and profitability.

Molson Coors competes with Anheuser-Busch InBev SA (BUD - Snapshot Report) and carries a Zacks #3 Rank (a short-term Hold rating). We have a Neutral recommendation on Molson Coors over the long term.

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