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Molson Coors Pinned at Neutral

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We reaffirm our Neutral recommendation on Molson Coors Brewing Company (TAP - Free Report) as the benefits of StarBev acquisition was offset by unfavorable currency impact, increased marketing costs and poor weather conditions in the first quarter 2013 results.

Why the Reiteration?

On May 7, Molson Coors reported its first quarter 2013 results. The company’s sales in the first quarter increased 19.8% year over year owing to the addition of the StarBev operations (Jun 2012), which also boosted worldwide beer volumes. However, earnings of 30 cents per share declined 36.2% due to unfavorable currency impact, increased marketing costs and poor weather conditions.

The acquisition of StarBev has significantly enhanced the company’s portfolio of premium brands, despite 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. Molson Coors is also focusing on the highest-potential opportunities in the U.S. beer market.

The company has undertaken 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, 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 recovery in the U.S. economy and the acquisition of the StarBev business also has the potential to boost volumes. However, we still wait for 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 deleverage 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 stocks in the consumer staples sector that are worth considering are B&G Foods Inc (BGS - Free Report) , Flower Foods Inc (FLO - Free Report) and The J.M. Smucker Co (SJM - Free Report) . While B&G Foods holds a Zacks Rank #1 (Strong Buy), Flower Foods and Smucker carry a Zacks Rank #2 (Buy).

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