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Molson Coors (TAP) Down 2.8% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Molson Coors Brewing (TAP - Free Report) . Shares have lost about 2.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Molson Coors due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Molson Coors Q2 Earnings & Sales Beat

Molson Coors reported a solid second-quarter 2018, wherein both the top and the bottom lines surpassed estimates. The reported quarter reflected an improvement from the dismal first-quarter 2018 results. In fact, this marked the company’s first top-line beat, after reporting sales miss for seven consecutive quarters.

Molson Coors’ adjusted earnings of $1.88 per share rose about 10.6% year over year and surpassed the Zacks Consensus Estimate of $1.84. This increase is attributed to a favorable global net pricing, realized cost savings, lower marketing spend and a lower tax rate.

Delving Deeper

Net sales fell 0.2% to $3,085.2 million, beating the Zacks Consensus Estimate of $3,048 million and marking a sequential improvement from the decline of 4.8% in the first quarter. While the sequential gain and top-line beat are attributed to a favorable global pricing and currency tailwinds, the year-over-year decline is accountable to lower financial volume and the adoption of the new revenue recognition accounting standard. On a constant-currency basis, net sales tumbled 1.9%.

Notably, net sales per hectoliter advanced 1.9% on a reported financial-volume basis, while it dipped 0.3% on a constant-currency basis, owing to the adoption of the new revenue recognition accounting standard. This was partly offset by positive global pricing and favorable mix in Europe and International.

Molson Coors’ worldwide brand volume declined 2.4% to 25.7 million hectoliters due to soft volumes in the U.S. and Canada, offset by the strength in Europe and International. Global priority brand volumes dipped 4% and financial volumes declined 2.1% to 27.7 million hectoliters. Financial volumes were hurt by lower brand volumes and contract brewing.

Underlying EBITDA was $783.3 million, reflecting a decline of 2.6% from the year-ago period. Further, underlying EBITDA slumped 3.8% in constant currency, due to a lower financial volume, increased input cost inflation and effects of the new accounting standards. This was partly negated by positive global pricing, cost savings and lower marketing expenses.

Segmental Details

The company operates through the following geographical segments.

Canada: Molson Coors’ Canada net sales dipped 2.5% to $397.4 million. Net sales per hectoliter (brand-volume basis) slipped 4.5% in local currency due to the adoption of the new revenue accounting standard. Further, Canada brand volume fell 2.4% on account of volume constraints in Ontario and the West, as well as lower Premium Light volumes, offset by growth in the Value segment. Financial volume descended 2.3% on account of lower brand volume. Underlying EBITDA declined 5.1% to $96.2 million, thanks to the unfavorable sales mix and soft volumes, as well as the negative impact of the new accounting standard, partly negated by a lower marketing spend.

United States: Molson Coors now has the complete ownership rights to all the brands in the MillerCoors portfolio for the U.S. market. Net sales for the segment dropped 3.1% to $2,072.5 million. Domestic net sales per hectoliter (on a brand volume basis), which excludes contract brewing and company-owned-distributor sales, improved 0.9%. Excluding the new revenue accounting standard, net sales per hectoliter (on brand volumes) increased 1.6%. The upside stemmed from a favorable pricing, partly countered by a negative mix.

However, U.S. brand volume decreased 4.8%, accountable to soft Premium Light volumes. In fact, sales-to-wholesalers volume (STWs), excluding contract brewing, declined 3.6%. The segment’s underlying EBITDA plunged 7.2% to $576.3 million, thanks to reduced volumes, higher COGS (particularly aluminum and freight), unfavorable mix sales and the effects of the new revenue accounting standard. Better pricing and lower MG&A costs provided some respite.

Europe: The segment reported net sales growth of 11.7% to $586.1 million. Europe net sales per hectoliter (brand volume basis) improved 1.5% in local currency due to favorable sales mix and pricing. This was partly offset by the impact of the new excise-tax guidelines in one of its European markets and higher investment in First Choice Agenda in 2018. Europe brand volume rose 2.9%, courtesy of growth in above-premium brands and national champion brand as well as World Cup consumption. Financial volume went up 3%. Underlying EBITDA increased 18.2% year over year to $135.8 million.

International: Net sales for the segment grew 4.3% $67.9 million. Net sales per hectoliter, on a brand-volume basis, rose 3.8%. An improved pricing and a favorable sales mix aided results. Further, International brand volume inched up 0.6%, backed by organic growth in focus markets, partly negated by the loss of Modelo contract in Japan. The segment’s underlying EBITDA was $6.5 million against loss of $0.9 million in the year-ago period. This was backed by an improved pricing, a favorable mix and a lower marketing spend, partly compensated by the loss of the Modelo brands in Japan.

Other Financial Updates

Molson Coors ended the reported quarter with cash and cash equivalents of $792.9 million and a total debt of $10.9 billion. This resulted in a net debt of $10.1 billion as of Jun 30, 2018.

Net cash from operating activities for the six months ended Jun 30 was $1,297.8 million, which marks a significant improvement from the year-ago period. The company generated underlying free cash flow of $659.8 million.

Outlook

Molson Coors remains committed toward achieving full-year free cash flow and cost savings targets, even though industry demand challenges persist in the U.S. and Canada alongside inflationary pressures. Moreover, the company aims to augment the top line through its First Choice commercial excellence plans. It also remains focused on disciplined capital allocation, driven by its Profit after Capital Charge or PACC approach.

Management retained its previously issued forecasts for 2018. Molson Coors continues to anticipate generating cost savings of roughly $210 million in 2018 while it expects cost savings to reach $600 million for the 2017-2019 period. Further, in 2018, it expects to deliver underlying free cash flow of around $1.5 billion in 2018, (plus or minus 10%). Capital spending is expected to be roughly $670 million (plus or minus 10%). Underlying tax rate for the year is likely to be 18-22%, thanks to the latest tax reforms.

Molson Coors expects 2018 to remain impacted by new revenue recognition standard (which became effective at the beginning of 2018) and the updated pension guidance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Molson Coors has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Molson Coors has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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