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Can Molson Coors Survive on Strategies as Beer Loses Fizz?

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Molson Coors Brewing Company (TAP - Free Report) is among the few stocks that are displaying mixed sentiments. We remain optimistic about the stock, given the company’s focus on cost savings and premiumization as well as its exposure to the fast-growing marijuana space. However, overall softness in the beer industry due to consumers’ shift to healthier drinking options and higher aluminum costs has been weighing on the stock.

Evidently, the company’s shares have decreased 25% year to date, reflecting a significant underperformance from 15.7% decline recorded by the industry. Nonetheless, Molson Coors has been in the spotlight for its recent joint venture with Hydropothecary Corp., targeting to produce and sell non-alcoholic cannabis-infused drinks in Canada after legalization. This gives the company an edge over its peers like Boston Beer (SAM - Free Report) , Anheuser-Busch InBev (BUD - Free Report) and others, which continue to suffer on account of soft industry-wide beer sales trends.

 



That said, let’s analyze the pros and cons of this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Hindering Stock Performance?

The company’s portfolio mainly comprises of more than 65 leading beer brands, including Coors Light, Molson Canadian, Staropramen and Carling as well as craft and specialty beers like Blue Moon, Creemore Springs, and Cobra. Consequently, soft beer sales environment in the United States is hurting Molson Coors’ performance for quite some time.

Notably, the company’s revenues fell 0.2% in second-quarter 2018. Sales were hurt by lower financial volume and adoption of the revenue recognition accounting standard. On a constant-currency basis, net sales tumbled 1.9%.

Furthermore, Molson Coors has been struggling with weak beer volumes across the United States, owing to challenging industry conditions. As already mentioned, consumers’ changing preferences, aging population and strong competition from other alcoholic beverages have been contributing to the decline. Notably, beer volumes in the second quarter were impacted by the Golden brewery system implementation, challenging sales during April and impact of holiday mismatches. Further, the company remains disappointed with overall market share trend and lost shares of Coors Light.

We note that during the second quarter, the company’s net sales for the U.S. region declined 3% to $2,072.5 million, with U.S. brand volumes down 4.8%, accountable to soft Premium Light volumes. Notably, the Golden brewery system implementation and ongoing freight carrier headwinds hurt U.S. business volumes by nearly 1%. Further, sales-to-wholesalers volume (STWs) remained soft, declining 3.6%.

Apart from this, the company continues to battle input cost inflation, which has been hindering it for a while now, especially due to aluminum and fuel costs. Management expects these hurdles to linger in 2018. It reiterated its previously issued cost of goods sold (COGS) per hectare outlook for Europe, Canada and International.

For 2018, the company expects COGS per hectoliter to increase low-single digits in Canada and Europe segments while it is expected to decline low-single digits in the International segment. However, Molson Coors raised COGS per hectoliter guidance for the United States to a mid-single-digit increase from a low-single digit stated earlier. This increase can be attributed to volatility in aluminum costs and the Midwest Premium as well as incremental pressures from the freight carrier market in the United States.

Clearly, these hurdles, along with increased tariffs on aluminum imports and beverage exports (due to the U.S.-China trade war), remain a concern for Molson Coors’ bottom line.

Strategies and Investment in Cannabis Raise Hope

Though the overall industry scenario remains tough, we commend the company’s First Choice plan that aims to solidify and premiumize portfolio, enhance customer relations, and generate significant profits from international businesses. Notably, this supports the company’s key priorities like cash generation, margin improvement and enhancing shareholder returns. Additionally, it remains focused on disciplined capital allocation, driven by its Profit after Capital Charge or PACC approach.

Apart from this, Molson Coors is expanding global footprint and accelerating its international business through acquisitions, and agreements, which are likely to cushion sales. In sync with its growth strategy and commitment toward becoming the First Choice for consumers, the company (in Aug 2018) formed a joint venture (JV) with leading Canadian cannabis producer, The Hydropothecary Corporation (“HEXO”), to produce and sell non-alcoholic cannabis-infused drinks in Canada after legalization. The JV, which will operate as a standalone company, will explore opportunities in the highly anticipated consumable cannabis market, which is expected to be legalized in Canada in October 2018.

Earlier, as part of its expansion plans, the company inked a 10-year import agreement with Heineken (HEINY - Free Report) to import, market and distribute the Sol beer brand in the United States through its U.S. division, MillerCoors in June 2017. Additionally, it entered a partnership with Hornell Brewing Company, part of AriZona Beverages, in July 2017 to market and distribute new beverage called Arnold Palmer Spiked Half & Half. This agreement should help Molson Coors in capturing the momentum of ready-to-drink teas (both alcoholic and non-alcoholic) in the United States. We believe these agreements are in line with its current business expansion initiatives.

Furthermore, the company has been undertaking restructuring initiatives to reduce overhead costs and boost profitability. For 2018, it expects cost savings of nearly $210 million, which forms part of its three-year savings goal of $600 million, extending up to 2019. These cost-saving efforts are likely to help it to expand EBITDA margins over the next three to four years.

Bottom Line

Although Molson Coors’ focus on premiumization and cost-saving initiatives bode well, softness in the U.S. beer industry and tough input cost environment seem to have marred analysts’ confidence. Consequently, we would suggest holding on to this stock for the time being as its exposure to the marijuana market may prove fruitful.

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