We are maintaining a Neutral rating on
Molson Coors Brewing Company
(
TAP
) 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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