We reaffirm our Neutral recommendation on
Molson Coors Brewing Company
) due to mixed second quarter results.
Why the Reiteration?
On Aug 6, Molson Coors reported its second quarter 2013
results. The company's sales in the second quarter increased
17.9% year over year owing to the addition of the StarBev
operations (Jun 2012), which also boosted worldwide beer volumes.
However, sales missed the Zacks Consensus Estimate by 1.7%. We
believe that the sales miss was due to weak consumer demand and
poor weather conditions in the second quarter of 2013. The
company's sales volumes improved overall due to StarBev
acquisition but organically, it declined in all the three markets
of U.S., Canada and U.K., due to poor weather conditions.
Earnings of $1.51 per share improved 9.4% and beat the Zacks
Consensus Estimate by 8.6%, driven by higher sales on account of
the StarBev acquisition. Lower tax rate in Canada and improved
performance in Europe and International businesses also boosted
earnings. The company was able to gain market share in its key
brands in core markets, despite weak consumer demand and poor
weather across all markets.
The acquisition of StarBev has significantly enhanced the
company's portfolio of premium brands, despite a 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 in
the second half of 2013. Molson Coors is also focusing on the
potential growth opportunities in the U.S. beer market.
The company has undertaken aggressive 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, management continues to expect weak consumer demand
in the coming quarters due to ongoing macro-economic headwinds.
We also note that 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 acquisition of the
StarBev business also has the potential to boost volumes.
However, we still await a substantial improvement in these
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 pay its debt (taken for
acquiring StarBev) by the next 2-3 years instead of buying back
Molson Coors holds a Zacks Rank #3 (Hold). Other beverage
companies that are worth considering are
Boston Beer Co
Constellation Brands Inc
). While Boston Beer and Constellation Brands hold a Zacks Rank
#1 (Strong Buy), Diageo carries a Zacks Rank #2 (Buy).
DIAGEO PLC-ADR (DEO): Free Stock Analysis
BOSTON BEER INC (SAM): Free Stock Analysis
CONSTELLATN BRD (STZ): Free Stock Analysis
MOLSON COORS-B (TAP): Free Stock Analysis
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