Molson Coors Maintains Focus on Above-Premium Beer Category

Zacks Equity Research

Global brewer Molson Coors Brewing Company (TAP) boasts a strong portfolio of well-established brands, including Coors Light, Molson Canadian, Carling and Staropramen, as well as craft and specialty beers like Blue Moon, Creemore Springs and Cobra. The company focuses on growing its market share through innovation and by shifting its focus on the above-premium category of beers.

Recently, Molson Coors and Heineken N.V. (HEINY) expanded their marketing partnership in Canada, whereby Molson Coors Canada will distribute five additional above-premium brands of Heineken including Dos Equis, Sol, Tecate, Birra Moretti and Desperados in Canada starting from Jan 2015.

Over the last two decades, Molson Coors in association with Heineken has been marketing and selling its brands such as Heineken, Murphy’s, Newcastle and Strongbow. In addition, Molson Coors has also agreed to distribute the Coors Light brand in Ireland.

However, we note that Molson Coors has been posting negative beer volumes in Canada for quite some time. Since 2001, the premium beer segment in Canada has been gradually losing volume to the above premium and value segments, mainly due to an aging population and a sluggish economy.

In Canada, the substantial excise tax increase in Québec, which was enforced in Nov 2012, has been hurting volumes as the company holds a significant share of the Québec market. Despite the reduction in tax rate in Canada in the second quarter of 2013, the region is still struggling with volume declines.

In the recently-reported second quarter 2014 too, a 2% decline in sales volume and currency headwinds led to sales decline in Molson Coors Canada. However, overall the company’s net sales, including excise tax, increased marginally by 0.9% to $1.19 billion in the second quarter driven by positive pricing and mix, which made up for the beer volume decline in the quarter.

Adjusted earnings of $1.57 per share exceeded the Zacks Consensus Estimate by 9% and grew 6.8% from the prior-year earnings driven by growth in underlying pre-tax income and expanded margins owing to lower interest expense (Read: Molson Coors Beats on Q2 Earnings on Lower Interest Costs).

We believe the new expanded agreement will not only strengthen the market share of the above-premium category of beers, but will also complement the existing portfolio of leading Canadian beer brands. The addition of the Heineken portfolio is a positive as Canadian drinkers have a strong appetite for imported beers.

Molson Coors currently holds a Zacks Rank #2 (Buy). Other players worth considering in the beer industry include Anheuser-Busch InBev SA (BUD) and Constellation Brands Inc. (STZ) with a Zacks Rank #2.

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