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Here's Why You Must Hold on to Molson Coors Stock Despite Woes

Zacks Equity Research

Molson Coors Brewing Company TAP displays mixed sentiments. While the Molson Coors stock has gained 2.8% year to date, it underperformed the industry’s growth of 10.4%. This softness clearly reflects the ongoing turmoil in the alcohol space resulting from consumers shifting to healthy drinks and wines, which is particularly hitting the beer makers hard. This resulted in weak beer volume in the United States for the company.

Molson Coors expects further contraction of the U.S. beer industry volume in the future. While it plans to offset these by accelerating its portfolio premiumization and improving industry volume share trends, there still remains uncertainty on the execution of these plans.

 



Additionally, the company continues to battle input cost inflation, which has been a hindrance for a while now particularly due to higher aluminum and freight costs. Management expects these hurdles to linger in 2019. The company estimates COGS per hectoliter to increase in a mid-single-digit in 2019 (in constant currency) mostly due to higher aluminum and other input costs. Clearly, these hurdles along with the increased tariffs on aluminum imports and beverage exports (due to the U.S.-China trade war) remain a concern for Molson Coors’ bottom line.

Driven by soft volume, adverse currency and cost inflation in all segments, the company’s sales and earnings missed estimates in first-quarter 2019. This marked an earnings miss after three straight quarters of positive surprise and a second consecutive sales lag.

However, Molson Coors’ portfolio-premiumization efforts and robust innovation pipeline appear encouraging. Moreover, the company’s restructuring initiatives to reduce overhead costs and boost profitability bode well. Let’s find out how these endeavors can help bring back the stock to growth trajectory.

Premiumization & Innovation — Key Endeavors

Molson Coors remains committed to growing its market share through innovation and premiumization. With a view to accelerating portfolio premiumization, the company made significant additions to its above-premium brands’ portfolio. In first-quarter 2019, Molson Coors’ above-premium brands continued to improve with Peroni, Sol, Henry's Hard Sparkling and Arnold Palmer Spiked growing very rapidly in the United States. Further, Blue Moon witnessed robust growth outside the United States and continued growth across Europe.

Management is focused on gaining share in the Premium Light segment in the United States through Coors Light and Miller Lite brands, as the demand for premium beer is growing.

Additionally, for 2019 and beyond, the company is encouraged by its innovation pipeline, including the accelerated development of Clearly Kombucha and launch of various innovative brands across regions. Molson Coors remains on track to witness continued segment share gains in premium brands, increase volumes in above-premium brands, and bring stability to its below-premium brands’ volumes and market share.

Cost Savings and Restructuring Actions

Molson Coors has undertaken restructuring initiatives to reduce overhead costs and boost profitability. The initiatives included the closure of underperforming breweries, improving efficiencies in finance, administration and human resources, as well as reducing labor and general overhead costs. In addition, the company has been focusing on initiatives to improve its supply-chain network and build on efficiencies across the business to generate additional resources to invest in brand building and innovation.

Progressing on these lines, Molson Coors anticipates generating cost savings of roughly $205 million in 2019, remaining on track with the target of generating total cost savings of $700 million for the three year period of the 2017-2019 program. The company’s cost-saving target is $150 million, ahead of its initial goal of $550 million. Further, it plans to achieve cost savings of another $450 million between 2020 and 2022, driven by procurement and supply chain, including brewery optimization. These cost-saving efforts are likely to cushion underlying EBITDA and underlying EPS growth in the quarters ahead.

Wrapping Up

We believe that the aforementioned strategies and actions position Molson Coors for growth in the future. Our view for this Zacks Rank #3 (Hold) stock is further supported by our Value Score of B and long-term earnings growth rate of 4.5%.

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