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Know the Molson Coors (TAP) Stock In and Out Before You Invest

Zacks Equity Research

Molson Coors Brewing Company TAP boasts a strong portfolio of well-established brands, which is its key strength. This along with its focus on premiumization and cost savings has been aiding its bottom-line performance. Further, innovation coupled with premiumization efforts is likely to boost the company’s market share.

Additionally, its approach to the First Choice plan, which aims at solidifying and premiumizing portfolio, enhancing customer relations, and generating significant profits from international businesses, bodes well.

Factors Supporting Growth

Molson Coors is witnessing significant benefits from the execution of its premiumization and cost-saving initiatives. With a view to accelerate portfolio premiumization, the company has made significant additions to its above-premium brands’ portfolio.

In second-quarter 2019, Molson Coors’ above-premium brands continued to improve, with Peroni, Sol, Henry's Hard Sparkling, and Arnold Palmer Spiked Half & Half growing rapidly in the United States. Further, Blue Moon witnessed strong growth outside the United States and its growth across Europe continued. Moreover, the company gained share in the premium Light category with Coors Light returning to segment share growth and Miller Light recording segment share growth for the 19th straight quarter.

Additionally, for 2019 and beyond, it 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; increased volumes in above-premium brands; and bring stability to its below-premium brands’ volumes and market share.

The company has also undertaken restructuring initiatives to reduce overhead costs and boost profitability. These initiatives include the closure of underperforming breweries, improving efficiencies in finance, administration and human resources, and 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 between 2017 and 2019. The company’s cost-saving target is $150 million ahead of its initial goal of $550 million. Further, the company 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 the underlying EBITDA and underlying EPS growth in quarters ahead.

With regard to the aforementioned First Choice plan, the company witnessed strong pricing across brands and regions in second-quarter 2019, driven by progress on this plan. Notably, Molson Coors’ First Choice approach supports its key priorities — including cash generation, margin improvement and enhancing shareholder returns. Apart from this, the company remains focused on disciplined capital allocation, driven by the Profit after Capital Charge or PACC approach.

Near-Term Hurdles

Though the aforementioned strategies speak well of the company’s long-term growth prospects, we remain concerned about the recent glitch, thanks to the dismal earnings and sales trend in recent quarters. The company’s top line in the second quarter was impacted by soft volume that stemmed from unfavorable weather and weak industry demand across the majority of its geographies in May and June.

This along with cost inflation in all segments, higher marketing expenses — owing to ongoing investments to support premiumization and innovation efforts, and lower G&A benefits from last year hurt the company’s bottom line. Additionally, its underlying EBITDA declined 9.2% in the second quarter, with a 12.8% fall in constant currency.

Moreover, Molson Coors has been witnessing softness in beer volume in the United States for quite some time. Consumers’ changing preferences and the aging population mainly contributed to the decline. Additionally, the company’s volume is hindered by tough competition from other alcohol beverage companies like Anheuser-Busch InBev SA/NV BUD, Boston Beer Co. SAM and Constellation Brands Inc. STZ.

Like others in the industry, Molson Coors is also battling input cost inflation, which has been a hindrance for a while now particularly due to higher aluminum and freight costs. Notably, input cost inflation in all segments led to a decline in its earnings in second-quarter 2019. The company estimates consolidated underlying COGS per hectoliter (on a constant-currency basis) to increase in a mid-single digit in 2019 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.

Wrapping Up

Nonetheless, we expect the company’s growth initiatives to help steer through tough industry conditions and the adverse tariff environment. This should contribute meaningfully to its growth in the long term.

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