We reaffirm our Neutral recommendation on Molson Coors Brewing Company (TAP) following an appraisal of its fourth quarter 2012 results.
Why the Reiteration?
Molson Coors reported better-than-expected adjusted earnings of 69 cents per share in the fourth quarter of 2012. In fact, Molson Coors has surpassed the Zacks Consensus Estimate in the last five quarters, with an average surprise of 14.2%. Earnings, however, declined 28.9% from the prior-year quarter due to higher tax rates this year and strong year-ago comparisons. Net sales, though short of the Zacks Consensus Estimate, increased 9.9% to $1.03 billion year over year due to addition of the StarBev operations (Jun 2012), which boosted worldwide beer volumes and thereby overall profits.
The acquisition of StarBev has significantly enhanced the company’s portfolio of premium brands, despite 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 cost-saving initiatives. Molson Coors has also grown its market share through innovation. Molson Coors achieved $74 million of cost savings through its synergy program named Resources for Growth Two (RFG2) and delivered $200 million of savings 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, Molson Coors has been posting sluggish sales volume trends in the U.S., U.K. and Canada for three straight years. The company has also spent on marketing and advertising for its Miller Lite and Molson Brands but this has not led to consistent growth in volumes. The recovery in the U.S. economy and the acquisition of the StarBev business has the potential to boost volumes but we do not expect the change to happen in the near future.
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 deleverage its debt (taken for acquiring StarBev) by the next 2-3 years instead of buying back shares.
Molson Coors holds a Zacks Rank #2 (Buy). Other stocks in the consumer staples sector that are worth considering are Companhia De Bebidas Das Ame (ABV), Kellogg Co. (K) and Hillshire Brands Co. (HSH). While ABV holds a Zacks Rank #1 (Strong Buy), Kellogg and Hillshire carry a Zacks Rank #2.
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