Weak Volumes & Cost Hurt Molson Coors, Growth Efforts on Track

Molson Coors Beverage Company TAP has been struggling on the bourses owing to persistent softness in volumes and high input cost. Shares of this Denver, CO-based company have decreased 10.4% in the past year, underperforming the industry’s growth of 17.6%.

Also, the stock’s dismal run on the bourses is mainly attributed to its unimpressive earnings and sales performance in recent quarters. Though the company beat earnings estimates in third-quarter 2019, both top and bottom lines declined year over year. Additionally, this marked its fourth consecutive quarter of negative sales surprise. The top line was impacted by soft volume across all segments, owing to a challenging industry backdrop.

This, along with inflation, higher underlying effective tax rate and cycling a favorable resolution of a vendor dispute in the United States hurt earnings. The company’s worldwide brand volume declined 2.4% to 24.7 million hectoliters and financial volume fell 5.5% to 25 million hectoliters. In addition to the aforementioned factors, financial volume was hurt by the timing of customer inventory levels in the United States and Canada as well as lower contract brewing volume. Its underlying EBITDA declined 7.1% in the third quarter, with a 5.6% fall in constant currency.

Additionally, Molson Coors has been posting weak beer volumes in the United States for quite some time, owing to tough industry conditions. Apparently, U.S. brand volume declined 3.9%, owing to declines in the Economy and Premium Light segments, offset by rise in the Above Premium portfolio trends. Sales-to-wholesalers (STWs) volume, excluding contract brewing, declined 6.2% on lower brand volume and quarterly timing of distributor inventories. Going forward, the company expects further contraction of the U.S. beer industry volumes.

Apart from these, the company continues to battle input cost inflation, which has been a hindrance for a while now. Notably, input cost inflation in all segments led earnings to decline in third-quarter 2019. Underlying COGS per hectoliter rose 5.9% on a constant-currency basis, driven by inflation and global volume deleverage partially offset by cost savings. Further, management expects these hurdles to linger in the quarters ahead. The company estimates mid single-digit increase of consolidated underlying COGS per hectoliter (on a constant-currency basis) in 2019.

Driven by the execution of the revitalization plan, Molson Coors expects 2020 to be a transition year. Consequently, it anticipates net sales to be flat-to-down low-single digits on a constant-currency basis. Further, EBITDA is likely to decline in mid-single digits in 2020 compared with underlying EBITDA (on a constant-currency basis) of $2.289 billion for the trailing 12 months ended Sep 30, 2019.

Factors Driving Growth

Molson Coors’ revitalization plan, aimed at achieving sustainable sales growth by improving efficiency and unlocking resources to reinvest in business opportunities, bodes well. Also, the company is witnessing significant benefits from the execution of its premiumization and cost-saving initiatives. With a view to accelerate portfolio premiumization, it has made significant additions to its above-premium brands’ portfolio.

In third-quarter 2019, Molson Coors’ above-premium brands continued to improve, with Peroni and Blue Moon growing rapidly in the United States. Further, Belgian Moon witnessed strong growth in Canada, registering 45% increase year to date. Additionally, for 2019 and beyond, the company is encouraged by its innovation pipeline and launch of various innovative brands across regions. Molson Coors is 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.

These apart, this Zacks Rank #3 (Hold) company has undertaken restructuring initiatives to reduce overhead costs and boost profitability. These initiatives include the closure of underperforming breweries, improve efficiencies in finance, administration and human resources, and reduce 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 and invest in brand building and innovation.

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.

3 Beverage Stocks to Consider

The Procter & Gamble Company PG has a long-term earnings growth rate of 7.5%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Coca-Cola European Partners plc CCEP presently has an expected long-term earnings growth rate of 8.9% and a Zacks Rank #2.

Luckin Coffee Inc. LK delivered positive earnings surprise of 13.5% in the last reported quarter. Currently, it carries a Zacks Rank #2.

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