Molson Coors: Battle To Expand in Premium Aisle Likely To Prove a Challenge; Shares Fairly Valued

Despite owning well-known brands including Miller, Coors, and Blue Moon in North America and Carling in the U.K., we view Molson Coors TAP as a laggard in the shifting beer landscape. Legacy brands’ volume concentration in the secularly challenged midrange and economy beer segments prevents the firm from monetizing high brand awareness to extract economic profits. Meanwhile, the lack of compelling premium brands constrains its ability to ride the premiumization trend and foster a lasting competitive edge. We don’t believe the firm possesses brand-driven intangible assets or any cost advantage to earn an economic moat.

We are nudging up our fair value estimate to $68 (from $67) on a time value benefit, which implies a 2024 enterprise value/adjusted EBITDA multiple of 9 times. Our reservation about its premium trajectory, coupled with volume headwinds in its core beer segments, has led us to forecast annual sales growth of just 1.5% over the next 10 years, driven by price increases on par with inflation alongside a 1% volume decline, which aligns with our no-moat rating. In addition, we have modeled operating margins to expand 350 basis points to 13.2% by the end of the 10-year period, relative to 2022, driven entirely by its gross margin widening to 38.3% in 2032 over the same period (from 34.2%) on better capacity utilization and cost savings. Anticipating significant brand and marketing investments required to bolster the brewer’s position in the premium sphere, we have modeled our expectation for advertising and marketing expenses as a percent of sales at 10.5%, versus a lower-than-average 9.3% in 2022.

We view Molson Coors’ shares as fairly valued, trading at a 4% discount to our intrinsic valuation. Given the lack of an advantaged long-term competitive edge reflected in our no-moat rating and persistent volume headwinds, we’d demand a wider margin of safety before building a position in this name.