Molson Coors Earnings: Premiumization Progress Encouraging, but Soft U.S. Volume Still a Concern

We expect to maintain our $67 fair value estimate for no-moat Molson Coors TAP and view shares as fairly valued trading at a 3% discount. While first-quarter organic revenue growth of 8% and adjusted EPS of $0.54 exceeded our estimates of 4.8% and $0.30 respectively, we are skeptical that strength in the seasonally small quarter will carry through the rest of the year. We believe top-line growth in the quarter was primarily driven by price increases implemented in 2022, which should not repeat in 2023 amid consumer belt-tightening. Additionally, soft volume (down 2.8%) in the core U.S. market does not bode well for volume trends in the coming quarters. On the profitability front, the 340-basis-point contraction in operating margins to 6.7% again supports our less sanguine view on the firm, as we believe higher marketing and distribution spending to support premium launches and a lack of pricing power in midrange and economy segments to offset high-single-digit input and manufacturing cost inflation both took a toll on profits. We don’t expect margin headwinds to subside in the near future. Our reservation about the brewer’s full-year prospects is consistent with management’s decision to maintain its modest full-year guidance calling for low-single-digit top-line and pretax profit growth.

We see signs of progress in premiumization, evidenced by volume share gain of Madri in the U.K. and inroads in beer adjacencies such as ready-to-drink spirits and hard lemonade under the Simply and Topo Chico brands licensed from Coke. That said, we continue to see Molson Coors facing an uphill battle to expand volume share (from low single digits) in premium beer where entrenched Constellation, AB InBev, and Boston Beer enjoy superior brand recognition and distributor support. Our concerns for headwinds in its core midrange and economy beer segments (still over 70% of total volume) were validated by a broad-based volume contraction (of 2.1%) across North America and Europe.