Molson Coors' Cost Savings Need Time to Materialize
Top-line gains will be feasible as a result of growth in the narrow-moat company’s above-premium offerings, share gains in the premium light segment, and improved branding in the economy segment.
We reiterate our $91 fair value estimate for narrow-moat Molson Coors (TAP) following its investor meeting, during which the firm reiterated several of its multiyear financial goals, including improving free cash flows, paying down debt, and delivering $550 million in cost savings by 2019, largely stemming from the MillerCoors acquisition (closed in October 2016). We remain comfortable with our long-term outlook, which forecasts sales growth averaging below 2% between 2018 and 2021 and operating margin averaging slightly above 17% over the next five years (comparable to the average margin between 2012 and 2015, prior to the MillerCoors acquisition). We continue to think that top-line gains will be feasible as a result of growth in the company’s above-premium offerings, share gains in the premium light segment, and improved branding in the economy segment. Shares tumbled over 6% following the news and now appear to be fairly valued.
During the meeting, Molson Coors provided additional detail on the sources of its cost savings, with 40% of savings expected to stem from North American supply chain efficiencies, 40% from improved procurement, and the remainder related to reduced overhead costs. We appreciate that these savings are not coming at the expense of investments behind the firm’s brands, which we believe will be crucial in driving sales of its core premium light offerings in the face of a sluggish domestic beer market. Beyond updating its financial and strategic outlook, we also note that Molson Coors recently signed a 10-year agreement with Heineken to import and distribute the Sol brand in the U.S. We think this deal is strategically sound, as it will provide the company with exposure to the fast-growing Mexican import category (around 8% of overall U.S. beer market); domestic volumes of imported beers grew nearly 7% in 2016, compared with the overall beer category, which remained roughly flat, and should facilitate more robust sales performance longer term.
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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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