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Stock Analyst Update

Pricing, Cost Savings Help Molson Coors Amid Challenges

We don't expect a big change to our fair value estimate for the narrow-moat firm.


We think narrow-moat  Molson Coors (TAP) second-quarter results indicate improving top-line trends, as net sales decreased just 0.2%, versus a mid-single-digit decline in the first quarter. While continued weakness in the U.S. and Canada led worldwide brand volumes to fall 2.4%, we were pleased to see volume recovery in the Europe (up 2.9%) and international (up 0.6%) segments. Despite these lower volumes, and subsequently deleveraged manufacturing costs, as well as further cost pressures (freight and aluminum), gross margin expanded 40 basis points to 42.6%. We continue to think the firm will be able to offset these headwinds through its efforts to take pricing (net sales per hectoliter grew 1.9%) and extract costs from its operations, allowing for modest margin expansion longer term. We may reassess our near-term outlook for volumes and margins in the U.S. and Canada, but we don't expect a big change to our $82 fair value estimate. Our outlook for low-single-digit revenue growth and operating margin averaging close to 17%, about a percent above 2017, over our forecast period also remains intact. Shares remain at a double-digit discount to our valuation, even with a 5% uptick after earnings, indicating an attractive entry point for patient investors.

Weak demand in the U.S., which accounts for roughly two thirds of sales, continued to weigh on results, with domestic sales-to-wholesalers volume declining 3.6%, driven by declines in the premium light segment, which includes core brands Coors Light and Miller Lite. However, we largely attribute this performance to industrywide challenges rather than a material shift in the company's competitive positioning, as evidenced by the mid-single-digit volume decline wide-moat AB InBev experienced in the U.S. in its second quarter. In this vein, we estimate domestic beer volumes contracted by 1% in 2017 and that beer's share relative to wine and spirits (based on supplier gross revenue) fell to 46% versus 50% a decade prior.

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Sonia Vora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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