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Molson Coors (TAP) Prospects Bleak: Time to Sell?


Molson Coors Brewing Company TAP has been in troubled waters for quite some time now as evident from its dismal earnings and sales surprise history. Lower volumes and significant currency headwinds amid difficult economy and competitive pressure have been the other major dampeners.

If we analyze the share price performance of the company over the last six months, we note that the stock has underperformed both the industry and the broader Consumer Staples sector in the said time frame. The stock has declined 6.3% against the industry’s gain of 10.4%. Meanwhile, the sector, of which they are part of, has improved 7.3%.

Let’s now take a closer look at the challenges that the company is grappling with rendering it a Zacks Rank #5 (Strong Sell).

Weak Earnings and Sales Trend

Molson Coors does not have a good track record of earnings. The company has reported negative earnings surprises in five of the trailing seven quarters. Sales have also lagged the Zacks Consensus Estimate in 10 out the last 14 quarters.

Downward Estimate Revision

The company has also seen significant downward estimate revision following the lower-than-expected second-quarter 2017 results. The Zacks Consensus Estimate is going down 21.8% to $4.35 in 2017 and down 20.2% to $4.77 in 2018 in the past seven days.

Continued Decline in Volumes

Molson Coors has been struggling with weak sales volume trends in U.S., Canada and Europe for the last few years. Though the acquisition of the Miller global brands has boosted sales in Europe and international regions, volume continued to decline in Canada.

Among the core brands, while Miller Lite and Staropramen brands witnessed volume growth, Carling volume in Europe decreased by 2.6% during second-quarter 2017 and Coors Light global brand volume decreased 2.2% due to lower brand volume in the U.S. and Canada, slightly offset by strong growth in Europe and International. The declines in Canada are attributed to the overall weak industry performance along with the ongoing competitive pressure in Quebec and Ontario and a continued shift in consumer preference to value brands in the West. Molson Canadian volume in Canada also decreased 5.5% in the quarter due to overall weak industry conditions and competitive pressures in the West and Ontario.

Since 2001, the premium beer segment in Canada has been gradually losing volume to the above premium and value segments. Aging population, a stalled economy and strong competition from other alcohol beverages led to the decline. The termination of the Modelo brands agreement in Canada in Feb 2014 also resulted in volume decline. In the U.S., the company suffered declines due to reduced labor participation rates and lower consumer confidence.

Though economic conditions improved slightly, competition from outside the beer category persisted. In Europe, the company witnessed volume declines since 2013, as volumes continued to shift from the higher margin on-premise channel to the lower margin off-premise channel. The loss of the Modelo brands in the U.K. in 2015 is also contributing to lower volume.

Weak EBITDA Margins

CNBC had pointed weak EBITDA guidance during investors meeting in June. Per reports, the company now expects underlying EBITDA margins to grow 30–60 bps per year for the next three to four years. This is weaker than the company’s previous expectation of 50–60 bps per year for the next three years, as announced during earnings conference.

Foreign Currency Headwinds

With a major portion of its revenues coming from outside the U.S., the company’s profits are being affected by currency headwinds due to the recent weakening of many foreign currencies against the U.S. dollar. Unfavorable foreign currency translations impacted sales by more than $180 million in 2016 and will continue to negatively impact the company’s profits in the near term.

Molson Coors Brewing Company Price, Consensus and EPS Surprise

Molson Coors Brewing Company Price, Consensus and EPS Surprise | Molson Coors Brewing Company Quote

Bottom Line

Molson Coors’ management is leaving no stone unturned to bring the stock back on growth trajectory. The company is focusing on increasing its marketing for beers and targeting above-premium brands to help grow its market share.

Further, the company’s recent agreements with Heineken and Hornell Brewing are in line with Molson Coors’ current business expansion initiatives and are expected to enhance its portfolio. However, whether these ongoing initiatives will be able to spark a turnaround in the company’s performance is a wait-and-watch story.

Stocks to Consider

Investors interested in the same space may consider some better-ranked stocks like Inter Parfums, Inc. IPAR, Nu Skin Enterprises, Inc. NUS and Constellation Brands Inc. STZ, all are carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inter Parfums has an average positive earnings surprise of 15.6% over the last four quarters. It has a long-term earnings growth rate of 12.3%.

Nu Skin has an average positive earnings surprise of 10.8% over the last four quarters. It has a long-term earnings growth rate of 8.7%.

Constellation Brands has an average positive earnings surprise of 11.7% over the last four quarters. It has a long-term earnings growth rate of 18.2%.

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