Molson Coors stock looks interesting after this week's earnings announcement. The move to spin U.S. operations into a joint venture with SABMiller is paying off, and could exceed management forecasts.
Let's look at the numbers first: Profit was 95 cents (U.S.) a share, a little less than last year but a little better than analysts expected.
But the most interesting figures belonged to MillerCoors, the joint venture. Earnings for that unit were up 28 per cent. Volumes were a little lower and production costs were up, but higher selling prices more than compensated for that. In other words, beer swillers are happy to pay more for the company's brews, notably Coors Light and Miller Lite, the flagship brands. The joint venture, of which Molson Coors owns 42 per cent, has almost a third of the U.S. market.
This was the first full quarter of operations for the joint venture, and it's starting to look like a sleeper hit. The owners are accelerating investments that are supposed to reap $500-million in costs savings six months earlier than initial forecasts. And that half billion of beer money might be a little conservative. Let's recall that after Molson and Coors merged, the new entity was more efficient than management predicted, as the bottom line showed.
Molson Coors Brewing
Analysts also like Miller Coors' portfolio of brands. For instance, the top considerations for light beer drinkers are taste and refreshment, according to Bank of Montreal's investment arm. So Miller Lite will be pitched on taste while Coors Light will be marketed as refreshing. These may seem like microdetails, but they're not. Beer is not so much a production business as a marketing business.
Another positive: While Molson Coors was on a roll until the second quarter of this year, when rapidly rising transportation and packaging costs finally caught up to investors and hammered the stock, costs should moderate as commodity prices ease.
Barley costs were up almost 30 per cent annualized in the third quarter, but they were lower than in the second quarter. Diesel fuel is down by a fifth since it peaked in the summer. Aluminum is also lower.
Meanwhile, the company is raising prices (in the U.S. at least), meaning the bottom line benefits twofold through lower costs and higher prices.
Another potential catalyst is the takeover of Anheuser-Busch by InBev. Bud Light is the No. 1 selling beer in America, with 19 per cent of the market. Coors Light has about 8 per cent, putting it in fourth spot. Any missteps arising from the takeover could cause Bud to stumble. It's an outlier of course, but even a single point of market share in beer land is worth tens of millions in profits.
Finally, there is the ever-present possibility of mergers and acquisitions. Molson Coors has taken a 5-per-cent stake in Australian brewer Foster's, which is undertaking a strategic review. Analysts figure the stake opens the door for some kind of partnership that would give Molson Coors access to the profitable Aussie beer market.
But it's not all roses, of course. The Canadian market is tough, with lots of competition, but there are signs of abatement here.
What this all adds up to is the possibility of multiple expansion. Molson Coors is quoted at under 12 times forward earnings estimates. Some analysts think 15 or even 16 times is a more appropriate multiple. The average is about 14, and just using that yields a stock price of $53. The stock is $43 today, yielding just about 2 per cent.
You may take some comfort in the fact that this story doesn't rely on growth forecasts. In fact, few analysts see much volume growth over the next few years. Instead, they see sharp pencils and accretive investments to improve productivity.
Belly up if you like the sound of it.
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