“Let’s take a look at the other stories we’re following on the Closing Bell ticker tonight. Brewer Molson Coors reported its third quarter profit was up 37%. The company made $235 million due to higher selling prices and cost cuts. Well, that beat wall street expectations. Total global beer volume was down by nearly 3% as consumers did cut back on spending. The stock today down 8.5%.” — CNBC’s The Closing Bell 11/4/2009
Molson Coors Brewing Company (TAP) was unable to lift investors’ spirits after reporting better than expected profits in the third quarter. Analysts were expecting the Denver-based brewer and distributor to post EPS of $.98 instead the company reported a seemingly impressive $1.14 largely thanks to price increases and tax benefits. According to an analyst at UBS (UBS), the company would have earned about 97 cents per share were it not for the lower tax liability. The trouble from investors’ perspective was revenue fell 7.3% on declining volume, and management refrained from offering any encouragement to the market that volume would rebound.
The conventional wisdom has long held that makers of alcohol were fairly recession resistant as people have been known to drink whether they are celebrating or sulking. However, that theory continues to be challenged as the beginnings of global recovery has not led to improved sales in the industry, and revenue certainly suffered over in the last year. Beer is after all a discretionary item, albeit generally a cheap one. Molson Coors is seeing volumes in some of its core brands like Coors Light dip and “value” brands such as Keystone Light are taking a larger portion of the sales. These low cost substitutes contribute a lower margin to the company’s bottom line. Consumers, at least when it comes to beer, continue to trade down even as the economy has begun to grow.
In order to combat the flagging sales, Molson Coors will build on its marketing efforts particularly in the U.S. and Canadian markets. The company’s relatively small international division was a bright spot in the results as it gained nearly 28% over last year, but that paled in comparison to the single digit declines in its primary markets. The other positive from the release was that the company revised its cost savings estimate upwards to $270 million by the end of 2009 from the previous estimate of $225 million.
Molson Coors endured a tough sell off of more than 8% on Wednesday following the results. We have an Overvalued stance on the shares, and we are unlikely to upgrade the stock following the lackluster earnings report. Sure, the bottom-line earnings were better than expected but much of that was due to tax benefits. TAP’s management continues to believe that global beer sales will be weak going forward, so we would avoid these shares and instead look for a company with more attractive fundamentals.
