Why You Shouldn't Tap Into Molson Coors (TAP) Right Now
Zacks Investment Research | Sep 15, 2017 04:43AM ET
Despite of the harmful effects, alcohol stocks have been performing quite well of late. The rise in demand for flavored whisky, premium tequilas and spirits seems to be doing the trick for the industry. In fact, in the alcohol market, the spirits segment has been gaining momentum, accounting for about 36% of the total alcohol market.
However, Molson Coors Brewing Company (NYSE:TAP) is one stock in the industry that has been in the red zone for quite some time now as can be seen from its dismal earnings and sales surprise history. Disappointing volumes, weak margins and significant currency headwinds amid difficult economy and competitive pressure have been the major deterrents.
Notably, Molson Coors is making efforts 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, looking at the headwinds and the company’s Zacks Rank #5 (Strong Sell), it seems that these initiatives are yet to bear fruits.
If we analyze the share price performance of the company on a year-to-date basis, we note that the stock hasunderperformed both the Consumer Staples sector in the said time frame. The stock has declined nearly 10% against the industry’s gain of 22.3%. 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, which makes it a no-no for investors.
Weak Earnings and Sales History
Molson Coors has a dismal 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.
Molson Coors posted weaker-than-expected earnings in second-quarter 2017, while revenues marginally beat the Zacks Consensus Estimate. While earnings increased 3.1% from the prior-year figure driven by increased brand volume, higher net pricing, positive sales mix, cost savings and lower marketing spending, sales dipped 0.6% year over year due to a 0.2% fall in net sales per hectoliter. Currency also had a negative impact of $57.3 million on overall sales.
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The company has also seen significant downward estimate revision following the lower-than-expected second-quarter 2017 results. The Zacks Consensus Estimate has gone down 33.5% to $4.34 in 2017 and down 29.8% to $4.78 in 2018 in the past 60 days.
Continued Decline in Volumes
Molson Coors has been struggling with weak sales volume trends in the United States, Canada and Europe for the last few years. Though the acquisition of the Miller global brands (in October 2016) 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 United States and Canada, slightly offset by strong growth in Europe and International.
The volume 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 February 2014 also resulted in volume decline. In the United States, 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 too, the company has been witnessing volume declines since 2013 due to a 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 volumes.
Foreign Currency Headwinds
The company is also plagued 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 deter the company’s profits in the near term.
Stocks to Consider
Investors interested in the same space may consider some better-ranked stocks like Boston Beer Company Inc. (NYSE:SAM) , Nu Skin Enterprises, Inc. (NYSE:NUS) and Constellation Brands Inc. (NYSE:STZ) . While Boston Beer holds a Zacks Rank #1 (Strong Buy), Nu Skin and Constellation Brands carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here .
Boston Beer has reported an average positive earnings surprise of 49.9% over the last four quarters.
Nu Skin has delivered 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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