Shares of Molson Coors (TAP) were under pressure after the company blamed declining demand in the U.S. and Canada and rising costs for transportation and aluminum for weaker quarterly results. Citing uncertainty as to whether demand trends can improve and the company can successfully deliver on its deleveraging and capital return commitments, Deutsche Bank analyst Steve Powers downgraded the stock to Hold. Meanwhile, his peer at Morgan Stanley reiterated his bullish beer revenue growth outlook and argued that the market is "materially mispricing" Constellation Brands' (STZ) medium-term revenue growth trajectory.
RESULTS: Molson Coors reported on Tuesday fourth quarter adjusted earnings per share of 84c and revenue of $2.42B, with consensus at 79c and $2.55B, respectively. The company also said worldwide brand volume of 92.1M hectoliters decreased 1.9% due to lower volume in the U.S. and Canada, partially offset by growth in its Europe and International segments. Financial volume of 96.6M hectoliters decreased 2.9%, global priority brand volume decreased 3.1%, and EBTIDA was up 3.9% from last year, Molson Coors added. For 2019, the company sees underlying cash flow of $1.4B, plus/minus 10%, capital spending of $700M, plus/minus 10%, consolidated underlying COGS per hectoliter in mid-single digit increase on a constant currency basis, and underlying effective tax rate in the range of 18%-22% range, which remains subject to additional definitive guidance from the U.S. government regarding the implementation of the tax reform legislation from 2017. The results also included a disclosure that the brewer overstated income for two previous years. Additionally, CEO Mark Hunter said during the company’s conference call that, "We'll also invest more than ever on digital and social channels to engage and recruit 21 to 34-year-old drinkers. Miller Lite, the original light beer with less carbs and calories, will further enhance its competitive messaging to drive greater consumer affinity and brand switching from its major competitor."
MOVING TO THE SIDELINES: In a post-earnings research note, Deutsche Bank's Powers downgraded Molson Coors to Hold from Buy and lowered his price target for the shares to $63 from $72. While the analyst acknowledged a potentially positive trade manifesting into mid-year to the extent that the company's demand trends continue to improve, and Molson Coors is able to successfully deliver on its deleveraging and capital return commitments, Powers pointed out that there remains uncertainty as to whether such positive outcomes can be achieved, and sees less obvious longer-term and limited strategic optionality.
INVESTORS MIGHT BE 'MISSING' OPPORTUNITY: Not as bearish on Molson Coors, BMO Capital analyst Amit Sharma reiterated an Outperform rating on the stock, while lowering his price target on the shares to $80 from $85. The analyst believes that investors who punished the stock by nearly 10% on Tuesday may be "missing an opportunity," and sees the company benefiting from the potential encouraging improvement in U.S. beer trends, return to market share gains, solid performance in Europe, and demonstrated ability to produce at least flat free cash flows even with depressed volumes.
PEER TRADING AT 'BARGAIN PRICE': Meanwhile, Morgan Stanley analyst Dara Mohsenian argued in a research note of his own that he believes the market is "materially mispricing" Constellation Brands medium-term revenue growth trajectory after a series of negative events has driven outsized recent stock underperformance. Reiterating his bullish beer revenue growth outlook, the analyst said he sees "material scope for multiple re-rating." Further, against growing market concern over the sustainability of outsized Constellation Brands’ beer revenue growth, including the underlying health of the Corona franchise and the trajectory of Premier in year 2, Mohsenian's new bottom-up and top-down analyses give him increased conviction in the achievability of his 8.25% three-year beer revenue CAGR. The analyst reiterated an Overweight rating on the stock and raised his price target on the shares to $233 from $207, adding that he views Constellation Brands as currently trading at a "bargain price."
PRICE ACTION: In morning trading, Molson Coors' stock is fractionally up to $59.27, while class A shares of Constellation Brands have gained about 2% to $175.80.
