Shares of TAP (Molson Coors Brewing Company) may get a lift with the news that the NHL owners and players have reached a tentative agreement on a CBA framework. With short interest at 2.4 days to cover, it wouldn’t be a surprise to see some weak shorts cover on news that represents a volume benefit to the company’s operations in Canada. Further, the stock is cheap – 10.8x P/E and 9.1x FCF - making it one of the least expensive stocks across our consumer staples coverage.
However, it is inexpensive for some very good fundamental reasons, as outlined below. While we aren’t a fan of shorting cheap stocks, neither are we fans of buying cheap simply because it is cheap – we prefer to wait for the right signals, so we would caution investors not to get caught offside if TAP sees some short covering. Comfortable that we have gotten Hedgeye off to a good start in terms of weekly hockey references, we expand on our view on the fundamental issues facing Molson Coors below.
Volume weakness in Canada as a result of the NHL’s protracted labor dispute is only one of the issues facing the company at this point. In the company’s most recently reported quarter (Q3 2012, back in November) we saw a decline in consumer demand across multiple geographies. In the United States, for example, distributor inventories are simply too high as the company has shipped ahead of consumption, a condition that will have to correct itself beginning in Q4. In the company’s newly acquired Central European business, weak economic conditions drove a 1.5% volume decline in the quarter that appears to have only accelerated toward the end of the quarter and through the start of Q4. Further, the business, when acquired, had a very healthy margin structure that we view as likely unsustainable. The United Kingdom has been a basket case as a beer market for a time as a weak economy, rising taxation, a smoking ban in pubs and competition from other alcoholic beverages (cider, for example) have hurt beer trends. While estimates have come down to reflect these factors, we believe that further negative revisions to consensus estimates ($3.97 in ’13) are likely.
One last point we need to mention - Molson Coors CEO Peter Swinburn mentioned back in November that Molson Coors would be seeking financial compensation from the NHL to cover the impact the lockout has had on the company. The validity and potential amount of that type of claim is unknown at this point, but it is certainly clear to us that Molson Coors lost a good chunk of an important cold weather driver of beer sales in Canada.
Have a good week.
Robert Campagnino
Managing Director
HEDGEYE RISK MANAGEMENT, LLC
