Making TAP a Best Idea Short
We are moving Molson Coors higher on our shortlist to a best idea. Molson Coors is in a secular decline as domestic premium beers are losing too hard seltzer. What kept us previously from making Molson Coors the best idea was 1) the recovery in the on-premise channel, 2) positive earnings revisions, and 3) low sentiment. Recent data points have caused us to view the risk/reward more favorably to the short side.
Hard seltzer share gains
The core beer business remains in a secular decline that is accelerating from hard seltzer share gains. Hard seltzer grew 160% in 2020, reaching an 8.6% share of the beer category. Domestic premium light beers run the risk that a younger generation may stick with the alternative low-calorie alcoholic beverage for the rest of their lives. The following chart shows the share loss over the past decade for Anheuser Busch InBev and Molson Coors before the pandemic. The stay-at-home restrictions accelerated hard seltzer’s share gains. Unlike competitors Anheuser Busch InBev (BUD) and Constellation Brands (STZ), Molson Coors does not have a major brand with organic growth tailwinds like Michelob Ultra Modelo Especial, respectively. Domestic premiums had a 28% share of the beer category in 2020. The majority of hard seltzer producers have set goals of 100% growth in 2021. While that ambitious target does not seem feasible mathematically, so does the prospect of domestic premiums not losing share.
Molson Coors has focused on hard seltzer in 2021 to recapture share losses. The company is at risk for being the last major entrant to the increasingly crowded category. Year to date through February 21, off-premise sales of the Vizzy Hard Seltzer variety pack were $11M, making it the top-selling hard seltzer SKU for the company. Vizzy’s differentiation adds vitamins to a hard seltzer drink – an additive that has not successfully sold more of any other alcoholic beverage to our knowledge. The Coors variety pack had sales of $4M. In comparison, the hard seltzer category surpassed $4.1B in sales in 2020.
Innovation pipeline seeks outside help
The company’s innovation pipeline lags behind its competitors. Before the pandemic, Molson Coors focused its new product development on Saint Archer Gold, a direct competitor to Michelob Ultra. The company spent $20M+ in marketing, including a Super Bowl ad to kick off the launch, only to stop production by the summer. After failed attempts with its own new products, Molson Coors has recently made several distribution partnerships. The company announced an agreement with Yuengling to carry the brand in western states, with Coca-Cola to carry Topo Chico and La Colombe Coffee to distribute canned coffee. The distribution agreements come at lower margins than its own products but can be implemented quicker. Volume declines come with dis-synergies which distribution agreements help offset.
Lagging on-premise recovery
Molson Coors’ recovery from the pandemic will disappoint in its slow and muted pace. As COVID-19 vaccines increasingly become more prevalent among the population on-premise trends are improving. Several states have removed all restrictions on bars and restaurants, making it seem inevitable for the rest of the U.S. Compared to 2019, St. Patrick’s Day this year in the U.S. was down 20.9% for the industry in volumes, considerably better than the down by half beer volumes have been over the past year.
In Canada, Molson Coors’ second largest country, the vaccine rollout has lagged the U.S. considerably. The U.S. has recently been vaccinating an average of 2.3 million people per day, while a total of 2.5 million people has been vaccinated since December in Canada. The rollout is scheduled to pick up in April, and by the end of June, Canada expects 36.5 million doses, enough for every person to receive a single dose. Europe’s slow recovery is challenging the company more than any other market. 92% of the Q4 revenue decline was due to Europe.
Molson Coors recently had a cybersecurity incident that caused the company to take its systems offline. This has caused manufacturing to be shut down, and inevitably production volumes will be missing. On Friday, we had a call with a Molson Coors distributor that confirmed the product shortages.
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CLICK HERE for a replay of our call with a Molson Coors distributor. |
2021 lacks a recovery in profits
The company faces margin pressures that offset a rebound in revenues from comparing against the pandemic. Molson Coors is sourcing cans for the U.S. market from international markets at additional costs. Industry transportation costs continue to rise. Our estimates are lower than consensus expectations by 10%. It may take three years for the company to reach 2019 EPS levels again. Management has guided revenue to grow mid-single digits in 2021, but EBITDA is expected to be flat. The projected revenue growth is largely from the return of on-premise sales. Management said the margin headwinds are from increased marketing spend and “investing in further expanding our capabilities to drive productivity and efficiencies.” The necessary investments to introduce new products and shift supply and demand too hard seltzer likely require more margins than bondholders have the patience for. The margins headwinds from distributing third-party brands, increased can costs, increased marketing, and increased transportation costs set up 2021 without a recovery in profits.
Modest sentiment, but favorable risk/reward
Sentiment is still modest for Molson Coors. The shares are trading at 13x 2021 EPS expectations and 8.7x EBITDA. However, in the past month, shares have increased 11% while the S&P 500 is near flat. The company’s 3.5x leverage may be preventing management from making the necessary investments to address the market share losses. The combination of share losses and high leverage limits its valuation multiple. We see shares having 30%+ downside to the levels seen in the fall and 12% upside to $55 as attractively balanced. Our position monitor is below:
