2023-09-12 10:07:14 ET
Summary
- Molson Coors Beverage reported strong financial results in 2Q23, driven by increased marketing spend and momentum in core beer brands.
- The company plans to allocate an additional $100 million for marketing expenditures in 2H to bolster core beer brands and prioritize digital marketing.
- The termination of the Pabst contract is expected to enhance overall operational efficiency and free up production capacity for future growth.
Summary
I recommend a Buy rating for Molson Coors Beverage ( TAP ) due to its strong financial results in 2Q23, driven by increased marketing spend to promote TAP's core beer brands and the notable momentum in these brands. Additionally, the winding down of Pabst's contract is expected to enhance overall operational efficiency.
Investment Thesis
TAP has reported positive financial results for 2Q23. Despite a slight underperformance in revenue compared to expectations, the company achieved a healthy bottom line beat. This was attributed to several factors, including the effective management of fixed costs and a reduction in the costs of goods sold ((COGS)) and marketing, general, and administrative expenses (MG&A). In terms of overall revenue, TAP saw a growth of 11.8%. This growth was primarily driven by a 9.3% increase in price/mix and a 2.8% rise in financial volumes. However, it's worth noting that TAP's financial volume in the Americas increased by only 5%, while volumes in the EMEA (Europe, Middle East, and Africa) and Asia-Pacific ((APAC)) regions experienced a decline of 3%. Despite facing challenges related to cost inflation during the quarter, the situation was not as dire as initially anticipated. This resulted in a significant expansion of gross margins, which increased by approximately 180 basis points YoY to reach 39.2%. Additionally, the company benefited from operating leverage driven by its strong revenue performance. As a result of these factors, TAP exceeded earnings per share ((EPS)) expectations by reporting an EPS of $1.78, surpassing the consensus estimate of $1.62.
Increase Marketing Spend to Grow TAP's Core Beer Brands
TAP has outlined plans to allocate an additional $100 million earmarked for marketing expenditures in 2H to bolster its core beer brands, which include Miller Lite, Coors Light, and Coors Banquet. This allocation will prioritize digital marketing over traditional media, a significant shift from the pre-Covid era when only around 10% of marketing funds were directed towards digital initiatives. Furthermore, management has indicated that a portion of the increased marketing budget will be invested in supporting rapidly growing brands like Madri and Simply Spiked. Simultaneously, efforts will be made to reinforce Molson Coors' presence in markets where the company has historically been underrepresented, particularly in the convenience store (c-store) channel, which is currently dominated by ABI (Anheuser-Busch InBev).
In my opinion, it's worth highlighting that the company has maintained a consistent strategy of increasing marketing expenditures, as clearly indicated by the fourth pillar of its Revitalization Plan. The exact amount allocated from one year to the next depends on various factors, including timing variations and the company's innovation calendar. TAP has emphasized its intention to focus on nurturing the growth trajectories of its fastest-growing innovations, including Madri, Simply Spiked, and Blue Moon. Additionally, the company intends to explore commercial opportunities, such as expanding its presence in the on-premises channel by adding 12,000 incremental tap handles in 2Q and implementing shopper marketing insights in the c-store channel. Looking ahead, I strongly believe these strategic marketing investments are expected to play a pivotal role in driving future revenue growth for TAP.
Strong Momentum in TAP's Core Beer Brand
It's evident that the strong performance of TAP's 2Q result proves that its core beer brands have remained resilient, even in the face of aggressive pricing and promotional tactics from ABI. This unwavering momentum suggests that TAP's market share gains are becoming increasingly robust, which is certainly an encouraging sign for the company's future revenue growth. Based on the current strength and the ongoing momentum, I believe these positive trends persisting without heavy reliance on pricing and promotions is well-founded. I believe that TAP's core brands' resilience will continue to drive revenue growth for TAP in the quarters to come.
Termination of Pabst Contract Will Enhance Productivity
In my view, the termination of TAP's Pabst contract next year, which is starting to be unwound in 4Q23, marks a significant step in simplifying TAP's network operations. This move is particularly notable due to the extensive range of Pabst brands that TAP has been producing. It's important to highlight that the Pabst contract has accounted for a significant volume of several million barrels for TAP. While there is an immediate impact on Q4 financial volumes, this decision is expected to have several positive effects in the coming years. First and foremost, it should free up production capacity as it heads into FY24. Additionally, it's likely to enhance TAP's long-term margin profile, which is a promising development. Looking further down the road, TAP's intention to replace the lost volume from the Pabst contract with its own brands is a strategic move that I believe will lead to improved overall efficiencies. This will make it easier for TAP to manage its inventory and supply levels effectively, ensuring smoother operations and potentially contributing to revenue growth in the future.
Valuation
Own calculation
In my model, I have incorporated optimistic future revenue and margin assumptions, which are higher than consensus expectations, considering TAP's strong performance in 2Q. This outlook is further supported by TAP's increased efforts to promote the growth of its core beer brands through strategic marketing expenditures, the remarkable momentum observed in TAP's core beer brand, and the company's strategies aimed at enhancing overall operational efficiency by winding down contracts with Pabst.
Comparing TAP to its peers, such as Carlsberg (CABGY) (CABJF) (CABHF), Ambev (ABEV), Brown-Forman (BF.A) (BF.B), Boston Beer (SAM), Duckhorn Portfolio (NAPA), Constellation Brands (STZ), their median forward EV/EBITDA is 14x, which is a premium to TAP's valuation. I expect the valuation premium to remain as TAP has a lower margin profile. Also, this is in line with historical relative valuation. Based on my model, I have a target share price of $84.55, which implies a substantial upside potential of 33%. Consequently, I recommend a buy rating for TAP as it appears to offer an attractive investment opportunity at its current valuation.
Risk
TAP's plan will either successfully achieve management's intended transformation, leading to sustained improvements in TAP's beer volume and market share, or it may not. In the latter scenario, if TAP's strategy fails to connect with consumers, the desired transformation may not materialize as expected. In addition, the shift in market share trends for domestic premium light beer may revert. There's also a risk of heightened competition in this segment that could negatively impact pricing and margins.
Conclusion
TAP 2Q financial results, despite a minor revenue underperformance, are marked by a robust bottom-line beat. This achievement is credited to effective cost management, including reductions in COGS and MG&A expenses. Looking forward, TAP's allocation of marketing funds to strengthen core beer brands, the strong performance of its core brands and the winding down of the Pabst contract indicate resilience and future growth potential. These actions are expected to enhance productivity and support future revenue growth, making TAP's outlook promising. I recommend a buy rating for TAP.
For further details see:
Molson Coors: TAP's Resilience And Revenue Expansion Plan