Brewing giant aims to counter slower beer sales with cannabis beverages

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After its big merger in 2005, this Canadian brewer became a leader in beer sales across North America.

In 2016 the company paid $12 billion to a Europe-based brewer to gain 100% control of a brewing joint venture. Cost savings from that deal helped earnings jump in the most recent quarter. However, in response to slower beer sales, the company has formed an alliance with a Canadian cannabis producer. Together, they aim to produce cannabis-infused non-alcoholic beverages. If these drinks become legal in 2019, as expected, this stock’s distribution network should give it a big marketing advantage.


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MOLSON COORS CANADA INC., (Toronto symbols TPX.A $95.99 and TPX.B $95.98; Shares outstanding: 215.8 million; Market cap: $20.7 billion; took its current form in 2005 when Canadian brewer Molson merged with U.S.-based Adolph Coors. Canadian investors received shares of Molson Coors Canada, which are equivalent to shares of Molson Coors Brewing (New York symbol TAP). Today, the merged company gets most of its sales from the U.S. (65%), followed by Europe (20%), Canada (13%) and other countries (2%).

In response to slowing beer sales, Molson has formed a new alliance with Canadian cannabis producer HEXO Corp. (Toronto symbol HEXO). Molson now owns 57.5% of that joint venture to develop cannabis-infused non-alcoholic beverages.

Ottawa will probably legalize the sale of foods and drinks containing cannabis in mid-2019. Molson’s marketing expertise and extensive distribution networks should give it an advantage over makers of other cannabis drinks.

The company’s sales fell 15.2%, from $4.2 billion in 2013 to $3.6 billion in 2015 (all amounts except share prices and market cap in U.S. dollars).

In October 2016, Molson Coors acquired the remaining 58% of the MillerCoors brewing joint venture from SABMiller for $12 billion. It now owns 100% of this business. MillerCoors was formed in 2008, when Molson and SABMiller entered an agreement to combine their U.S. brewing operations.

Thanks to that purchase, Molson’s sales improved to $4.9 billion in 2016, and soared to $11.0 billion in 2017.

Earnings fell from $3.16 a share (or a total of $581.3 million) in 2013 to $2.10 a share (or $391.3 million) in 2015. Earnings then jumped to $9.35 a share (or $2.0 billion) in 2016, but declined to $6.52 a share (or $1.4 billion) in 2017.

If you disregard restructuring costs and other unusual items, overall earnings for Molson Coors rose 1.5%, to $968.6 million in 2017 from $954.6 million in 2016. Due to more shares outstanding, earnings per share rose 1.1%, to $4.47 from $4.42.

In the third quarter of 2018, Molson Coors’ sales rose 1.8%, to $2.93 billion from $2.88 billion a year earlier. Unfavourable exchange rates offset higher selling prices and volumes. Without currency rates, sales improved 2.5%.

The company continues to cut costs following its acquisition of SABMiller’s MillerCoors stake. Excluding restructuring costs, earnings jumped 34.3%, to $1.84 a share (or a total of $398.5 million) from $1.37 (or $296.5 million).

Molson now expects merger savings and other cost cuts will save it a total of $700 million between 2017 and 2019. That’s more than its initial goal of $600 million. The savings will help the company pay down its long-term debt of $9.0 billion (as of September 30, 2018). That’s a high, but still manageable 63% of Molson’s market cap. The company also held cash of $750.1 million.

Molson will probably earn $4.98 a share in 2018. The class A shares trade at 12.1 times that estimate (13.2 times for the B shares). The $1.64 dividend yields 2.7% for the A shares (2.5% for the B shares).

Holders of Molson Coors’s class B shares have less voting power to elect directors than those holding class A shares. But the B shares are more liquid and get the same dividend.

OUR RECOMMENDATION: Molson Coors B is a buy.


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