Cannabis-infused drinks could help grow Molson’s slowing sales

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This major beer producer has formed a joint venture to create and market cannabis-infused non-alcoholic beverages. While it saw earnings rise in the recent quarter, it’s also counting on its cannabis deal to bolster future revenue and profits.


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MOLSON COORS CANADA INC., (Toronto symbols TPX.A $84.14 and TPX.B $81.00; Shares outstanding: 216.3 million; Market cap: $17.5 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).

In October 2016, Molson Coors acquired the remaining 58% of the MillerCoors brewing joint venture from SABMiller for $12 billion (all amounts except share price and market cap in U.S. dollars). 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.

Today, the company gets most of its sales from the U.S. (71%), followed by Europe (16%), Canada (11%) 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.

As part of the deal, Molson received warrants to purchase HEXO shares. In the quarter ended March 31, 2019, it recorded an unrealized gain of $23 million on those warrants.

If you exclude that gain and other unusual items, Molson’s earnings in the quarter rose 8.1%, to $112.7 million, or $0.52 a share. A year earlier, it earned $104.3 million, or $0.48.

Sales in the quarter fell 1.2%, to $2.30 billion from $2.33 billion. If you disregard currency rates, sales improved 0.6%, as higher selling prices offset lower volumes.

The company continues to cut costs following the MillerCoors purchase.

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 company also expects to cut a further $450 million from its costs between 2020 and 2022.

Those savings will help Molson pay down its long-term debt of $8.5 billion (as of March 31, 2019). That’s a high, but still manageable 65% of its market cap. The company also held cash of $234.4 million.

Molson will probably earn $4.72 a share in 2019. The class A shares trade at 13.2 times that estimate (12.7 times for the B shares). The $1.64 dividend yields 2.6% for the A shares (2.7% 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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