Innovative Expansion And Premiumization Drive Growth Amid Analysts' Pessimism And Inflation Concerns

Key Takeaways

• Management's bullish stance, through accelerated share repurchases, hints at expected EPS growth, emphasizing premiumization and global market expansion for revenue boosts.
  
• Focused investment in innovative 'beyond beer' categories and strategic market entries, like Romania and the U.K., indicate a pursuit of diverse growth avenues and increased market share.
  
• Strategic decisions and market exits, alongside inflationary pressures and substantial investments in modernization, present both short-term financial risks and opportunities for long-term efficiency gains.

Catalysts

Manufactures, markets, and sells beer and other malt beverage products under various brands in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.

• Accelerated share repurchases indicate a bullish outlook by management on Molson Coors Beverage Company, reflecting the potential for earnings per share (EPS) growth due to reduced share count.
  
• The emphasis on premiumization and growth in EMEA (Europe, Middle East, and Africa) and APAC (Asia Pacific) regions through favorable net pricing and brand volume growth suggests an opportunity for significant revenue and net margin expansion.
  
• Strategic expansion and investment in high-growth markets, as illustrated by the successful launch of a new core power brand in Romania and strong performance of brands like Madri in the U.K., pointing to potential for increased market share and revenue in these regions.
  
• The company’s focus on driving efficiencies and cost savings within its operations, alongside a strong performance in generating underlying free cash flow, signals a robust strategy to bolster net margins.
  
• Molson Coors’ approach to innovation and scale in the 'beyond beer' category, including investments in brands like Simply Spiked and Peroni, showcases a forward-thinking strategy aimed at capturing new growth avenues, enhancing brand portfolio diversity, and ultimately contributing to top-line growth.

Assumptions

• Analysts are assuming Molson Coors Beverage's revenue will decrease by -0.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.8% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $5.75) by about August 2027, down from $1.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $986 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2027 earnings, up from 9.5x today. This future PE is lower than the current PE for the US Beverage industry at 23.5x.
• Analysts expect the number of shares outstanding to decline by 4.17% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.23%, as per the Simply Wall St company report.

Risks

• The deliberate decision to increase U.S. inventories in anticipation of labor strikes and to maintain supply during peak season could result in overstocking if demand projections are not met accurately, potentially impacting revenue negatively due to excess inventory carrying costs.
  
• The ongoing exit from the Pabst contract brewing volume, accelerating from the first quarter and reducing financial volume by over 900,000 hectoliters, represents a significant decline in volume that could negatively affect net sales revenue.
  
• A near-term headwind to total volume and net sales revenue from the Pabst contract termination, despite possible mix benefits and premiumization strategies in other markets, could impact consolidated net sales revenue and profitability.
  
• Expected inflationary pressures, including increased COGS (Cost of Goods Sold) per hectoliter, driven by the Americas business and ongoing volume deleverage partly due to reduced Pabst contract brewing volume, might reduce net margins.
  
• The planned significant investment in modernizing facilities, such as the multiyear, multimillion-dollar modernization of the Golden Colorado Brewery, while aimed at long-term efficiency gains, poses a risk of short to medium-term cash flow constraints and increased operational costs, potentially impacting earnings if projected efficiencies and savings do not materialize as planned.

Valuation

• The analysts have a consensus price target of $60.76 for Molson Coors Beverage based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $47.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.9 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $53.53, the analyst's price target of $60.76 is 11.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.