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Morningstar | Molson Coors' Efforts to Restore Top-Line Growth and Extract Costs Reflected in 3Q Results

Narrow-moat Molson Coors posted improving sales and margin trends in the third quarter, with constant-currency net sales expanding 2.5%, marking a recovery from the declines in the first two quarters, and adjusted EBITDA margin expanding 190 basis points to nearly 26%. Above-premium brands grew around 3.6% in the quarter and now contribute around 21% of the firm's portfolio versus 20% last year. We think these results show that the firm is making progress in its strategic initiatives, which include stabilizing volume in the United States (two thirds of sales), driving portfolio premiumization across its geographies, and increasing efficiency across its supply chain.

While we don't expect material sales acceleration longer term (we forecast low-single-digit consolidated revenue growth with roughly flat average volume in the U.S.) as the domestic beer market remains tepid, we've long been constructive on the firm's opportunities for bottom-line expansion as it captures additional synergies from the MillerCoors acquisition and extracts further costs from its operations. As such, we expect average operating margin north of 16% over our forecast, about 100 basis points above 2017. We don't anticipate a significant change to our $80 fair value estimate, and we still think the current price provides an attractive entry point, despite a high-single-digit percentage uptick after the earnings announcement.

Results in the U.S. largely aligned with our full-year expectations, with a 3% decrease in brand volume partly offset by a 1% increase in net sales per hectoliter. This improvement in pricing, coupled with cost savings and a one-time benefit from the resolution of a vendor dispute (which accounted for nearly half of the segment's 8% decline in marketing, general, and administrative expenses), helped offset ongoing input cost headwinds (primarily transportation and aluminum), allowing U.S. underlying EBITDA margin to expand nearly 200 basis points to 27%.

Performance outside North America was also solid, with constant-currency net sales in the Europe (20% of sales) and international (2% of sales) segments each increasing around 4%. According to management, the firm's above-premium brands (such as Blue Moon) grew at high-single-digit rates in Europe during the quarter, helping net sales per hectoliter grow more than 2% in local currency.

For further detail on our outlook for the U.S. beer market, including how we think larger brewers like Molson Coors will respond to premiumization trends and craft beer growth, please refer to our September report, "Boston Beer's Improving Prospects Don't Justify Frothy Valuation."