By Tomi Kilgore, MarketWatch
Shares of Molson Coors Brewing Co. dropped toward their lowest close in over 5 years Monday after a double downgrade at Bank of America Merrill Lynch, which said the beer brewer will likely have to spend more and make less to stem the decline in its beer brands.
Analyst Bryan Spillane cut his rating two notches to a rare underperform rating from buy, and slashed his stock-price target by 29% to $50. That ties Spillane with Jefferies’ Kevin Grundy for having the most bearish calls on Wall Street for Molson Coors, as Grundy also has a sell rating and $50 price target, according to FactSet.
The stock (NYS:TAP) sank as much as 3.7% in intraday trading, before paring losses to close down 1.3%. The intraday low of $52.36 was the lowest price seen during regular-session hours since lowest close since Feb. 10, 2014. The stock has now shed more than 4% this year, while shares of its beer-brewing peers have posted soared, and has lost more than half its value since closing at a record $111.25 in October 2016.
Spillane said as consumers’ preferences have evolved toward hard seltzers, wine and spirits, growth in the beer industry has become more expensive. Therefore, many companies have had to “step back profit ambitions” in order to rekindle growth.
He said his research indicates Molson Coors’ rivals Corona-parent Constellation Brands Inc. (NYS:STZ) , Samuel Adams-brewer Boston Beer Co. Inc. (NYS:SAM) and of Budweiser-parent Anheuser-Busch InBev S.A. (NYS:BUD) have all increased advertising spending as a percentage of sales.
Meanwhile, Spillane said the most recent syndicated industry data from Nielsen suggests Molson Coors’ core brands, which include Coors Light, Miller High Life and Blue Moon, have continued to lose market share this year, indicating the company has been “underinvesting” in its brands versus the industry over the past three years.
“As a result, we think there is heightened potential that management will take the step to ‘rebase’ earnings at some point over the next year in order to boost funding for product and marketing investments,” Spillane wrote in a note to clients. “In our view, this would be a healthy action for the business and sustainability of returns over time, but it would likely cause the stock to underperform in the near term until investment has time to produce results.”
Molson Coors isn’t just losing to seltzers, wine and spirits, its falling behind within the beer industry, Spillane said. As consumers have chosen quality over quantity, they have “traded up” to higher-end brands, of which the company only has about 8% exposure in the U.S.
The company is scheduled to report second-quarter results on July 31, before the market opens. Spillane has cut his full-year 2019 earnings-per-share estimate to $4.51 from $4.58 and his 2020 estimate to $4.51 from $4.66, compared with the FactSet consensus of $4.69 for 2019 and $4.79 for 2020.
He estimates the company will have to invest an additional $100 million to match the peer group average in spending as a percentage of sales.
Five Ways the Beer Industry Is Trying to Bounce Back
Americans are losing their taste for beer, with consumption sinking about 8.5% between 2010 and 2017. WSJ's Spencer Macnaughton takes a look at how U.S. beer makers are fighting back for a share of the market. Photo: Bud Light
Spillane acknowledged that the company has taken a “positive step” by hiring a new chief marketing officer--Michelle St. Jacques--who appears to have made a good impression with wholesalers.
“This is a constructive step,” he wrote. “That said, we see [Molson Coors] in a position similar to many domestic food and beverage peers over the past 2 years who have had to step back maring ambitions near term to fund sales growth acceleration.”
Shares of Molson Coors have now lost 4.4% year to date, while Constellation Brands have climbed 23.5%, Boston Beer have soared 60.7% and Anheuser-Busch have hiked up 34.6%. The S&P 500 index has rallied 20.2% this year.