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While the markets generally liked Molson Coors' (NYSE: TAP ) higher profits in the second quarter, sending shares 6% higher as acquisitions helped bump up results, the chilly reception the brewer got in Canada for its top-selling Coors Light brand hints at the stock possibly being sent into a deep freeze later on this year.
Its partnership with SABMiller (NASDAQOTH: SBMRY ) is in trouble, as the world's second largest brewer wants to sever their Canadian ties, and if volumes don't improve in the Great White North in the back half of the year, an investment in Molson Coors could be as refreshing as skunked beer.
Management at Molson admitted the Canadian beer industry had an "appalling" month in June as volumes tumbled, with even the broader alcohol market -- that includes wine and spirits -- only managing to enjoy flat volumes. Yet, despite the dismal performance by Coors Light, which MillerCoors said declined in the mid-single-digit range, it was still able to grow its above-premium division by 9% for the quarter.
A combination of poor weather and weak consumer demand seemed to take its toll that it was only able to overcome through the benefit of acquisitions and a better tax rate in Canada. While it will be spending more money on marketing to support its brands as we head into the back half of the year, I'm not seeing how this will translate into a better operational position. Even the U.S. business of its Miller Coors joint venture saw profits fall nearly 6% in the quarter.
Of course, other brewers are facing the same challenges. Anheuser-Busch InBev (NYSE: BUD ) reported U.S. selling-day adjusted sales-to-retailers fell 2.3%, also blamed on poor weather, but additionally, on a calendar that had July 4 fall on a Thursday, so that sales were booked in July rather than June, as they otherwise might have been. MillerCoors saw STRs drop 4.4%, as well.
Brewers, in general, had to look toward their craft business and new product introductions to perk up operations. For example, Molson saw volumes decline by around 100,000 hectoliters for the year, but half of them were comprised of Coors Light Iced T, which it introduced last year. Its new Redd's Apple Ale also did well, as did the national expansion of its Leinenkugel Summer Shandy.
Boston Beer (NYSE: SAM ) was able to coast higher because its Angry Orchard brand of ciders have catapulted to the top spot in the booming cider market, despite it quickly becoming crowded with product introductions from major brewers everywhere. But it also had a surprise contribution from its flagship Samuel Adams brand that unexpectedly lifted sales after years of slowly declining.
Despite Molson expecting demand to remain weak in the back half of the year, I'm not sure its stock doesn't deserve the effervescent reaction the market thad to its earnings. At just 12 times earnings estimates, the brewer offers the cheapest valuation to any of its rivals, and with the company selling at just over twice its sales, the market is placing a much higher premium on either Bud or Boston Beer, both of which go for more than four times sales.
In short, Molson Coors' quarter may have been flat as day-old beer, but the risks have been priced into the stock, and an investment here could have investors tapping into a big run still.