Molson Coors: Monitor Upcoming Market Share Trends

Thesis

Molson Coors Beverage Company (NYSE:TAP) brews and produces beer. The company's first-quarter 2023 financial results were highly encouraging as they exceeded expectations in terms of both revenue and earnings. The standout performance was driven by a strong net price realization of 8.4%, which more than compensated for a slight decline in volume. Earnings per share increased by 83% to $0.54 due to the high incremental margins that come with the price realization. This is a significant beat vs consensus estimates of only $0.25. Importantly, there is a chance TAP will see a strong FY23 with high possibility of it beating guidance. The swing factor will be TAP's ability to sustain its gained (and likely to be gained) share from competitor Bud Light - which suffered a major backlash from its marketing campaign. Notably, these potential share gains from Bud Light are not factored into FY23 guidance, and this suggests consensus estimates will likely move higher. Nonetheless, it is not an unwise move to not move guidance upwards either as it gives management more breathing room to ensure they can beat guidance, especially if Anheuser-Busch InBev (BUD) were to activate its full might in marketing to gain back share losses. I am on the side of management to be conservative on expectations here. BUD is not a weak competitor here, it has an earnings power 10x TAP (EBITDA basis), as such we should not downplay its ability to come back from this crisis. I am recommending a hold rating to further monitor TAP's market share trends over the next few quarters.

1Q23 results highlight

TAP's adjusted EPS for 1Q23 was $0.54, far exceeding the consensus estimate of $0.26. The growth in net sales was much higher than expected, coming in at 5.9% (or 8.2% when adjusted for currency fluctuations). All regions performed well, with growth in The Americas at 5.6% and in EMEA&APAC at 7.6%. As a result of price increases and premiumization, net sales per hectoliter increased by 8.4 percent on a constant currency rate basis. A rise of 87 basis points brought the gross margin to 35.1%. Pricing and premiumization, which helped to counteract volume deleverage and cost inflation, were also cited as reasons for the rise in gross margins. Marketing, general, and administrative expenses as a percentage of sales was 25.9%.

Market share

I believe TAP and other players in the industry are a beneficiary of the BUD marketing campaign backlash. While TAP did not report how much market share was gained, it is hard to imagine the volume that originally goes to Bud Light - which commands >30% market share - will disappear into thin air. The concern here is how sustainable is this market share and what counter moves will BUD pull off to gain back share losses. This is especially true when the cost of switching is little to none, the fact that Bud Light lovers can switch overnight also tells us that they can switch back to drinking it. If I were BUD, it would not be difficult to roll out price discount promotional campaigns to lure these drinkers back. That said, so far it seems like no moves have been made by BUD yet as TAP CEO mentioned. On the flipside, if I were TAP, I would ride on whatever momentum I have ongoing by rolling out new campaigns to solidify these gains and also drive near-term performance. If the latter comes true, we could see a strong 2Q23, which will further improve the likelihood of TAP beating FY23 guidance. As such, I believe this will be an area of focus for many investors over the coming quarters.

Growth outlook

There are also other factors that also put me on the backseat. For instance, there seems to be a "sell-in" tailwind in 1Q23 where US shipments were to build distributor inventories against lower levels last year in order to buffer against any uncertainty. As the year progresses and more shipments are aimed at the end consumer, management anticipates this trend will reverse. In addition, the first quarter of 1Q23 reaped the benefits of early 2022 pricing action and the September 2022 pricing, both of which had been carried over from the previous year. This benefit is expected to diminish after the company has fully lapped the first price increase implemented in early 2022. Management also dropped a hint about a shift in the market, where customers are increasingly purchasing larger pack sizes in search of better value. This is bad news for TAP's margins but good news for their volume. All in all, it seems to be game of choosing sides: will the market share gain overwhelm all these normalizations and changes or would it be the other way. It is tough to say, as such I think it is better to stay on the side lines.

Valuation

I also think that the market seems to be running ahead of itself. TAP valuation soared back to its average of 14x earnings just as its share price surged to $64. I believe a good amount of optimism is baked into the stock right now. Although management is being conservative, if the coming quarters do not come as expected, we could see short-term pressure on the stock and valuation as I expect momentum buyers to jump ship as soon as they see a slowdown.

Conclusion

TAP delivered impressive first-quarter 2023 results, surpassing expectations with strong revenue growth and earnings per share. The company benefited from a significant net price realization of 8.4% that offset a slight decline in volume. However, it is important to monitor TAP's market share trend and the actions of Bud Light in the coming quarters. With the risk of Bud Light regaining lost market share and the need for TAP to sustain its gains, a conservative approach is warranted. Considering these factors, I recommend a hold rating to observe TAP's market dynamics and performance over the next few quarters.