Weaker US, lower likelihood of MillerCoors buyout
Downgrade to Neutral
We downgrade Molson Coors (TAP) to Neutral from Buy. We believe that volume and pricing trends for the company have worsened year-to-date in the US. We also see lower probability of an opportunity for the company to buy out the rest of MillerCoors in the US. We lower our target price to USD 74 from USD 82. Within this, we no longer factor in a 25% probability of TAP purchasing the remainder of MillerCoors, which was worth USD 4 per share in our previous valuation.
Cost cutting continues, but US weaker than we had modelled
As set out at the investor day last week, the company continues to have visibility on cost savings, particularly in Canada, for at least the next three years, which should provide some support to EPS. However, with the benefit of lower gas prices, we had expected the US beer market to go back into growth in 2015; we now model for industry volumes to be flat to -1% and MillerCoors to be -2%, with the change in management putting a damper on performance.
Lower probability of a MillerCoors buyout
We had been somewhat sceptical about reports of a bid by ABI for SABMiller, which could allow the company to buy out the rest of the MillerCoors JV. However, we now see this as even less likely and remove any potential upside related to the possible deal from our TP – our target price previously included USD 4 per share of upside. There are no changes in our assumptions on capital returns – the company has announced a USD 1bn share buyback programme over four years that is back-end loaded.
Valuation
The company is currently trading at a cal 2015 PE of 19.8x vs the beer average of 22.2x.