With many companies struggling to beat earnings expectations amid double-digit drops in revenue, it's refreshing to know that some segments of the economy are holding up just fine. Molson Coors Brewing (TAP) said that second quarter profits, excluding one-time items, increased over 20% from last year, as cost savings more than offset a 3 percent decline in beer volume. Earnings per share of $1.11 topped analyst estimates of $0.97.
Molson Coors, which also has a joint venture with SABMiller to market brands like Miller Lite, also said that it was achieving its cost savings target of $500 million more quickly than previously anticipated. Accounting rules related to the agreement with SABMiller make other metrics for Molson Coors, such as revenues and sales volumes, difficult to use for comparison purposes, but pro forma statements provided by the company showed that segment earnings were up 16% year-over-year.
On Molson Coors' conference call, management acknowledged that there had been some weakness in buying trends, describing multiple markets as "soft" and saying that customers are being more value-oriented in purchasing beer. A discussion of the MillerCoors segment said that "softness in above premium brands" were fortunately offset by boosts to Coors Light, MGD 64, and Keystone Light. Given the mass appeal and value proposition offered by most of Molson Coors' beverages, it will be interesting to see how hard the recession hits upper-tier craft beers like Boston Beer (SAM).
Beverage stocks are typically seen as safe havens in a recession, based upon the argument that alcohol consumption does not drop off (or even increases), unlike other purchases. Molson Coors' unit volume results show that U.S. sales were off about 1 percent, and unit volumes in Canada were off about 3 percent. In the United Kingdom, Molson Coors sales dropped more than 12 percent, due in part to a strategy shift, and the industry as a whole saw sales fall 5 percent.
Predictably, there continues to be a growth market for beer sales in emerging countries. Molson Coors said that volumes were up 18% in global markets such as China, which helped the company narrow its loss in that relatively small line of business. The real strength of beverage companies, however, is demonstrated by the Mexican and Brazilian beverage giant FEMSA (FMX). The company said last week that its beer segment saw a 6.7 percent jump in quarterly revenues, even though unit volumes were down 6 percent in Mexico and more than 8 percent in Brazil. FEMSA, with a brand portfolio including Dos Equis, Sol, and the distribution rights to Coors Light in Mexico, was able to raise prices enough to compensate for lower unit purchases.
In an era of consolidation that is creating global brewery distribution networks (and some international tensions when Budweiser is no longer an American-owned company), the value of beer brands increases dramatically. Molson Coors, as the largest publicly traded pure-play on alcohol consumption, is not extremely cheap, but it's a lower-risk way to wade into an increasingly bullish market. More importantly, there's near-term upside as the company continues to improve its cost structure.
James Cullen edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns FMX, but has no personal position in the stocks mentioned above.