Molson Coors' Second-Quarter Results Overshadowed by Economic Concerns; Shares Undervalued

No-moat Molson Coors overcame a lengthy strike (resolved in June) at one of its breweries and a product recall to achieve 2.2% constant-currency sales growth in the second quarter. While this result against the reopening of the economy last year keeps the firm on track to reach our 4.5% 2022 sales growth estimate, investors focused on the murky outlook for the second half of the year, given cost inflation, weakening U.S. beer sales, unfavorable currency movement, and economic growth concerns, sending the shares down 10%. Molson Coors’ net sales in the Americas dropped 1.7% (constant currency) in the quarter due to the strike and recall but also some trade-down by consumers to its lower-priced beer offerings. Given the economic situation, we expect to lower our $69 fair value estimate by a low-single-digit percentage but still view Molson Coors as undervalued. We are encouraged that the firm reiterated its guidance of about $1 billion in underlying free cash flow this year, which should allow it to continue to pay its dividend (yielding about 3%), repurchase shares, and pay down debt. Moreover, we think investments in its premium brands will improve share in some categories after years of losses.