Should You Buy Molson Coors as It Moves Into Hard Seltzer?

The adult beverage sector has gotten a lot more complex. For investors considering Molson Coors (NYSE:TAP) in 2020, it becomes a question of how well you believe the company is positioned to compete.

Molson Coors is still getting strong sales from its flagship Coors Light and Miller Light brands. However, today’s consumer of beer and spirits has many more options available to them and Molson is in the middle of a revitalization plan that will allow it to gain market share in many of these new areas.

 The Sector Continues to Move Beyond Beer

The introduction of hard seltzers has taken the industry by storm. These ostensibly “healthier” adult beverages (they are low-carb and low calories) are causing many traditional beverage companies to come out with their own hard seltzer products.

“Consumer interest in hard seltzer is coming from a combination of health and wellness and mining a seam that exists between consumer demand for wine and spirits versus beer,” wrote an analyst from Bank of America.

Molson Coors is now entering that mix. The company recently announced it will launch its own hard seltzer, Vizzy, in March. Although Vizzy will be Molson Coors first hard seltzer offering in the U.S., the company already has a presence in the Canadian market. The company acquired Atwater Brewery in January. This brings Aquarelle Hard Seltzer into the company’s portfolio.

Molson Coors Plans to Take the Wellness Angle to a New Level

Of course, as the category gets more crowded, companies are looking to differentiate themselves. This will be particularly important for Molson Coors because analysts are concerned the company is coming late to the party.

During the company’s fourth-quarter earnings call, CEO Gavin Hattersley announced that Vizzy’s unique selling proposition (USP) will be that it is made with acerola cherry which is high in vitamin C. An analyst from MKM Partners wrote, “Molson Coors has been quieter…in promoting/advertising their seltzer offerings, but Vizzy will attempt to differentiate itself by interestingly leaning on antioxidants in formulation.”

In a transcript from FactSet Hattersley said, “There’s no  reason to believe that this isn’t going to resonate very well with consumers and particularly that 25- to 39-year-old male and female that choose to drink, but are looking for potentially better choices.”

Hattersley also told analysts that he projects the hard seltzer category to exceed $2 billion in sales in 2020. According to MKM Partners, the category already exceeded $1.5 billion in off-premise sales (e.g. liquor and grocery stores) in 2019.

Analysts Are Taking a Wait-And-See Approach

The good news is that Molson Coors had a good earnings report. The company posted adjusted earnings per share (EPS) of $1.02 which beat consensus estimates of 78 cents. Revenue of $2.49 billion came in above expectations as well.

Plus TAP stock, which has been lagging the S&P 500 Index, is up 8% over the last three months. And at least one analyst, Bill Kirk of MKM Partners, believes the company could be ready to enter a period of growth with Coors Light.

“With better Coors Light and Miller Lite volume, fixed cost deleverage pressure eases and reinvestment flexibility improves,” said Kirk. “Given the already strong free cash flow generation, we believe the revitalization plan carries more reward than it does risk.”

But not all analysts share that outlook. One concern is that the company will not take the seltzer market by storm. “In our view, Molson Coors seltzer could take time to gain traction in competing with other brands, given it will lack brand recognition,” an analyst from Bank of America wrote.

JPMorgan added that the company’s portfolio is still top-heavy with premium light and economy beers which add to muted expectations. JPMorgan gives TAP stock a neutral rating with a $60 price target. That would represent an approximate 10% increase in the stock price from its current level.

What About Cannabis?

As you may know, Molson Coors has a joint venture with Hexo (NASDAQ:HEXO) in Canada. The companies collaborate to product CBD-infused beverages as the Truss Beverage Company. The real growth in the cannabis sector will come when the United States is completely open for business.

Molson Coors estimates that the market in Canada could be a $3 billion market by itself. That may be a bit optimistic. According to industry reports, the entire Canadian cannabis market was only $1.15 billion. However, the same study showed that as cannabis has become legal in Canada, beer consumption has gone down. This would imply that Molson Coors is smart to be hedging into the CBD-infused beverage market even as other beverage companies such as Constellation Brands (NYSE:STZ) are also looking to enter the sector.