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Pint Of No Return: Weighing The Impact Of Trial Between Molson Coors, Pabst

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Pint Of No Return: Weighing The Impact Of Trial Between Molson Coors, Pabst
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With Pabst and Molson Coors Brewing Co (NYSE: TAP) facing off in court, BMO Capital Markets considered the implications for the beer industry.

The Analyst

Analyst Amit Sharma reiterated a Outperform rating on Molson Coors with an $85 price target.

The Thesis

The trial has the potential to have a substantial and immediate influence on Molson Coors’ cost and margin structure, Sharma said in a Tuesday note. (See his track record here.)

“The best-case scenario for TAP, in our view, would be a full exit from its current co-packing arrangement with Pabst, enabling TAP to cease production of low-margin contract beer and perhaps further optimize its U.S. brewery footprint by shuttering an additional brewery.”

The core of the trial revolves around the imminent expiration of the companies’ market agreement, in which MillerCoors brews Pabst products. Several outcomes are possible, the analyst said, listing them in order of their favorability for MillerCoors:

  • The complete exit from the agreement upon its June 2022 expiration, “enabling TAP to optimize its U.S. brewery footprint by potentially closing another brewery. Removing Pabst volume would likely be a $90-100 million hit to revenues, but given unfavorable margins, it would have minimal impact on earnings," Sharma said.
  • Increasingly favorable rates for the continued brewing of Pabst products. Up to roughly $130 million could be added to incremental revenue through this initiative, the analyst said.
  • The continued brewing of Pabst products at poor rates plus the risk of punitive damages, as Pabst is seeking $400 million, Sharma said. "That said, given that our estimates are based on TAP's current product mix, continuation of the status quo would not have any impact on our current margin outlook.”

Price Action

Molson Coors shares were down 2.31 percent at $64.88 at the close Tuesday.

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Latest Ratings for TAP

DateFirmActionFromTo
Nov 2018CitigroupMaintainsBuyBuy
Oct 2018Standpoint ResearchInitiates Coverage OnBuy
Sep 2018GuggenheimInitiates Coverage OnNeutral

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