Does Molson Coors Brewing Have Profits on Tap?

Year to date, shares of Molson Coors Brewing (TAP) are up about 12%. The company reported third-quarter results on Tuesday. But I don't think profits are on tap for Molson Coors.

Molson Coors' third-quarter fiscal 2016 earnings were $1.03 per share, 6 cents worse than the consensus estimate. Revenue fell 6.9% to $947.6 million, vs. the $964.4 million estimate.

Worldwide beer volume fell 3.8% to 15.9 hectoliters. Coors volume fell 3.3%. The results were disappointing across the board. The only good news was a lower-than-expected tax rate, which offset the lackluster results. The company's effective tax rate in the quarter was 19.7%.

Three weeks ago, the company completed the acquisition of the 58% of the MillerCoors joint venture it didn't own. With the deal, Molson Coors Brewing becomes the third-largest brewer in the world.

Now that the MillerCoors deal is completed, investors have turned their attention to how much cost the combined companies can squeeze out. Combined, the companies will have a total brewing capacity of 94 million hectoliters, up from 58 million, and an estimated operating income of $1.6 billion. Management believes it can deliver about $200 million of annualized cost savings within four years of the deal close. Plus, the companies should receive a $250 million annualized cash tax benefit.

Molson has a strong record of achievement in reducing costs. The company believes it has been able to cut over $1.4 billion of cumulative annualized cost savings out of Molson.

While cost reductions and lower taxes are great, I haven't heard a lot about revenue growth. Volume is shrinking and unit case volume is not growing. Investors are buying the stock because earnings are forecast to jump 15% next year because of the MillerCoors deal, but revenue is expected to only grow 4%.

With all the deal making, Molson still doesn't have a significant effort in the Mexican beer category. Mexican beers like Corona and Modelo are growing like crazy. On Monday, Constellation Brands (STZ) said it would buy a Mexican brewery from Anheuser-Busch InBev (BUD) for $600 million. Constellation paid a huge premium for the brewery because the company is having trouble keeping up with demand.

Even though Constellation Brands trades around 24 times forward estimates (nosebleed territory!), I would rather own Constellation. Earlier this month, Constellation said second-quarter revenue grew 17%, operating income was up 27% and earnings grew 17%. Net beer sales grew 20%. About 15% (of that 20%) came from organic sales, primarily driven by volume and favorable pricing.

Molson Coors only wishes it had those kinds of numbers.

I don't see much top-line growth at Molson Coors. Keep in mind that this quarter's results included July 4, and revenue fell 6.9%.

I don't think profits are on tap for Molson Coors shareholders.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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