Why Morgan Stanley Just Upgraded Molson Coors

May 28, 2015

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In a report published Thursday, Morgan Stanley analysts Dara Mohsenian upgraded the rating on Molson Coors Brewing Company (NYSE: TAP) from Equal-weight to Overweight. The price target was raised from $81 to $83. The analyst believes the stock has a compelling risk/reward profile.

The analyst also believes that the company’s strategic potential has not been fully priced into its stock valuation and that the risk/reward profile is now more compelling, following the recent pullback in the share price.

Mohsenian expects fundamental downside for the company to be limited through its cost-cutting efforts, which are likely to ramp going forward. In addition, “TAP’s profit after capital charge model, which is based on EVA, sets a more disciplined framework for capital allocation and should generate improved results as it is rolled out across TAP and reflected in LT compensation,” the analyst said.

Given that the current expectations for the company’s U.S. performance are low, the U.S. macro-driven recovery could potentially be higher than the market expectations.

According to the Morgan Stanley report, “We believe strategic potential is not fully priced into TAP’s stock with ongoing consolidation in the beer industry. This includes a potential indirect benefit from TAP buying out the MillerCoors stake of SABMiller (its US JV partner) if Anheuser Busch Inbev SA (NYSE: BUD) were to acquire SAB, as continues to be postulated in the financial media.”