Molson Coors: TAP Into Profits with This Brewing Stock

The S&P 500 is down 42% since this time last year. If you feel like you need a drink after hearing that statistic, you’re not alone.

In fact, that’s one of the reasons alcoholic beverage companies are known for doing well in recessions – people want to unwind with a drink when things aren’t going well financially. That’s certainly a statistic that’s holding true this year. While the economy has taken a serious blow in 2008, the alcoholic beverage industry actually grew during the last 10 months.

And in the industry, beer is king. Last year, beer accounted for 52% of retail alcohol sales dollars making it a $98 billion category. Beer is also a priority for consumers; for the first quarter of 2008, beer was the 4th largest edible grocery supermarket category (only beaten out by milk, soda, and bread).

Those numbers haven’t been ignored…

The potential for serious growth is one of the reasons Belgian beer giant InBev NV recently snatched up Anheuser-Busch, the U.S.’s number-one brewer. The company known for Budweiser was purchased for $52 billion.

But don’t think that beer’s profitability has insulated it from the market craziness of the past year. Like most other companies, beer brewers have seen their share prices tumble in the wake of subprime.

With brewer stock prices lower than we’ve seen in a long time, the opportunity to get a phenomenal deal is greater than ever. But one company stands out from the rest…

Molson Coors Brewing Company (NYSE:TAP)is the company that produces well-known beers like Coors, Molson, and Blue Moon.

TAP is a special case right now for a few reasons. For starters, the company has been actively working to build their business through increased efficiency and a new joint venture with SABMiller. Second, with TAP trading at book value, it’s cheap compared to the industry average of almost twice that. Last, TAP’s financials are stellar – the company is income and cash flow positive, and have very little debt.

Picking Partners

One area where TAP should be commended is their recent joint venture with rival SABMiller: MillerCoors. SABMiller brings a number of highly popular brands to the table, including Miller Lite and Miller Chill.

The venture combines SABMiller and Molson Coors’ U.S. operations (respectively #2 and #3 in the U.S. market), and will save an estimated $210 million annually for Molson Coors. In 2007, the two brands grew twice as fast as rival Anheuser-Busch to almost 30% of the U.S. beer market.

But TAP isn’t new to mergers – they completed their own (between Molson and Coors) in 2005, and have since been exceedingly successful as a combined entity. As long as the company continues to develop successful strategic partnerships, ever-increasing boosts to TAP’s bottom line can be expected.

Equally important is the company’s potential as a buy-out target. Anheuser’s recent purchase showed investors that even the biggest brewers can be bought out at a hefty premium. Could a buyout be on the horizon for a company like Molson Coors?

An Undervalued Stock

From a value perspective, TAP is a phenomenal play. The company is trading at $42.68 with a market capitalization of $7.9 billion. Like many stocks, TAP has been trading just below book value for a little while now, meaning that if the stock were liquidated, you’d get more cash than you spent to buy it in the first place.

With a price-to-book ratio of 1.0 TAP is still an excellent value story, especially when compared to the rest of its industry. Other brewing stocks have a price-to-book that averages 1.95, meaning that as an investor you’re paying half as much for TAP’s assets as you would if you bought a stock like the Boston Beer Company (NYSE:SAM) or AmBev (NYSE:ABV).

And TAP’s assets are performing at a level that should all but guarantee a rise in share price in the coming quarters. The company reported net income of $173.2 million for the third quarter of 2008 – a 29% increase over the previous year. Despite their impressive results, TAP’s share price managed to fall 8% in the last quarter briefly touching a 52-week low of $35.

To me, the message here is clear: the market isn’t acting rationally. This isn’t news to many investors who’ve seen their portfolios plummet double-digits or more without any bad news to speak of, but it does suggest that when the market corrects its 12-month free-fall stocks like TAP will be first in line for a sharp gain.

Financials Worth Drinking To

But valuation is only part of the picture; when it comes to Molson Coors’s financial condition, things are equally impressive. For starters, the company has a healthy balance sheet with a low 0.28 debt-equity ratio, a current ratio above 1.0, and the ability to generate cash quickly.

TAP’s “cash generator” is largely the product of high profit margins (currently around 8.6%, but expected to grow as a result of their joint venture) and a relatively strong receivables turnover of 7.3. Couple that with a growing bottom line – the company’s net income grew 38% from 2006 to 2007 – and TAP suddenly looks like a stock you’d have to be drunk to turn down (pun intended).

In the coming quarters, improved efficiencies and cost savings from the company’s CoorsMiller joint venture should continue to improve TAP’s margins.

Right now, the biggest risk to TAP is an overall decrease in consumer spending while the world continues to ride out the financial crisis. Over the course of the next two quarters, I expect the company to increase its margins (to 9% for 2008), grow earnings, and beat analyst estimates for the fourth quarter of 2008 with an EPS of at least $0.80. Expect to see this stock in the mid-to-high $50s in the next 12 months.

Disclosure: TAP is a long position in the Rhino Stock Report’s model portfolio.