Molson Coors: I'll Drink to Those Earnings After All

This marks the second time Molson Coors Brewing Company (TAP) has graced the pages of the Rhino Stock Report. And while its appearance might make it seem like a certain investment newsletter has a drinking problem, the reason for this TAP redux is much more disciplined than that.

Let’s face it: Most stocks aren’t that attractive right now. Scraping through the depths of the market to find obscure stocks really isn't worth our time when we already own solid stocks that are worth taking a second look at.

The “second look” part is key here.

Molson Coors has taken a fairly significant tumble since we took our position back in December (fairly significant for us, not for the rest of the market, which is still down significantly more). Taking a second look at the whole company is the mechanism that keeps us from throwing good money after bad. That said, what is it that makes Molson Coors a good investment, even now?

TAP’s slide has largely been the result of underwhelming Wall Street in its latest earnings release a month ago. The company posted earnings of $96.8 million, or $0.44 per share, missing analyst estimates by 30 cents per share.

But digging deeper reveals a quarter that wasn’t quite as bad as Wall Street made it out to be.

Molson’s Currency Conundrum

While increasing input costs (like the barley and hops that go into beer) accounted for some of the decline in Molson Coors’s income last quarter, the biggest reason for the drop in earnings was because of currency translation.

During 2008, scores of investors fled to the relative safety of treasuries as the stock market began to freefall to its November cushion. As a result, the U.S. dollar gained big-time relative to other currencies. For companies with significant overseas operations, like Molson Coors, the result was very bad.

That’s because since these companies report earnings in U.S. dollars, all of their overseas operations have to be translated to dollars for their quarterly earnings report. So even though no money had actually been switched over to dollars, TAP and others had to use the new higher value of the U.S. dollar in computing their earnings. The result was an extenuating circumstance that accounted for more than 55% of the earnings decline TAP experienced last quarter. In fact, the company says that excluding currency translation losses, income only declined 7% from the same quarter last year.

That means that were it not for the situation caused by currency conversion, TAP would have actually announced earnings of $0.88 per share… beating analyst estimates for the quarter by more than 23%!

Drinking Your Way to Profits

For 2008, Molson Coors saw higher sales volume and underlying income than they did in 2007. People are buying more beer, and Molson Coors’s brand positioning puts it in a prime position to benefit from consumers who are looking to downgrade from more expensive “gourmet” beer brands like Sam Adams.

In the few months since the Rhino Stock Report recommended Molson Coors, almost nothing has changed fundamentally. In fact, at its lower price, many of the value indicators we talked about it December are shouting, “buy” even louder than they were then.

From an investment standpoint, Molson Coors continues to be an attractive stock right now. Not only is the company at a lower price than we originally recommended it at, but it declared a $0.20 dividend late last month.

The brewer is a buy for all of the same reasons it was in December when we first opened our position. In fact we still haven't seen the full effects of the MillerCoors joint venture that saved $175 million in superfluous expenses last year.

Likewise, analysts continue to underestimate Molson Coors’s ability to perform. The current consensus on Wall Street is earnings for next quarter of $0.35 per share. That’s a full 20% lower than the $0.44 per share the company booked (and the analysts balked at) last month.

TAP’s large market cap and low beta (a measure of risk relative to the rest of the market) make it a sensible stock for us to take a double-large position in for the Rhino Stock Report. We bought the second position in TAP at $32.96, bringing our adjusted basis to $36.84 per share.

As TAP adjusts for the current economic climate, its value will likely reflect what I see as a huge opportunity in a relatively recession-resistant industry.

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

Comments

[ECONOMICS 101:]

Jonas, I am glad I found your site. TAP is truly a large beer producing company with very large sales (not as big as the competitor) but they have many bigger problems besides the FOREX conversions. They have a problem where some of their Sr Management are un-ethical and have convenient losses of memory. As a shareholder and customer I called their previous CEO 3 times, to voice a complaint. Although his secretary was very polite and professional he never returned my calls. I then called the President, his secretary returned my call saying "he will not call me back, I'm sorry". I was a AAA National customers of there for many years. Stay tuned, more to come..

Apr 10 08:47 PM