The alcoholic drink industry tends to perform well during recessions, and some investors will select companies from the industry purely for the concept of diversification; however, Intelligent Investors will bring each company to the same level and compare them against companies of other industries in a bottom-up stock selection method. Intelligent Investors must stick to their investment techniques and look primarily at the fundamentals and actual results the company achieves. A company must have strong financial statements to prove that it is stable enough for Intelligent Investors. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Molson Coors (TAP) fares in the ModernGraham valuation model.
TAP data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$49.77|
|Value Based on 0% Growth||$29.18|
|Market Implied Growth Rate||3.38%|
|Net Current Asset Value (NCAV)||-$32.02|
Balance Sheet - 9/28/2013
Earnings Per Share
Earnings Per Share - ModernGraham
TAP Dividend data by YCharts
Molson Coors is an intriguing company to both Defensive Investors and Enterprising Investors, and should be kept on their watch lists. For the Defensive Investor, the company only fails the current ratio requirement, and because the company is suitable for the Defensive Investor, it is also suitable for the Enterprising Investor. Value investors interested in following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research, including a comparison of Molson Coors to other companies that pass the ModernGraham requirements.
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $2.27 in 2008 to an estimated $3.43 for 2013. This level of growth solidly supports the market's implied estimate of 3.38% growth and the company would appear to be fairly valued by the ModernGraham valuation model at this time.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Molson Coors Brewing Co.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Molson Coors Brewing Co. (TAP) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.