Shares of Molson Coors (TAP) are on a momentum run recently as analysts are anticipating that the red hot merger & acquisition market will move towards the beer industry in the coming period.
After the huge-run up in its share price, and given the more than fair valuation, it seems like an excellent point to take some profits. Investors might be better off enjoying the summer as analysts are rushing to cover their short recommendations.
Morgan Stanley Joins The Bandwagon
Analyst Dara Mohsenian upgraded Molson Coors from Underweight to Equal-weight, which in essence is an admittance that the company's stance has been completely wrong after shares have risen 33% year to date.
Mohsenian attached a $79 base case valuation to Molson Coors from now onwards. The focus on strategic potential in the consumer packaged goods space and potential Anheuser-Busch InBev (NYSE:BUD) acquisition of SABMiller (NYSE:SAB) are driving up valuations in the industry. This has resulted in the markets assigning a strategic value to Molson Coors which Mohsenian believes is sustainable.
Morgan Stanley now sees just 2% earnings per share growth per annum in the coming three years on the back of higher tax rates and weak volume growth trends in developed market regions. In these geographic regions, beer has been losing market share to wine and spirits.
The $79 new price target is based on 15 times forward earnings per share, including a $15 fixed component for the strategic value which Molson could add to a potential acquirer.
Recent Annual Meeting
Earlier this month, Molson Coors held its annual meeting outlining its focus on the PACC (profit after capital charge) model for growing shareholder returns. Key in its strategy is innovation and investments in core brands, a focus on efficient operations and deployment and return of cash and capital.
The company will continue to focus on core brands, but next to this also offer bottled beers, ciders and more distinctive tastes to address the changing drinking habits of consumers.
Coors Light sales have been relatively steady in US and Canada, but are growing rapidly in the UK, although it is from a small base. Molson Canadian, Carling and Miller Lite have been losing market share over the past few years. As such the company has been focusing on branded and specialty beers like Six Pints, Blue Moon, Staropramen, among others.
For now, following a large acquisition in Europe two years ago, the company will focus on reducing liabilities while returning cash. This means that the dividend payout is targeted at 18-22% of EBITDA. Share repurchases are not considered at the moment given the ambitions to improve the financial health of the company.
Valuing Molson Coors
Back in May, Molson Coors opened its books for the first quarter of 2014. The company ended the quarter with $338 million in cash and equivalents while total debt stands at $3.79 billion. This results in a net debt position of about $3.46 billion.
The company posted trailing revenues of $4.19 billion on which it net earned $695 million. Trading at $75 per share, equity in the business is valued at $13.8 billion. This values equity in Molson Coors at 3.3 times annual sales and 20 times trailing earnings.
Molson Coors pays a quarterly dividend of $0.37 per share, providing investors with a 2.0% dividend yield.
A Somewhat Complicated Past
Consolidation in the beer market has not surpassed Molson Coors. The company itself is a merger product of Canada's Molson and US-based Coors. In 2007, it set up a joint-venture called MillerCoors with SABMiller for the US operations in which it owns 42% of the shares. Including in the joint venture are brands like Miller Lite, Coors, Coors Light, Crispin Hard Cider and Blue Moon.
This was followed by the $3.5 billion acquisition of Starbev LP in 2012. With the deal the company gained access to breweries and brand sin Central and Eastern Europe where consumption is still growing. At the time, the deal valued Starbev at 11 times EBITDA while the company anticipated $50 million in annual synergies.
Takeaway For (Potential) Investors
For years shares of Molson Coors have been trading in $40-$50 trading range, making the mature company quite a boring stock. So far in 2014, shares have gained significant ground. As recent as February of this year shares were still trading at $50, after which nearly 50% returns have pushed up the valuation and shares a lot.
Underlying all of this is of course the very vibrant merger & acquisition market, and the market's quest for investing in companies with great brands while paying solid dividends.
All of this combined with the company's acquisition of Starbev, the success of Blue Moon and the company's strategy are paying off. No longer are investors seeing very mature and even declining sales, but prospects for real growth are becoming apparent again.
That being said, the roughly 50% return in just a four month's time span is of course a bit of an overreaction for such an established company. Clearly the market is pricing in something to happen which might very well happen given persistence of the rumors regarding a huge beer deal. If not, shareholders can expect relatively poor returns going forwards.
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