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Summary

  • Molson Coors has a range of popular product offerings and the company is strong on fundamentals.
  • The company is trying to reinforce brand loyalty and cut costs, but the market for beer is shrinking.
  • Molson Coors is a good company, but it is currently priced too high to justify buying in at this level.

Molson Coors Brewing Company (TAP) is the brand behind Coors Light, Miller Lite, Molson Canadian, Carling, and Blue Moon. Its products are popular and its earnings are strong, but the company lacks enough growth to justify its price.

GOING FORWARD

The US light beer market is currently six times larger than the craft industry and Molson Coors offers some of its top brands. Coors Light is currently the second most popular light beer in the US, while Miller Lite ranks fourth. Molson Coors also enjoys strong preference in foreign markets. Its Coors Light is the number one beer in Canada, while Molson Canadian ranks third. Molson Coors also makes the most popular beer in the UK - Carling. The company is also doing well in the craft beer market. Molson Coors' Blue Moon is the largest craft brand in the US.

Molson Coors is well-positioned to take advantage of these facts. The company is investing in its core brands, which account for 70% of its volume, while reducing costs - both in operations and to the consumer. The idea is to bolster brand loyalty while also attracting new drinkers. Improving GDP trends in North America and declining unemployment points to improving conditions in Molson Coors core markets, but this is tempered against a decline in beer-only drinkers and a growing preference for smaller craft beers.

CHANGING LANDSCAPE

Molson Coors has been successful so far in keeping costs down - the company has enjoyed roughly $1 billion in cost saving synergies and savings from operational efficiencies since 2008. Cost savings may help with this, but Americans are drinking less beer and that trend is likely to continue. Molson Coors is also losing market share in millennials - particularly in its economy and premium regular beers.

Molson Coors has a joint venture with SABMiller in the US and owning the entire joint venture would be a compelling opportunity, says International Strategy & Investment group LLC analyst Robert Ottenstein. According to the Financial Times, in June, Molson Coors CEO Peter Swinburn said he would not rule out buying rival SABMiller's 58 per cent stake in MillerCoors." Swinburn is expected to retire at the end of the year.

VALUATION

Molson Coors is trading around $70 per share after seeing a brief boost on Wednesday from reporting its second-quarter earnings. The $12.9 billion market cap company's net income grew to $1.56 per diluted share, up from $1.44 for the same quarter last year. On a non-GAAP basis, Molson Coors posted $1.57 per diluted share versus $1.47 for 2Q13.

Molson Coors is a strong company. It has solid stock performance, it is up over 26% year to date and 67% over the past three years. The company also has strong growth in its earnings per share, net income, profit margins, and cash flow from operations.

Molson Coors is priced at 18.35 times its current earnings, which is lower than its industry's 19.5, but significantly higher than Anheuser-Busch InBev (NYSE:BUD)'s 12.91 PE ratio. At the same time, Molson Coors is only predicted to grow at a rate of 7% per annum over the next five years, while its industry is forecasted to grow at a rate of almost 15% and Anheuser-Busch is expected to grow at 9%.

TAKEAWAY

Molson Coors is a solid hold position, but it isn't worth buying in at this price. The growth just isn't there. The company is strong enough that it may be able to deliver decent returns for those who already hold a position, but there isn't enough margin to warrant initiating a long position at this time.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Molson Coors: A Good Company Currently Priced Too High For Entry