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Summary

  • On a P/E basis, Molson Coors is trading at its highest valuation since the 2005 merger between Molson and Coors.
  • The price of the stock has increased 55-60% since last August, yet the company's business prospects have not improved commensurately.
  • This stock may appeal to dividend investors who like the 13% dividend growth rate over the past five years and a dividend payout ratio that is only 42% of profits.

Over the past twelve months, Molson Coors (NYSE:TAP) has generated $3.81 in profits on behalf of shareholders. At a current price of $74.86, that works out to a valuation of 19.64x profits. Since the 2005 merger between Molson and The Adolph Coors Company, the company has never been more expensive than it is today.

From 2005 through 2008, the most expensive valuation for Molson Coors was 18.0x earnings. During the recession and its aftermath, the price of Molson Coors got cheap (as you'd probably expect), trading between 11.3-12.6x profits. And then in 2012 and 2013, Molson Coors traded at a high valuation of 17.5x profits. Someone who buys Molson Coors in 2014 is accepting a lower starting earnings yield than at any time since the merger.

And the peculiar thing is this: even though Molson Coors' stock price has gradually gotten more expensive on a P/E basis, the fundamentals don't support the advancing stock price: Over the past five years, sales have declined 8% annually. Cash flow has declined by half a percent annually. And earnings per share have only grown by 3.5% annually over that timeframe. And the dividends have grown by 13% over the past five years, but this is a reflection of the fact that Molson Coors has increased its payout ratio from 24% to 42% over the past five years.

Additionally, the company carries a decent-sized debt load. It has $3.7 billion in total debt, with $180 million due in interest payments. This is in relation to profits that came in at $565 million in 2013. The company's pension is not quite fully funded, as Molson has $3.9 billion in pension obligations and $3.6 billion in pension assets (most likely, the company is relying on increasing interest rates for the bond portion of its portfolio to be able to improve the assumed rate of return for its pension assets so that it can claim a fully funded pension when interest rates improve).

By the way, I don't want to come across as if I'm hating the company. There are good things going on at Molson right now; sales have grown from $3.9 billion to $4.2 billion in the past year, the company has increased its profit margins from 11% to over 13%, the return on shareholder equity has increased from 5.5% to 6.5%, and the return on total capital has increased from 4.7% to 5.5%.

Rather, my concern about Molson is this: it is trading at its most expensive valuation since the 2005 merger, but despite this price advance, there is no indication that the company's future prospects have improved commensurately.

Heck, last August, you could buy the stock for $48 per share. That worked out to 15.5x profits. That worked out to a typical valuation of where Molson has historically traded. Since the end of last August, the price has gone up 55-60%. But has the business improved by that much? No, the only way you could justify Molson's stock would be if you thought the stock was on sale last year by 25% or so, and due to improving business fundamentals, has finally improved towards fair value.

That thesis does not seem plausible because: (1) the previous valuation of 15.5x profits was in line with historical norms and did not suggest undervaluation, and (2) the company's business prospects have not improved in a way to suggest that a historically high valuation would be warranted.

From a dividend standpoint, there's a lot to like: the dividend has grown 13% annually over the past five years, and despite the increasing payout ratio, the dividend does not even take up half of the company's profits yet. For current holders of the stock, it is entirely reasonable to expect dividend growth that is at least double the rate of inflation going forward (that is, 6% or so dividend growth in a world of 3% or so inflation).

But from the perspective of someone contemplating a new investment in Molson, now does not seem the right time. It's never been this expensive on a P/E basis since the merger, and most likely, patient investors will be rewarded and see the day when this company again trades at 15x profits in line with historical norms. This is not a recommendation to short the stock, as there is nothing to stop an overvalued stock from becoming even more overvalued. But this is only my opinion, and no one cares more about your money than you do, so you should draw your own conclusions.

Source: Molson Coors: No, Don't Buy It Now