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A Perspective On Investing Seen In Molson Coors (TAP)

Mar. 25, 2012 2:31 AM ETTAP
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"Should I buy this stock?"

This is a loaded question, especially for someone who has accumulated knowledge and experience with investing. There are countless angles and perspectives on how to answer this, many of which conflict. I'll throw in one more perspective- it's one that I find valuable because it helps me find clarity in an environment filled with all sorts of noise.

I haven't thought of a name for it yet, I'm sure someone else has. It builds off of a quote that Warren Buffett often repeats saying, "when you ask yourself if you want to buy a stock, you have to ask yourself if you'd want to buy the whole company". This takes out "trading", or buying because for any variety of reasons you think the stock will be trading at a higher price in the near future. Building off of this question of considering the whole business, I then look at the price the market is giving, or Market Capitalization. I then ask myself one question:

"If this company did not exist, and I had the option to spend [current market cap] to make the company exist under my ownership, would I?"

This question, as you'll see below, begins to drive a whole thought process. I'll try to explain through an example, Molson Coors (TAP).

Imagine we live in a world where there is no such thing as Coors, Coors light, or all the other brands the company owns. There is significant demand for these products that isn't getting met- or due to Budweiser(InBev) having such a huge market share, they have a quasi-monopoly and are making large profits. No one has heard of Molson's beers or brands, no one has seen a Keystone Light commercial, and no infrastructure is in place for distribution, advertising, or production.

Now you put yourself into the scenario. Everything about you is the same, save for these two changes:

1. You have $8 billion dollars.

2. You have the magical power to spend that $8 billion to create Molson Coors Brewing Company as it exists today.

Remember that everything else is the same. You have the option to buy an index fund. You can buy treasuries- every other option is still out there. But would buying Molson Coors be adventageous? What is the value that we put on the market share, the ability to control expenses, price sensitivity of consumers, consumer's concept of the brand and products, the future prospects of the company, and the ability of management? And then, most importantly, what is the value of current and future earnings or cash flow? Remember that there are all sorts of other options- but where does TAP lie on the risk/reward spectrum?

When I ask myself these questions it becomes quite clear to me that risk is low, and that an earnings yield of ~$700million, or 8.75%, is attractive. Within it's industry, I believe that TAP has as good a chance of growing market share as anyone else- their advertising and pricing across their product line is very strategic. While profit margins could be better at higher prices for craft-type brews, there is safety in the low-cost, high volume customers. The one major threat that could hurt TAP is inflation, specifically in fuel prices. The revenue per pound of product sold is very low- and if transportation costs rise this could certainly hurt profits. A point to remember is that the demand for beer is inelastic, and that consumers, in a high-oil environment, may cut vacations and discretionary expenses, but they'll continue to drink beer- especially cheap beer. But even with these economics, certainly some of the price increase from fuel inflation would not pass on to the customer. The solution is to also invest in companies that would thrive in an inflationary environment. But the value of brand awareness, product position, future prospects and earning potential are too much to ignore when it comes to TAP.

These are more thoughts than I was planning to share, but hopefully it was a helpful read. The question of value is so important. You want to buy a stock where you would have confidence to buy it even if its stock was crashing- you can't know this if you haven't asked about value. This investment approach may not get the best results in every environment, but you'll be able to sleep, and you'll have confidence in volatile markets- and both of these become exponentially more important when handling other people's money. Asking this question about several different stocks may help you see potential in overlooked stocks, and may help you see the risk others may be missing in stocks that are "outperforming"- aka trading at higher prices.

http://weatheredoak.blogspot.com/2012/03/perspective-on-investing-seen-in-molson.html

Disclosure: I am long TAP.

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