04/08/13 Covered Call Pick: Molson Coors Brewing (NYSE:TAP)
Molson Coors Brewing Company (TAP) is a North-American brewer that manufactures and distributes a variety of lagers, malt beverages, and energy drinks. Molson Coors was formed in 2005 with the merger of the Canadian-based Molson Brewing company and the U.S.-based Coors Brewing. The merger created the seventh-largest brewer in the world by volume, and brought together a portfolio of popular brand names such as Coors, Coors Light, Molson Canadian, Killian's Irish Red, Keystone, and Blue Moon.
Molson Coors has a market capitalization of $9.08 billion with 181 million outstanding shares.
Molson Coors currently pays a $0.32 quarterly dividend for a current yield of 2.6%.
With a beta of 0.84, TAP currently trades with approximately 15% less volatility as compared to the current market.
Since the merger between brewers Molson and Coors in 2005, the resulting management team has had one thing on their mind: trimming costs. The company has made a number of cost-saving measures that has allowed them to run more efficiently, and thus compete more effectively in the crowded alcoholic beverage market. One such measure was the company's creation of the MillerCoors Joint Venture (JV) with competitor SABMiller. The JV was tasked with the selling the largest and most popular brand names owned by the two companies in the United States, in order to more effectively compete with powerhouse Anheuser-Busch InBev (NYSE:BUD). The numerous cost-saving measures the company has made shows in the growth of their operating margins from 7% in 2005 up to 22% last year.
Yet the operating margins have plateaued as of late due to the few largest headwinds that the entire beverage industry faces. The company's major market is domestic, which is thoroughly saturated and is facing declining attraction as consumers are starting to favor smaller craft brews over the larger lager names. Competition is also extremely stiff with Anheuser-Busch aggressively attempting to expand their operations, and numerous local craft startups chipping away at business.
Yet while we can expect margins to begin to flatten out as both the number of cost-saving options dwindle and competition increases, we still believe that TAP is a worthwhile target for a Covered Call Strategy as it provides a nice dividend, with high single digit earning's growth, and a cheaper valuation than its main competitor BUD. The management has also proven themselves highly competent at surviving in the currently crowded marketplace, which helps lend credence to the belief that they will be able to navigate the waters as competition increases. That said, even though we are bullish on TAP, we understand that there are some definite headwinds for the company. That is why we are recommending the July 2013 $55 Call. This shorter Covered Call Strategy is a more conservative time frame, allowing us not to be locked in to a long-term strategy if we see that the headwinds are blowing a little stronger than we had expected. The $55 strike price represents a fair value estimate with a P/E relative to the overall market's valuation. That is why we are recommending buying TAP and selling the July 2013 $55 Call.
- Buy 100 shares of TAP @ $50.01 = $5,001 + Commission ($12.95) = $5,013.95
- Write 1 TAP July 2013 $55 Call @ $105 - Commission ($8.70) = $96.30
Note: Prices may vary from the time of post. Actual commissions paid will vary returns.
Static Return (Not Called):
(Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration
(0.96 + (0.32))/50.14 X (365)/102
= 9.14% Static Return
(Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration
(0.96 + (0.32) + 55 - 50.14)/50.14 X (365)/102
= 43.82% If-Called Return
Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.