After writing articles about Heineken (OTCQX:HEINY), Anheuser Busch Inbev (BUD) and Molson Coors (TAP), I think it is time to compare the brewers with the help of several metrics. In this article, I will give points for different criteria. I may combine two criteria. Total points per criteria will not be equally split between all categories, because I think some criteria are more important than others. Molson Coors scores the most points, mainly because of the company's low D/E ratio, low payout ratio and the margin of safety in its forward P/E ratio.
Source: Author created table with use of Yahoo Finance & Morningstar.
Return on Equity/Assets
The return on equity is calculated by dividing net income by shareholders equity. The return on assets is calculated in the same way, but instead of 'equity' you use 'assets'. The higher the ratio, the more effective the company is with its shareholder's money. Heineken has the edge in both the ROE and the ROA. I will therefore reward the company with 2.5 points. AB InBev ties with Molson Coors in the ROE, but has the edge in the ROA. I will give 1.5 point to AB InBev and 1 point to Molson Coors.
Debt to Equity
AB InBev and Molson Coors have both made a big acquisition in 2016. AB InBev paid $104.8 billion for SABMiller, while Molson Coors bought SABMiller's 58% stake in MillerCoors for $12 billion. Both acquisitions have leveraged the companies' balance sheet quite a bit. AB InBev has a D/E ratio of 1.59, while Molson Coors has a D/E ratio of 0.71. Even though Heineken did not make a major acquisition, the company still has a higher D/E ratio than Molson Coors. Heineken did make several smaller acquisition, for example Lagunitas Brewing, which leveraged up the company's balance sheet.
In deciding which company I like the most, I put relatively much emphasis on the D/E ratio, compared to the other ratios. In the beer industry, acquisitions are a great way of increasing earnings. Big brewers often acquire craft beer producers because of the increasing craft beer consumption. I want to point out that a brewer can also grow profits without acquisitions, but they certainly help because of the great synergies in the sector. A company will not be able to acquire another company if the D/E ratio is too high.
For the second criteria, I will give 5 points to Molson Coors, 3.5 points to Heineken and 1.5 point to BUD.
Yield and payout Ratio
I personally care little about the yield of a company. I am only 20 years old and therefore do not need dividends to keep putting food on the table. I will certainly not complain about a high yield, but I trust management of all three companies. A lower payout ratio gives them the ability to make more acquisitions and create stock price appreciation. I will reward the companies for having a high yield, but also for having a low payout ratio.
I will hand out 5 points for both criteria. For the yield, I will give 2.5 points to AB InBev, 1.5 points to Molson Coors and only one point to Heineken. For the payout ratio, I will reward Molson Coors with 3 points and Heineken with 2. I do not give any points to AB InBev because a dividend payout above 100% will not be sustainable in the long run. I would prefer AB InBev cutting down its dividend and using the cash to pay down its long term debt.
It is easy to find quality companies, however, it is harder to find quality companies at a quality price. The forward P/E ratio gives a great indication of the valuation of a company. I prefer the forward P/E ratio over the "standard" P/E ratio because the forward P/E ratio contains at least some growth element. A high P/E ratio is not always better than a low one, the forward P/E ratio only contains one year of growth, which may not always be enough. However, I still prefer the low P/E ratio of Molson Coors. In the challenging consumer staple environment, the low P/E ratio of Molson Coors, combined with at least flat earnings growth, provides a margin of safety which the other two brewers cannot provide.
For the last criteria, I hand out 10 points in total. Because of its margin of safety, I will give 5 points to Molson Coors. I will give 3 points to AB InBev and 2 points to Heineken.
|ROE & ROA||2.5||1.5||1.0|
Source: Author created table.
Taking all the points I rewarded to the three companies in consideration, I conclude that Molson Coors is the clear winner with 15.5 points. The company shines in the D/E, the forward P/E and the payout ratio criteria. The only downside is the relatively low ROE and ROA. Heineken is rated second best, beating both companies with its high ROE and ROA. Heineken is only rated third best in the yield section, but like I stated already, I do not put too much emphasis on the yield. I trust management and the low yield makes sure the company can acquire new breweries. I rated AB InBev as the worst of among the three. The company has the biggest debt load, which makes it harder to acquire, for example, craft breweries. Although the yield is high, I do not know whether the dividend is sustainable in the long run.
I used the criteria that I think are most important. Using other criteria or dividing the total amount of points differently, will certainly affect the final results. I strongly dis encourage investing based on only the above represented metrics. I recommend to check out my other articles to find more specific information about all three companies. If you enjoyed this article, please follow me by clicking the orange subscribe button on the top of this article.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HEINY, TAP, BUD over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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