Good Product But An Expensive Stock

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Molson Coors Brewing (NYSE: TAP) is the largest brewer based in America, ever since the InBev acquisition of Anheuser-Busch.  Molson Coors has a 30% share of the U.S. market, 40% of Canada, and 19% of the U.K.’s market, making it the fifth largest brewer in the world.  The company has traded pretty flat in recent years, and seems to be stuck in a range between about $38 and $50.  With the company set to report earnings on Valentine’s Day, investors will be looking for signals that the stock may finally break out of that range.

Profile

Molson Coors has over 65 brands, including many very well-known names such as Coors Light, Molson Canadian, Miller Lite, Miller Genuine Draft, and more.  They also have a line of craft and specialty beers such as Blue Moon, Killian’s, and Leinenkugel (my personal favorite!). 

The general growth strategy of the company is to expand its brands into new markets.  A great example is the results of marketing efforts of Coors Light in Canada, where it now has a 14% market share.  Molson Coors continues to try to integrate their brewing processes, which they have been trying to do since their 2005 merger.  Once this is fully complete, the company should realize even more cost savings as a direct result of the merger.

The Beer Industry

In the U.S., 79% of the beer market is controlled by the largest two companies, Molson Coors and Anheuser-Busch InBev (NYSE: BUD).  While successful, other American beer companies like Boston Beer (NYSE: SAM) are a distant threat.  The general trend in the beer industry has been away from the basic beers (Bud Light, Miller Light, etc.) and towards premium and super-premium beers.  I’ll bet that most readers of this article have a “tap room” style place somewhere near their home that sells an absurd number of premium beers, and that has opened in the last five years or so. 

This is why the large beer companies have been acquiring smaller, premium brands like my beloved Leinenkugel.  With the general trend toward luxury items in the U.S. since 2000 (granite countertops in every home, luxury cars, etc.), it only makes sense for the beverage industry to follow suit.  When they company reports, pay attention to sales trends and what the company is doing about them to gain market share.

Valuation

Molson Coors trades for 14.5 times TTM earnings, which are forecast to rise by around 5% annually over the next several years.  I personally think that the stock is a bit overpriced right now, with slow growth and about $1 billion in net debt.  Unless the company provides new growth plans or a rosier outlook for the next several years, I actually think we’ll see a pullback to the lower end of the trading range mentioned earlier.

Anheuser-Busch InBev trades at 19.2 times earnings, however they are growing more aggressively by far.  Consensus estimates call for earnings to rise at a 14.3% average annual rate over the next three years, which more than justifies the higher valuation.

Frequent readers know my “valuation rule” to roughly estimate whether a stock is fairly valued.  Take the forward growth rate and double it.  This number should be more than the P/E multiple, unless the company has a gigantic cash position or other extenuating issues.  Anheuser-Busch Inbev qualifies.  Molson Coors, sadly, does not.

Even the Boston Beer Company looks more attractive as an investment.  The maker of Sam Adams trades at 31 times earnings, with a 15% forward growth rate and has about $50 million in cash and NO debt whatsoever.

Conclusion

As far as Molson Coors goes, my opinion is to basically “wait and see.”  In other words, I need the company to give me a reason to invest in it.  Although I believe they make a quality product, I need them to show me signs of growth comparable to their peers, or at least growth at a level that is on par with the valuation.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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