This Family-Controlled Brewer is Worth a Closer Look

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Brewers have struggled to grow during the recent period of global economic uncertainty, but their shares have held up relatively well which has made it difficult to find bargains in the industry. However, Molson Coors (NYSE: TAP) may be the exception. As the second-largest brewer in the U.S. and Canada, Coors owns a portfolio of well-known brands and has developed regional economies of scale in many of the areas in which it operates.

However, the recent economic weakness in the U.S. and Canada has caused the company to report operating losses in each of the last three years. In addition, 84% of shares outstanding are controlled by insiders and family members, so shareholders have no say in how the company is run. However, these weaknesses may be overcome by superior financial performance in the coming years.

Trades at discount to peers

Coors trades at a sizeable discount to its peers; it trades at just under 12x TTM earnings, whereas Anheuser-Busch (NYSE: BUD) trades at 18x, Boston Beer (NYSE: SAM) at nearly 30x, and AmBev (NYSE: ABV) at 21.5x earnings.

However, Coors is the only company in its peer group that has posted an operating loss in the last decade. The company has faced intense competition in its markets, which has resulted in declining revenue since 2007.

It has also taken on several new issues of long-term debt. Coors' leverage ratio of 1.62 is in line with Boston Beer (1.47) and AmBev (1.79), and lower than Anheuser-Busch (2.74), but its operating performance is more volatile than its peers. Thus, even though Coors maintains a similar level of debt to its peers, the debt is riskier because the operations it finances are riskier.

Turnaround on the horizon

Despite the bleak outlook suggested by recent performance, Coors has some opportunities that may allow it to turn its operations around. When Molson and Coors merged in 2005, the intent was to combine the companies' scale to better compete with Anheuser-Busch in the United States. The result has been a marked improvement on returns on invested capital.

Many investors shy away from insider-controlled companies because outside shareholders have little or no input on major decisions. However, these controlled entities often represent great long-term value because they are run like private companies for the benefit of shareholders. Coors' management is known for having a permanent cost-cutting plan in place -- every expense is minimized to the greatest extent.

Management has also made good strategic decisions in the last several years, including the joint venture with SABMiller. Investors can expect the history of shareholder-friendly management to continue because of insiders/family members grip on the company.

Valuation

Since 2002, Coors has averaged a free cash flow margin of just over 9%. If you apply the 9% margin to LTM sales of $5.5 billion, you get normalized free cash flow in the range of $500 million per year, or $47.60 per share. At a recent price of $42.30, the company is undervalued by more than 10%. However, if operations were to improve, the value of the company could be much higher.

In addition, SABMiller may be interested in making a bid for Coors while its shares trade at a relative discount to its peers. It is difficult to say what the company would be acquired for -- certainly at a lower multiple than its more profitable peers -- but it would likely have to be more than $55 for insiders to accept the bid.

Turnaround situations in mature industries are difficult to handicap, but Coors may be worth a closer look for those who believe domestic lager consumption will rebound in the next year or two.


titans8904 has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services recommend 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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