This Brewer Is Cheap No Matter What Kind of Beer Americans Like
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Investing is an undertaking with inherent uncertainties; since the value of a company is the present value of its future cash flows, the ability to discern a company's future earning power is a crucial attribute for good investing. For many companies, this is a difficult undertaking. However, for Molson Coors Brewing (NYSE: TAP), the future may be good enough to justify its stock price no matter what happens.
Traditional brewers don't stack up
Molson Coors is the second-largest brewer in the U.S. and Canada -- and the largest craft beer brewer in the world. The company's operations are concentrated in mature markets in which it already has a significant presence, making growth hard to come by.
Instead of investing in growth, the company is focusing on maximizing profitability in its core markets, creating high margins and predictable earnings. That is why it is a surprise that the company trades at just 10.5 times trailing free cash flow.
The stock's cheapness may be due to investor fear of increasing competition from traditional and craft brewers. Anheuser-Busch InBev (NYSE: BUD) is the only brewer with more North American sales than Molson Coors, but its $50 billion in global revenue towers over that of its smaller competitor, which sold only $4.2 billion worth of beer in the last four quarters.
But whereas Anheuser-Busch's sales are spread out across the entire globe, Molson Coors is concentrated in Canada and the United States, which gives it equal scale to its larger rival in those markets. As a result, Molson Coors earns mid-to-high 20's margins -- only a few percentage points lower than Anheuser-Busch's 30% operating margin.
In fact, without low margins in non-core markets, Molson Coors' operating margin would equal that of its larger rival. This enables the company to compete effectively with even the biggest traditional brewers in the U.S. and Canada.
A rising tide lifts all boats
The 10.5 times trailing free cash flow is too low a price for a traditional brewer in mature markets, but it is exceptionally low for a brewer of craft beers -- a product that is experiencing rapid adoption in Molson Coors' core markets.
But craft brewing is quickly becoming a competitive business. Even Molson Coors' flagship craft beer, Blue Moon, is just one alternative amid an offering that includes Boston Beer's (NYSE: SAM) Sam Adams, among other nationally-branded craft beers.
Even though Boston Beer is much smaller than Molson Coors -- it sold just $600 million worth of beer over the last four quarters -- the company is growing quickly, with volumes likely to double over the next 10 years. Moreover, the company's pristine balance sheet ensures that it will be able to absorb another recession without reducing growth in capital expenditures, though the last recession only had a small effect on the company's sales growth. Meanwhile, Molson Coors and Anheuser-Busch carry heavier debt burdens and experienced sharper sales declines during the 2009 recession.
However, instead of competing for market share, Molson Coors and Boston Beer are more likely to grow alongside each other as the market for craft beer continues to grow, especially in the United States. Even with its massive scale and global distribution system, Anheuser-Busch faces a rough future in the U.S. as craft beers take the country by storm. Its global presence offers a degree of diversification from the shift in consumer sentiment, but the company is clearly on the downswing while Molson Coors and Boston Beer enjoy significant tailwinds.
Molson Coors is cheap if craft beer is just a fad that will run its course within a few years, and it is cheap if the strong growth in craft beer sales is a long-term trend. At 10.5 times free cash flow, it is hard to imagine a future in which Molson Coors does not earn an above-market return for investors.
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Ted Cooper 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!