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Can Molson Coors Brew Some Portfolio Profits?

Tuesday, April 17th, 2018

Molson Coors (TAP) has enjoyed a strong brand name for many years, but lately the company has faced growth concerns. Some are concerned the rise of craft breweries will have a negative impact on sales growth, while others remain confident in the brand loyalists. Nevertheless, the concerns have pushed the stock price under $74/share which is more than 25% off its 52-week high of $99.65 and near its 52-week low of $72.34.

The company has a strong list of brands which includes Miller, Keystone, Coors, and Blue Moon. To battle against the craft beer rise, the company has made acquisitions of smaller craft beer companies which includes Saint Archers, a local San Diego Brewery.

A company could have great name brands, but if you overpay for those brands it could be a dangerous investment. To make certain we get a good value for the company, we always look at the valuation ratios. The current Price/Earnings multiple of 16.3 is above the industry average of 11.4; Price/Sales of 1.4 is the same as the industry average; and Price/Cash Flow of 8.8 is slightly higher than the industry average of 8.7. Overall the valuation ratios are not concerning, but they also do not excite me.

One area of concern is the Price/Tangible Book Value. It is concerning because the value is not material. This is likely a result of acquisitions and mergers which have led to goodwill of $8.4 billion and intangible assets of $14.3 billion. The combination of these two greatly exceeds the company’s current equity of $13.2 billion. This means large write downs could jeopardize the company’s equity in the long term. The best way to reduce the risk is by understanding Molson Coors intangible assets and the deals the company entered to acquire the various companies. I would want to make sure those companies have been accreditive to Molson Coors bottom line and that they are producing cash flow.

Investors do receive a nice dividend of 2.2% and the company uses just 36.1% of earnings to pay out that dividend. The reasonable payout ratio gives me comfort in the sustainability of that dividend.

The growth rates look very strange as sales have grown 125.2% over the last 12 months, yet EPS has fallen 51.3% over that same time frame. If you are holding this company or considering buying it, you must take a closer look at the income statement to see how sales more than doubled, but EPS was cut in half.

The balance sheet has a concerning start as the current ratio is 0.64, but that is near the industry average of 0.69. Debt/Equity looks decent at 85.5%. It is not a major problem, but I would like to see this number a little lower and would want to see if the company has plans and cash flow to reduce its debt level.

If we look forward to December 2019, estimated GAAP EPS of $5.44 would give us a target sell price of $89.76. This would be an estimated return of nearly 22% and would place the company in our hold category. I would consider adding this company to your portfolio if the company continued to pull back and provided further research into the company’s debt and acquisitions looks positive.

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