Buying Molson Coors

When I was working my way through college, a somewhat chauvinistic male coworker would joke, "Heaven is cold beer and hot women. Hell is hot beer and cold women."

Molson Coors Brewing Company Class B (TAP/NYSE or T.TAP.NV/TSX) shareholders, male and female alike, could be excused for thinking that hell is owning the beer company's stock. Molson Coors shares got hammered on April 28 when the company unexpectedly announced a first quarter loss -- plunging approximately 24%. Beer sales were down and the company had made $30 million in severance payments resulting from the February merger of Adolph Coors Company and Molson Incorporated.

Many analysts cut their ratings and, since the company announced the first quarter results, the SEC has announced it's investigating the Coors-Molson merger. There is also a lawsuit that's been brought by Molson shareholders in Canada. If that's not enough bad news, consider that some beverage industry analysts see a consumer trend favoring spirits at the expense of beer. Plus, many expect a summer price war in the U.S. with Molson Coors taking on Budweiser and SABMiller, reducing profit margins.

All this bad news caught the attention of CG

I bought stock in TAP on Monday. The shares closed today at $60.35 in New York. Last summer the company was trading just over $80 and hit a low of $57.37 on May 26.

Molson Coors has a market cap of approximately $3.4 billion with 57 million shares outstanding. The company is cheap -- it sells for roughly 0.66 times book value and only 0.88 times sales. It offers a 2.15% dividend yield.

My hunch is that this is a case of the company being overly punished for disappointing results. Management is experiencing problems merging the operations of Coors and Molson, and is struggling to turnaround the Brazil business inherited from Molson. Yet these seem to be short-term challenges. Looking 3-to-5 years down the road (if that long), TAP shares should be up not down.

Is this pick all wet? Time will tell.

Comments

[DanielXX]

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[John Bethel]

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[Geoff]

Hi,

I bought into this stock yesterday.
I agree that it's much too cheap. 0.66 of book. It's Q1 loss was around $45M, but most of this was one-off due to merger.
It's operating loss for Q1 was only $5M.
Q1 has traditionally been a down quarter for this company. Still see it making around $4.4 a share this year.
It's Brazilian business is a cherry. Either, TAP will sort out their distribution problems there, and profit. Or, they will partner with someother company to sort distribution in Brazil. I hope they don't have to dump it.
The lack of NHL last year didn't help earnings. Should be back to normal this season (?)
The US beer price war is a worry.

Global beer and food brands are a good place to be right now. Buffet has placed his bet on BUD. At least the Chinese can't copy Molson Coors products and make them cheaper. Or can they????

Thanks for your insightful blog, and keep finding those undervalued stocks. Must be some more out there somewhere.

Geoff

[John Bethel]

Geoff,

I'm gratified that you find this blog insightful. Don't worry, I'm keeping an eye out for undervalued stocks all the time. Most stocks I check out are trading at fair value, as opposed to being grossly overvalued.

What does that mean? I don't know. I hope it means a lot of stocks are about to become ripe opportunities for us.

Thanks again for reading.

John

[Keld Jensen]

Re: undervalued stocks. The Canadian Government recently hammered income trusts with some new tax rules. But....the rules don't come into effect for 4 years. In the meantime you can be sure CFOs everywhere are going to be burning the midnight oil figuring out ways to circumvent the impending rules. Concurrently many funds are seriously undervalued. For instance, a small company, Dominion Citrus (DOM-UN.TSX) (current price 0.73cdn) is plugging away as it has for years consistently producing a steady income which is being distributed at the rate of (at current prices) 16+% return on investment. The company does not overcontribute its earnings. I can't find any fault with the financial statements, their labour force is under multi-year contract, and one hardly ever hears any news to concern oneself with its operation. So why has it dropped in price along with the losers? I have seen its share price fluctuate 18% in one day without a whimper or notice in the news. Strange. This company should in my opinion be trading well above $1 based on its performance, stability, and longevity.

[jackie]

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