MOLSON COORS CANADA INC. (Toronto symbols TPX.A $49 and TPX.B $49; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 181.7 million; Market cap: $8.9 billion; Price-to-sales ratio: 2.4; Dividend yield: 2.6%; TSINetwork Rating: Average; www.molsoncoors.com) is one of the world’s leading brewers. Its main brands include Coors Light, Molson Canadian and Carling.
The company’s sales fell 36.5%, from $4.8 billion in 2008 to $3.0 billion in 2009 (all amounts except share prices and market cap in U.S. dollars). That’s because it merged its U.S. brewing operations with those of rival SABMiller to form MillerCoors. Each company has a 50% voting interest in this joint venture, but Miller gets 58% of the profits while Molson Coors gets 42%. Because it owns less than half of MillerCoors, accounting rules forced Molson Coors to stop including the sales from this business in its overall sales.
Big acquisition helps fuel sales growth
However, sales rebounded to $3.9 billion in 2012. That’s partly due to the contribution of StarBev LP, which owns nine breweries in Central and Eastern Europe. Molson Coors paid $3.4 billion for StarBev in June 2012.
Thanks to savings from the MillerCoors joint venture and an unusually low tax rate, earnings rose 37.5%, from $2.77 a share (or a total of $512.6 million) in 2008 to $3.81 a share (or $707.4 million) in 2009. Earnings fell to $3.56 a share (or $666.9 million) in 2010 but turned around in 2011 and rebounded to $3.91 a share (or $710.5 million) in 2012.
Buying StarBev should cut Molson Coors’ exposure to slow growth in its traditional markets, including the U.S., which supplied 48% of its 2012 earnings; Canada (40%); and the U.K. (4%). Central Europe accounted for the remaining 8% of its earnings. The company has now merged its U.K. operations with StarBev, which will help it cut $50 million from StarBev’s annual costs by 2015.
Balance sheet still in good shape
These savings will also help Molson Coors pay back the money it borrowed to buy StarBev. At March 30, 2013, its long-term debt was $3.4 billion, which is still a manageable 38% of its market cap. It also held cash of $511.5 million, or $2.82 a share.
The extra earnings from StarBev and ongoing savings from MillerCoors should let the company raise its $1.28-a-share dividend, which yields 2.6%. In 2012, Molson Coors paid out just 25.3% of its cash flow as dividends.
Molson Coors also aims to spur its long-term growth with joint ventures and licensing deals with foreign brewers. These operations have yet to make a meaningful contribution to the company’s earnings, but they give it a low-risk way to enter new markets like China and India.
P/e remains low after big gain
The stock is up 17% in the past year. Even so, both the class A and B shares trade at 12.2 times the $4.00 a share that Molson Coors should earn in 2013. However, the B shares have better liquidity.
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