MOLSON COORS BREWING CO. $44 (New York symbol TAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 184 million; Market cap: $8.1 billion; Price-to-sales ratio: 2.1; WSSF Rating: Average) is the world’s fifth-largest brewer by volume. Its major brands include Coors Light, Molson Canadian and Carling.

Molson Coors was formed in February 2005, when Canadian brewer Molson Inc. merged with U.S.-based Adolph Coors Co. The merger let Molson Coors close plants and combine distribution networks in the face of growing competition.

Canada is Molson Coors’largest market, accounting for 40% of its 2008 sales and 57% of its gross profit. The U.S. (32% of sales and 33% of profit) was its second largest, followed by the U.K. (28% of sales and 10% of profit). It exports its beers to other markets, such as Asia and Latin America, or licenses them to local brewers.

Sales rose 12.4%, from $5.5 billion in 2005 to $6.2 billion in 2007. However, earnings jumped 60.5%, from $316.1 million in 2005 to $507.4 million in 2007. Earnings per share rose 40.9%, from $1.98 to $2.79, on more shares outstanding.

Second big merger in four years

In July 2008, Molson Coors merged its operations in the U.S. and Puerto Rico with those of rival brewer SABMiller, to form a new company called Miller-Coors. Both companies have equal voting rights, but Molson Coors gets 42% of the profits.

Accounting rules force Molson Coors to recognize only its proportionate share of sales from Miller-Coors. Consequently, its 2008 sales fell 22.9%, to $4.8 billion. But thanks to $28 million in savings from the new joint venture, its earnings rose to $512.6 million, or $2.76 a share.

In the first quarter of 2009, Molson Coors’ earnings jumped 75.2%, to $98.8 million, or $0.53 a share. The company earned $56.4 million, or $0.31 a share, a year earlier. The gain mainly came from savings realized from the creation of MillerCoors. Sales fell 58.8%, to $559 million from $1.4 billion.

MillerCoors expects to lower its annual costs by $128 million in its first year, more than double its original goal of $50 million. By the end of the third year, it aims to find $500 million in annual savings.

More savings at hand

Besides the savings from the new joint venture, Molson Coors has its own cost-cutting plan. This includes laying off workers and outsourcing certain administrative functions. This should save an additional $250 million a year by the end of 2009.

Molson Coors is using some of these savings to strengthen its balance sheet. Last year, it cut its long-term debt by $428.9 million, to $1.8 billion. In the first three months of 2009, Molson Coors’ long-term debt fell again, to $1.6 billion, and now stands at a moderate 20% of its market cap. The company faces few repayments this year, but has $300.1 million due next year.

At $5.1 billion, goodwill and other intangibles account for a high 52% of Molson Coors’ total assets. However, $2.7 billion of this is related to its brands, most of which have long-term value. That reduces the chance of a big writedown.

The company will earmark some of its cost savings for advertising and marketing. The Miller-Coors joint venture is particularly interested in spurring interest in older brands, such as Miller Lite.

MillerCoors also hopes to build on its 30% share of the U.S. beer market while its larger rival InBev concentrates on integrating last year’s purchase of Anheuser-Busch (which has 50% of the U.S. beer market). The recession could actually help MillerCoors in this regard; struggling automakers are buying fewer TV advertisements, which should make it cheaper for the brewer to buy ads on popular shows.

InBev-style takeover unlikely

It is unlikely that a large international brewer like InBev would be interested in a takeover of Molson Coors. This is because the two founding families control the company through special voting shares (the regular common shares are non-voting). These insiders have over 80% of the votes. However, the low likelihood of a hostile takeover shouldn’t stop you from investing in a well-managed company like Molson Coors.

The stock got as high as $60 in May 2008, but dropped to $31 in March, partly on fears that the recession would prompt drinkers to switch to lower-cost beers. However, Molson Coors produces several low-cost brands, so the overall impact on its sales was small. Falling prices for barley, hops and other ingredients will also help expand its profits.

The high U.S. dollar hurts the contribution of the company’s overseas operations, and will offset some of the benefits it gets from its lower costs. Still, earnings will probably improve to $3.26 a share this year, and the stock trades at 13.5 times that estimate.

The success of its cost-cutting plan has also freed up more cash for dividends. In May, Molson Coors raised its quarterly dividend by 20%, to $0.24 a share from $0.20. The new annual rate of $0.96 yields 2.2%.

Molson Coors is a buy.