Chapter four of A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan
Fistful Of Valuations - Chapter 4
An estimated valuation of Molson Coors Brewing Co., TAP, was first performed on 5/6/2010.
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Molson Coors Brewing Company (MCBC) is a holding company. Its operating subsidiaries include Coors Brewing Company (CBC), operating in the United States prior to the formation of MillerCoors LLC (MillerCoors); Molson Coors Brewing Company (UK) Limited (MCBC-UK), operating in the United Kingdom; Molson Coors Canada (MCC), operating in Canada, and other corporate entities. The Company operates in four segments: Canada, the United States, the United Kingdom and Molson Coors International (MCI). MCBC has a portfolio of more than 65 strategic and partner brands, including signature brands Coors Light, Molson Canadian and Carling, which are positioned to meet a range of consumer segments and occasions.
In 2010, the 52 Week High 51.33 52 Week Low 38.44
Does TAP make for an intelligent investment or intelligent speculation in 2010? The 2015 discussion starts at the end of this chapter.
Let’s do a rough estimation of intrinsic value per share for 2010. Starting with a base estimate of annual Free Cash Flow at a value of approximately $730,000,000 and the number of shares outstanding at 185,000,000 shares (In 2015, the current number of shares outstanding is 162,770,000 .); I used an assumed FCF annual growth of 8 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here, and think about its sustainability:
The resulting estimated intrinsic value per share (discounted back to the present) is approximately $62.66.
Market Price = $41.96 Intrinsic Value = $62.66 (estimated). The Debt/Equity ratio here = .24 Price To Value (P/V) ratio = .64 and the estimated bargain = 33 percent.
More importantly, before we make a purchase decision, we must decide ( filter #1 ) if TAP is a high quality business with good economics. Does TAP have ( filter #2 ) enduring competitive advantages, and does TAP have ( filter #3 ) honest and able management. The current price/earnings ratio = 11. It ‘s current return on capital = 7.31
Using a debt to equity ratio of .24, TAP shows a 5-year average return on equity = 7.8
The biggest threat to profitability is: Competitive substitutes and competitor pricing. The main competitors are: The Coca-Cola Company, Pepsico, Inc. PEP, Dr Pepper Snapple Group, Inc. DPS, Groupe Danone World Water Division, Nestle Waters Private, ITO EN, LTD. Private, Red Bull GmbH Private, Cott Corporation COT, BTVCF.PK, Ocean Spray Cranberries, Inc. Private, NSRGY.PK, Diageo plc DEO, HINKY.PK, SBMRY.PK, Anheuser-Busch InBev BUD, Suntory International Corp. Private, Kraft Foods Inc. KFT, Pernod Ricard SA Private, GPMCF.PK, Constellation Brands Inc. STZ.
The Main Competitive Advantage currently is: Coors and Molson brands. Formed by the merger of the Coors Brewing Company and the Molson Company in 2005, the Molson Coors Brewing Company is the fifth largest brewer in the world by production volume. The company brews and sells 40 different beer products.
Further discussions on competitive pressures can be viewed here: http://www.wikinvest.com/stock/TAP
You the reader can insert your notes about management here:
In 2007, the company announced a joint venture with SABMiller (SAB-LN). The deal, forming the second largest brewer in the US, after Anheuser-Busch Companies (BUD), was completed on July 1, 2008. Under the agreement, Molson Coors claims a 42% share in the joint venture's profits, but retains 50% voting rights. The joint venture only encompasses the company's operations in the US; its Canadian and UK businesses remain completely under the control of Molson Coors. The combined company benefits greatly from logistical and transportation synergies. Instead of having to brew Coors Light in Colorado and shipping it to the east coast, Molson Coors can now brew the beer in SABMiller (SAB-LN)'s east coast breweries, creating a simpler distribution chain. The company expected to realize cost savings of $500 million. Molson Coors, TAP, must maintain Brand Loyalty in a highly competitive environment. TAP must also adapt to an increasingly consolidated beverage industry.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Does TAP make for an intelligent investment or speculation in 2010? The 2015 discussion starts at the end of this chapter.
Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is TAP the best place to invest our money today? Or, are there better alternatives? How will TAP compete going forward? Technologies change and new technology can emerge. Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.
Molson Coors Brewing Company current 2015, Div/yield = 0.41/1.85.
In summary, using a debt to equity ratio of .24, TAP shows a 5-year average return on equity = 7.8 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 33. percent, and a relative FCF growth of 8 percent, then the estimated effective annual yield on this investment may be greater than 12.1%. Going forward, are there any transformational catalysts or condition indicators imaginable on the horizon? Would brand loyalty keep customers buying here?
SEC Filings online:
Now, let’s discuss Molson Coors Brewing Corporation, TAP results over the past five year period. As a business, the Net Profit Margin of Molson Coors Brewing was in the range of 15.05% in 2010. In 2015, the Net Profit Margin is 9.61% TTM. This indicates that Molson Coors Brewing has decreased significantly from its 2010 performance. However, October 2015 brings a new surprise!
On Tuesday, October 13, 2015, Molson Coors stock gained 9.9% on the day after SABMiller (SBMRY) agreed to be acquired by rival company Anheuser-Busch (BUD) for $67.50 per share. This acquisition is one of the biggest and is worth $104 billion.
As part of the acquisition regulatory process, SABMiller intends to divest some of its assets, including its MillerCoors joint venture with Molson Coors. If this joint venture is divested, Molson Coors has the right of first refusal to acquire the remaining 58% stake, giving it an upside in this probable event.
The Return On Equity of Molson Coors Brewing was in the range of 9.51% in 2010. In 2015, the Return On Equity is 4.46% TTM. Molson Coors Net Margin 5 Yr. Avg. is 15.68 % versus 17.96 % for the industry. This indicates that Molson Coors Brewing has produced lower returns for its shareholders recently. Why?
The brewing industry has evolved and become an increasingly global beer market. The industry was previously founded on local presence with modest international expansion achieved through export, license and partnership arrangements.
More recently, it has become increasingly complex, as the consolidation of brewers has occurred globally, resulting in fewer major global market participants. This industry consolidation produced a few large global brewers representing the majority of the worldwide beer market. At the same time, smaller local brewers within certain established markets are experiencing accelerated growth as consumers increasingly place value on locally-produced, regionally-sourced products.
As the beer industry continues its evolution of consolidation and diversification of its products to meet consumer demand with broadening preferences, Molson Coors management states that large global brewers are uniquely positioned to leverage the scale, depth of product portfolio and industry knowledge to continue to lead the market forward.
As part of its participation in these industry changes, Molson Coors Brewing expanded operations globally and in emerging markets, including the acquisition of StarBev Holdings S.a.r.l. ("StarBev") in 2012, representing brewing operations within Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia. Molson Coors Brewing also aims to grow market share within emerging markets, such as Latin America and Asia.
On February 10, 2015, the Molson Coors Board of Directors approved and authorized a new program to repurchase up to $1.0 billion of the Class A and Class B common stock. The program has an expected term of four years from the date of the announcement.
In 2015, Molson Coors continues to drive the strategy of building a stronger brand portfolio, delivering value-added innovation, strengthening core brand positions and increasing share in above premium, craft and cider.
Molson Coors expects the 2015 financial results to be negatively affected in the U.K. by the termination of the Modelo distribution arrangement at the end of 2014 and the termination of the contract brewing arrangement with Heineken at the end of April 2015. Additionally, Molson Coors has agreed to terminate the license agreement for the distribution of the Miller brands in Canada. Molson Coors expects the loss of these three contracts to negatively impact 2015 pretax profit by approximately $40 million.
In Canada, the market remains weaker than the U.S., and Molson Coors intends to continue to invest in supply chain efficiency and capability as well as streamline the Canada cost base.
In the core brands, Molson Canadian introduced its Beer Fridge campaign, and Coors Light will see more retail programing and new advertising. In above-premium, consumer demand remains strong for Coors Banquet, Molson Canadian Cider, and Mad Jack Apple Lager.
Molson Coors launched Coors Altitude, a 6.4% ABV lager that is an alternative to spirits. This year, Molson Coors also plans to introduce Rickard’s Radler as a seasonal. In addition to Heineken and Strongbow, Molson Coors is now marketing and distributing the rest of Heineken’s top-end import brands in Canada, including Desperados, Dos Equis, Moretti, Sol and Tecate.
In the regulatory arena, the Ontario government considers potential changes in the way beer is distributed in the largest Canada province. In the U.S., Molson Coors’s primary focus will be to drive share in American light lagers, making sure consumers know the heritage behind Miller Lite and Coors Light. In addition, Molson Coors intends to continue to transform the product portfolio to above-premium with innovations like Redd’s, Smith & Forge Hard Cider and further extensions from Leinenkugel's and Blue Moon.
Overall, Molson Coors also expects to continue to invest significantly in its brands and information technology. As a result, Molson Coors does not expect to grow U.S. operating margins in 2015.
In Europe, the economy continues to struggle with weak overall consumer demand and a deflationary backdrop. Molson Coors expects the continued growth of the value segment, lower-margin channels, and package configurations to be challenges in 2015.
Molson Coors plans to heavily invest in major segment brands such as Carling, Ozujsko and Jelen, while continuing the strong momentum of our above-premium, craft and cider portfolio. Molson Coors International business will focus on growth and expansion in new existing markets. Molson Coors will continue to drive strong momentum with Coors Light and Coors 1873 in Latin America along with growth in the India business. At the same time, Molson Coors must remain disciplined with its cost base toward the goal of achieving profitability by 2016.
Molson Coors currently anticipates approximately $260 million to $270 million of cash contributions to its defined benefit pension plans in 2015. This includes a pension expense of approximately $20 million, based on foreign exchange rates as of December 31, 2014. This increase in expected cash contributions in 2015 is due to a GBP 150 million (approximately $230 million) lump sum payment made to the U.K. pension plan in January 2015. From this case, I have learned to appreciate the concept of “brand pressure” from competition, both large and small players. So, is Molson Coors Brewing a business that I would invest in today? No. Not at this time.
As of October 20th, 2015, Valuepro.net estimates the intrinsic value per share of TAP at: $49.65 and the market price is at: $88.23 Therefore, Molson Coors Brewing does not appear to be a bargain at this time.