Today's Buy Opportunity: Molson Coors Brewing

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While millions of revelers descend on Munich to celebrate the 200th anniversary of Oktoberfest, now is the time for investors to consider pouring a little Molson Coors Brewing (NYSE: TAP  ) in their portfolios.

What's on tap?
With its Molson roots dating back to 1786 and a Coors legacy from 1873, Molson Coors boasts more than 350 years of combined beer-making prowess. Although both Molson and Coors had its own history and brewing culture, the 2005 merger of these venerable Canadian and American brands helped both of them gain distribution and marketing scale. The merger was fraught with tension, but the company has made it successful. In fact, it was so successful that management took it a step further in 2008, making a strategic joint venture with SABMiller that essentially merged the two companies' U.S. and Puerto Rico operations. All this served to help those companies keep pace with Anheuser-Busch -- now Anheuser-Busch Inbev (NYSE: BUD  ) -- the companies' larger competitor at the time.

Between the merger and subsequent joint venture, this brewer of such big names as Coors, Molson, Blue Moon, Killian's, Keystone, and Carling is no pushover in the global beer competition. In its top three markets, Molson Coors and the MillerCoors joint venture hold significant market share: 41% in Canada, 29% in the U.S., and 20% in the United Kingdom. However, while these are substantial positions, they're also in relatively mature (low-growth) markets. But Molson Coors is expanding its reach in smart ways to faster-growing markets.

The company's first foray, into Brazil, taught it a lesson on controlled, cost-conscious growth; it struggled badly in that market before backing off in 2006. Having experienced that, management has focused its efforts on low-cost growth through the use of strategic partnerships and joint ventures. In fact, they've just announced one such partnership in China.

Unlike many management teams, Molson Coors' crew has achieved the ever-elusive corporate synergies promised from these deals and has done so ahead of schedule. Not only does the market not fully appreciate this skill set, but it seems to be ignoring the fact that the company still has more cost savings to come. In addition, the company's financial health provides it with the option to pursue growth through acquisitions of smaller players such as Boston Beer Co. (NYSE: SAM  ) and Craft Brewers Alliance (Nasdaq: HOOK  ) -- makers of Samuel Adams and Red Hook, respectively.

The company already produces hundreds of millions of dollars in free cash flow, and if we believe it can meet its 2010 free cash flow goals, things begin to look really interesting. Assuming Molson Coors can grow FCF at a modest 4% clip for the next decade, we're looking at a stock worth $57 to $62 a share.

Beer and present danger
Molson Coors is not an investment devoid of risk. For starters, brewers operate in a tightly regulated industry, so we have to watch for any negative political momentum. And while the company's goals are not unreasonable given its past success, execution remains a risk factor. Also keep in mind that Molson Coors is a midsize (perhaps sloshed) fish in a big, competitive global beer pond. If large competitors wanted to engage in drastic price-cutting, it could be hurt. However, the company's large competitors have massive amounts of debt on their balance sheets, and with these bills to pay, we don't expect price wars to break out anytime soon.

Again, Molson Coors has a healthy balance sheet, a track record of cost-cutting and execution, and enough scale to compete. The company is relatively small compared to the competition and would actually make a nice acquisition for a bigger player -- such as its joint-venture partner, SABMiller.

This consumer staple with solid brands is the kind of business that can make money in any economy. With a stock possibly 20%-27% undervalued, a 2.5% dividend, and potential growth through further joint ventures or acquisitions, Molson Coors is an investment even a teetotaler like Warren Buffett would toast.

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Inside Value and Special Ops analyst Andy Louis-Charles owns no shares of the companies mentioned in this article. You can follow Andy on Twitter @TMFAloha. Boston Beer is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (23)

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  • Report this Comment On September 20, 2010, at 12:19 PM, XMFAloha wrote:

    If anyone has any questions about beer, wine or sangria please post them here. I'll do my best to answer most of them and avoid writing anything that may preclude me from ever running for office.

    Again, thanks for taking the time to read this article. Hope you had a chance to read (and invest) in my first pick:

    http://www.fool.com/investing/high-growth/2010/08/06/todays-...

    But that's neither here nor there ... Molson Coors is on tap today, so pour on the questions!

  • Report this Comment On September 20, 2010, at 12:40 PM, dargus wrote:

    Do you honestly think Molson Coors would try and purchase a craft brewery? I'm not sure about HOOK, but I suspect The Boston Brewing Company would resist such a takeover attempt. I also wonder if being owned by a large scale brewer would hurt the craft brew brands. I suppose many of the craft brewers have reached a more mainstream audience, but I suspect some serious beer drinkers might be turned off by the idea.

  • Report this Comment On September 20, 2010, at 1:23 PM, PeyDaFool wrote:

    TMFAloha... I have some pressing questions:

    How do they make the Coors can change color when it's cold?

    Why is Keith Stone so ridiculously smooth?

    Do you think it would be prudent to bring a beer bong to a wedding?

  • Report this Comment On September 20, 2010, at 8:57 PM, kstoltz wrote:

    Darqus -

    There's only a couple of publicly traded craft brewers out there. As big as the niche is, most are small brewers, some of which have been very successful, but most see Samuel Adams as one of the 800 lb gorillas out there. If Sam Adams was purchased by Molson Coors or Inbev, most consumers wouldn't notice or care. The majority of those who would are probably giving a good amount of their money to the non-public brewing companies. The trick will be whether or not the Coors or Inbev muck with a good thing.

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