The beer industry has a wide range of companies by market capitalization. Anheuser-Busch (NYSE:BUD) , Molson Coors Brewing Company (NYSE:TAP), and Boston Beer (NYSE:SAM) each have a market capitalization of $170 billion, $10.5 billion, and $3 billion, respectively. Anheuser-Busch has been a major player for years, making big acquisitions and growing its product line to keep up with the current craft beer craze. Boston Beer has been spending heavily on research and development, marketing, and introducing new products to keep hold of its first mover advantage in the craft industry. Molson Coors and Anheuser-Busch are more established, mature companies that possess a wide range of product offerings. Foolish investors can get a better idea of competitors in different life-cycle stages by looking at cash flow.

Earnings can be Misleading While Cash is King
Currently, the trailing twelve month P/E ratios for Anheuser-Busch, Boston Beer, and Molson Coors are 12.24, 46, and 19.14, respectively. P/E ratios can be somewhat misleading when comparing over a multi-year period due to one-time gains, charges, and revaluations. Investors today may be paying too much attention to short-term top and bottom line growth. For the long-term investor, it is beneficial to have companies that generate real cash from their business operations, increase shareholder returns, and spend wisely on upgrading their operations. Focusing on cash flow instead of P/E multiples provides more detail into how a company runs and how much cash is left over to be distributed to shareholders.

Wait, Free Cash Flow Can Increase My Returns?
Free Cash Flow (FCF) is the actual cash that would be available to the company's investors after making all investments necessary to maintain ordinary business operations. These are funds that can be distributed to equity and debt holders in the form of buybacks, dividends, and reducing debt. In other words, Foolish investors should love cash flow because cash flow leads to higher potential returns on investment.

FCF= Operating cash flow – Capital expenditures.

FCF in millions





Boston Beer





Molson Coors










All FCF figures for OCF and capex taken from most recent 10-k filings, or 20-f in BUD's case. 

Boston Beer's FCF has been on the decline the past four years, Molson Coors has been steadily growing, and Anheuser-Busch was growing up until 2013, which was slightly negative. To better understand what these numbers mean for Foolish investing, we can look at the FCF growth rates per year.

Growth in FCF




Boston Beer




Molson Coors








Boston Beer's FCF has decreased considerably over the past two years, but due to its life-cycle stage, it is not necessarily a bad thing. Molson Coors has been steadily growing FCF for the past four years, while Anheuser-Busch has gone from a high of 20.49% growth in the 2011 period all the way to barely negative territory in 2013.

Breaking Down Free Cash Flow
FCF can be broken down into its component parts for a better understanding. The two components of FCF are:

  1. Operating cash flow (OCF), which is the actual cash generated during ordinary business operations
  2. Capital expenditures (Capex), which are cash outlays used to upgrade or purchase new property, plant, and equipment.

Numbers in millions

OCF 2012

Capex 2012

Capex % of OCF 2012

OCF 2013

Capex 2013

Capex % of OCF 2013

Boston Beer







Molson Coors














Companies that are heavily investing in and growing their business, such as Boston Beer, will have a higher capex percentage than companies in more mature phases in their life-cycle. This is not to say that Molson Coors and Anheuser-Busch are not investing in their businesses--these companies are just not spending nearly as much on a percentage basis. They have done so in the past and ideally their investment has paid off with higher OCF.

Looking at the chart, Boston Beer's capex percentage of OCF has gone from 69% to just over 100% from 2012 to 2013. Molson Coors and Anheuser-Busch have hovered around the 22%-28% range, but Molson Coors has the lowest percentage based on this metric. This means Molson Coors and Anheuser-Busch will have more cash left over to fund buybacks, dividends, and reduce debt.

Boston Beer is spending heavily to increase capacity in their breweries and on additional kegs to store all that delicious beer. Their cash balance has decreased from $75 million in 2012 to nearly $50 million in 2013. Also, in the most recent 10-K, management has estimated 2014 capex to be between $160 million and $220 million. If the mid-range is taken, there is a growth rate estimate of 89% in capex from 2013. This will translate into even lower FCF unless they generate enough OCF to cover it, which is unlikely.

Molson Coors and Anheuser-Busch both pay a dividend and have the means to increase them. Anheuser-Busch is considerably larger than Molson Coors and will have a harder time growing FCF, as evidenced by the previous table.

Foolish Takeaway
On a free cash flow basis, Foolish investors should delve further into Molson Coors. Boston Beer may be the hot craze in craft beer at the moment, but those investments have not produced FCF growth, only a lofty share price which may not be warranted. Anheuser-Busch is considerably larger than the other companies, which has translated into slowed revenue and OCF growth. In this instance, cash is king and Molson Coors has sprung a leak.

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Zach Friesner has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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