Has Molson Coors Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Molson Coors (NYSE: TAP  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Molson Coors.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (9.8%) Fail
  1-Year Revenue Growth > 12% 7.5% Fail
Margins Gross Margin > 35% 41.3% Pass
  Net Margin > 15% 15.5% Pass
Balance Sheet Debt to Equity < 50% 62.2% Fail
  Current Ratio > 1.3 0.80 Fail
Opportunities Return on Equity > 15% 6.8% Fail
Valuation Normalized P/E < 20 18.28 Pass
Dividends Current Yield > 2% 2.9% Pass
  5-Year Dividend Growth > 10% 14.9% Pass
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Molson Coors last year, the company has dropped a point. Higher debt is to blame for the drop, and the shares have languished somewhat, rising just 5% over the past year in a market that jumped much more strongly.

So-called "sin stocks" have long been prized for their healthy dividends, and Molson is a good example of the payoffs they can bring to investors. Molson has roughly 30% market share in the U.S. and 40% in Canada, and shareholders reap the benefits of a 3% dividend yield on payouts that have risen sharply in recent years.

With fierce competition in the brewing industry, consolidation has taken hold in a major way. Earlier this year, Molson spent $3.5 billion to buy StarBev, a central European brewer that should help Molson extend its reach. Yet with Anheuser-Busch InBev (NYSE: BUD  ) having bought Corona-producer Modelo and SABMiller acquiring Australian beer maker Foster's, Molson's move just helped it stay even with its rivals.

One lingering question that Molson has to answer, though, is how it can respond to the general move toward craft beers. Boston Beer (NYSE: SAM  ) and Craft Brew Alliance (Nasdaq: BREW  ) have made big waves in the brewing industry, re-emphasizing high quality and making beer about more than just price.

The other issue facing Molson is international expansion. The StarBev buyout certainly addresses that concern, but with Diageo (NYSE: DEO  ) moving into Africa while other big players focus on Latin America, Molson needs to make sure it doesn't get left behind.

For Molson to improve, it needs to counterbalance flagging U.S. sales with growth in other regions. If it can do that and get its balance sheet in somewhat better order, it could go a long way toward pushing Molson up toward perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Molson Coors may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Molson Coors to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Boston Beer. Motley Fool newsletter services have recommended buying shares of Boston Beer, Molson Coors, and Diageo. 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 Fool has a disclosure policy.


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