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Dr. Paul Price
Dr. Paul Price
Articles  | Author's Website |

Molson Coors Offers Heady Returns Even in a Flat Market

April 27, 2010 | About:

Molson was the 14th largest brewing company prior to their February 2005 merger with Adolph Coors. Together, Molson Coors [NYSE:TAP - $42.95] is currently the 5th biggest brewer in the world. They sell into three of the top eight markets- North America, Europe and Asia. Major brands include Coors, Coors Light, Molson, Carling and Killian’s Irish Red.

While overall beer volume has been growing at just a moderate pace, Molson Coors has posted decent per share improvement since the merger. Here are TAP’s per share, split-adjusted numbers (excluding excise taxes) as reported by Value Line:



Year


Cash/Flow


EPS


Dividend


Book Value


Avg. P/E


52-Wk Range


2005


4.14


1.98


0.64


31.08


16.6x


28.70 - 40.00


2006


4.58


2.16


0.64


32.85


15.9x


30.40 – 38.50


2007


4.72


2.80


0.64


39.55


16.8x


37.60 – 57.70


2008


4.28


2.77


0.76


32.54


18.0x


35.00 – 59.50


2009


4.81


3.80


0.92


38.04


11.3x


30.80– 51.33




Just a quick glance at the chart reveals substantial growth in cash flow, earnings, dividends and book value over the five years ended last December. At the same time the P/E had contracted from its typical historical range of around 16x (from 2005 – 2008) to only 11.3x in 2009.

Zacks and Value Line differ on their views for 2010 – 2011 with estimates of $3.44 and $3.73 from Zacks and VL’s more optimistic views of $3.85 and $3.95 for this year and next. Even the lower projections put TAP shares at just 12.5x this year’s and 11.5x 2011 expectations.

Molson Coors has a good balance sheet with long-term debt at just 17% of capital and over $734 million in treasury cash as of year-end 2009. Value Line rates their financial strength as ‘B++’ while noting their ‘stock price stability’ and ‘earnings predictability’ rank in the 85th and 90th percentiles (with 100th being best). TAP’s Beta is a very low 0.55.

The $0.24 quarterly dividend rate translates to a current yield of 2.23% - better than most bank money market and CD rates right now. The payout ratio is a healthy and sustainable 28% of projected 2010 EPS.

With the stock market having risen for eight straight weeks it may be time to be a bit cautious and more conservative than previously. Molson Coors is that type of stock. It’s a low Beta, low multiple, dividend paying non-cyclical business trading at a discount to its typical valuation.

I think TAP shares can rebound to at least a 14 multiple before year end. That brings me to a minimum target price of $48.16 by next January or about 12.1% above this afternoon’s quote. Is that a rational goal? Sure. If anything it may be too conservative. Molson Coors shares peaked at $51 -$57 during each calendar year 2007 – 2008 – 2009 and fundamentals look solid going forward.

Outright purchase of TAP could lead to 14% or better total returns over the next 12 months on a relatively low-risk basis.

Here’s a nice nine-month buy write combination that can perform well even if TAP shares do nothing from here through next January 22nd.





Cash Outlay


Cash Inflow


Buy 1000 TAP @$42.95 /share


$42,950




Sell 10 Jan. $45 Calls @ $2.45 /share




$2,450


Sell 10 Jan. $40 Puts @ $2.40 /share




$2,400


Net Cash Out-of-Pocket


$38,100






If Molson Coors shares are unchanged on the Jan. 22, 2011 option expiration date:

· The $45 calls will expire worthless.

· The $40 puts will expire worthless.

· You will likely have collected at least $720 in dividends.

· You will still hold 1000 shares of TAP worth $42,950 and the $720 in yield.

· You will have no further option obligations.

Your total long value of $43,670 on your net investment of $38,100 would represent a net profit of $5,570/$38,100 = + 14.6% achieved in just under 9 months on shares that did not go up at all from trade inception.



If TAP rises to $45 or higher (+4.8%) by the Jan. 22, 2011 option expiration date:

· The $45 calls will be exercised.

· You will sell your shares for $45,000.

· The $40 puts will expire worthless.

· You will likely have collected at least $720 in dividends.

· You will have no further option obligations.

· You will hold no shares and $45,720 in cash.

Your total cash of $45,720 would represent a total return of $7,620/$38,100 = + 20% achieved in just under nine month on shares that only needed to go up by 4.8% or more.



What’s the risk?

If TAP drops below $40 (-6.9%) by the Jan. 22, 2011 option expiration date:

· The $45 calls will expire worthless.

· The $40 puts will be exercised.

· You will be forced to buy an additional 1000 TAP shares.

· You will need to lay out another $40,000 in cash.

· You will likely have collected at least $720 in dividends.

· You will have no further option obligations.

· You will end up with 2000 TAP shares and $720 in cash.



What’s the break-even on the whole trade?

On the original 1000 shares it’s the $42.95 purchase price less the $2.45 /share call premium = $40.50 /share.

On the ‘put’ shares it’s the $40 strike price less the $2.40 /share put premium = $37.60 /share.

Your overall break-even would be $39.05 per share (excluding dividends) or $38.69 /share (including yield).

Even without the dividend TAP could drop by up to 9% without causing a loss on this trade from start to finish.



Dr. Paul Price

www.BeatingBuffett.com



Disclosure: Author is long TAP shares and short TAP puts.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com

https://seekingalpha.com/account/research/subscribe?slug=arrow-loop-research

Visit Dr. Paul Price's Website


Rating: 2.0/5 (4 votes)

Comments

Dr. Paul Price
Dr. Paul Price - 9 years ago    Report SPAM


Molson Coors announced tofay that they have raised the quarterly dividend from $0.24 to $0.28 - an 8.33% rise.

At today’s close of $44.10 that’s a 2.54% current yield.

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