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:
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.
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.
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.
