Molson Coors

History

Molson was founded in 1786 and Coors was founded in 1873. In 2005, Adolph Coors merged with Molson, creating Molson Coors Brewing. Molson’s shareholders owned 55% of NewCo the Coors CEO was appointed as chief executive of NewCo. In 2016, Molson Coors acquired the remaining 58% of its Miller JV for $12B (debt financed). In 2020, the name was changed from Molson Coors Brewing to Molson Coors Beverages to symbolize the new “revitalization” strategy, which involves moving away from beer to higher end drinks and the non-alcoholic category, cost cutting, and other exciting initiatives.

The Thesis

Molson Coors has fallen out of favor and the stock is trading at 12-13x historical earnings. We believe there are four key drivers to the stock which will reshape the way investors will view the company, and will grow EPS:

1.      The company is undergoing a “premiumization” with regard to its beverage portfolio;

2.      They are paying down debt;

3.      Material amounts of corporate costs are being taken out of the business.

The Business

In the financials, the business is broken down into two segments — EMEA and the Americas. The EMEA is a small % of revenue, and even smaller % of profit, so it is not material for the thesis (we simply add $100m to operating income in our models for the Europe business). In 2021, the business broke down as follows:

Though a quantitative breakdown is not furnished by management, they consider company sales to be split into “economy”, “premium”, and “above premium” segments. The premium segment is really mid-tier beer i.e. Coors and Miller.

Internally, we believe the stock is driven by four categories, in the order of importance — the Coors/Miller business, hard seltzer, ventures/other high-end business lines, and cheap economy beer. Though management tells us little, we have estimated what from the crumbs we are dealt, and detail the percentage of revenue and operating profit that comes from each segment to our best abilities.

Premiumization

We believe that the business mix will premiumize materially in the next three years. Particularly, this will come as the economy brands are phased out, mid-tier beer stays flat/in slow decline, and higher end products (hard seltzers, high-end beers, and TAP’s “emerging growth” division) take share. Through some sleuthing, we arrive at an estimate of the business’s segments.

For the first time in recent history, CEO Peter Hattersley mentioned in passing on the Q1 2022 call that the Coors/Miller business is 2/3^rd of revenue and 2/3^rd operating profit for North America. Thus, in our models, we assume this business is (in $mm): 8,485 X 67% = 5,685. We assign a -2.5% nominal growth rate into 2025, which we believe is reasonable and conservative, and thus estimate that Coors/Miller will be a $5.1B business in 2025.

In hard seltzers, management has a 10% market share goal for this year, which translates to about $600m in seltzer sales, or about $300m in revenues to TAP after kickbacks to retail and distributors. As value investors, TAP’s seltzer strategy is a favorite of ours — their approach is slow, calculated, and careful. TAP partners with existing brands to “harden” their soft drinks (e.g. Topo Chico hard seltzer), while competitors like BUD recklessly throw new brands at the wall and see what sticks after draining millions into ad campaigns. Thus, TAP’s share in the hard seltzer market is now 9%, was 6% last year, and 3% the year before. Though we have no idea, we think it is reasonable to assume the hard seltzer industry will grow 10% per annum and TAP will continue to take share. Thus, we estimate TAP’s seltzer business will grow to be ~$1B in 2025.

For non-seltzer high-end sales, there are two major businesses —Blue Moon and the “emerging growth” division. For the latter, management has a $1B 2023 goal (division is headed by Pete Marino, who we are fond of and hear from industry people is excellent). This division is all high-end and capital light. It includes craft beers, a high-quality LatAm distribution biz, US distribution of La Colombe and ZOA, cannabis drinks in Canada, etc. We estimate this business will be ~$1B by year end, and we estimate Blue Moon to be a $500-700m business. We assign a 12% CAGR to the whole division, and estimate it will grow to $2.7B by 2025.

This leaves us with economy beer, which is mostly irrelevant for the thesis (it is a small, shrinking, and low profit business). We estimate it to be $500m today and think it will shrink to roughly $300m by 2025.

Thus, we believe that the cookie crumbles like so:

Debt Situation

Debt increased substantially after the Miller acquisition in 2016, from $3B to $12B. However, beer is generally a good cash-flow business. Thus, gross debt declined from $12B in 2016 to $7B today. Post-Miller, net debt/EBITDA stood at 4.8x. Management guides to

Presently, TAP has about $6.6B of net debt. We believe that TAP’s debt situation is a material reason for the stock’s depression. We conclude that the strong FCF of the beer business should allow TAP to service outstanding and pay down maturing debt. After some modest assumptions, we project that between today and 2025 TAP will throw off about $3.5 of FCF, after returns to shareholders. Thus, ceteris paribus, we see net debt to EBITDA dropping materially. Our low models assume a 1.8x net debt to EBITDA in 2025, and our optimistic assumptions go as low as 0.5x!

Cost Cutting

Management’s goal was to take $600m of costs out of the business (sizable, 6% of revenue). Last year, about $300m was realized and, as of Q1, $490m has been realized. Thus, about $100m is left in the program. We believe the stock has not been rewarded appropriately for management’s competence in executing on this program.

Valuation

Given our operating profit estimates above, we believe the stock will generate $5.23 of EPS in 2025. Capitalized at 16x earnings, the stock is worth $83, plus $5 for dividends. This gets us to $88, or 57% above today’s price of $56.

DISCLAIMER: This is intended for information purposes only (not investment advice) and should not be relied upon solely as a basis for investment. The author may hold a position in the issuer and undertakes no obligation to update any future changes in the position or in the investment opinions expressed herein.