Molson Coors Equity Evaluation Nathan Dormann [email protected] Josh Lantz [email protected] Jacqueline Otieno [email protected] David Haley [email protected] Ravi Patel [email protected] 1 Molson Coors Brewing Company Equity Evaluation Table of Contents Executive Summary 1 Molson Coors Firm Overview 3 Industry Structure and Profitability Overview 5 Accounting Analysis 13 Financial Statement Ratio Analysis 23 Forecasting 31 Valuation Analysis 34 Valuation Results 40 Appendices 42 References 53 2 Investment Recommendation: Overvalued, HOLD 11/01/2006 Ticker Symbol TAP EPS Forecast S&P 500 Price 71.4 2005 2006 2007 2008 1.7 3.29 3.68(e) 3.82(e) 52 Week Range 60.45-74.10 Intrinsic Valuations Market Cap 6.24B Actual Price $71 Shares Outstanding 86,280,000 Residual Income $62 Divedend Yield 1.28% AEG $61 Average Book Value 6.8 LRRI $69 ROE 2.50% Beta 1 ROA 1.10% R2 0.1 3 Executive Summary Molson Coors has been brewing the finest quality beers for people around the world for almost two centuries now. It is no wonder that Molson Coors is the third largest brewer in the United States and fifth largest brewer in the world. By producing the finest quality beers Molson Coors has created a loyal and dedicated customer base. Only recently did Coors merge with Molson to create one of the largest and oldest brewing companies in the world. But Coors has been expanding their market share through acquisitions and internal growth for years before the merger. Molson Coors competes in an industry with few true competitors, with Anheuser Busch and Miller being the only real challengers to Molson Coors market share. The threat of new competitors is low because of several barriers to entry, including economy of scale which keeps many of the smaller breweries from challenging the larger power houses. Molson Coors business strategy has been to sell the best quality ingredients at low affordable prices. Molson Coors also includes many promotions and advertisements to attract new customers and to insure old customers remain loyal. By owning most of their own packaging facilities Molson Coors is able to offer lower prices while making sure their products are bottled at a higher quality than their competition. The accounting practices of Molson Coors are fairly conservative. Their accounting disclosure is very transparent, making it easier for investors to decipher the financial situation of the company. Molson Coors accounting is more transparent and conservative than its industry competitors, which says a lot for a industry that is highly regulated. Molson Coors is not afraid to disclose negative information about the firm; they just make sure to let investors know how they plan to rectify the problem. The financial information of Molson Coors shows that the company has been increasing sales in a rapid manner as of recent years. This has to do with the large growth of the company. While an increase in sales is good, it has 4 translated into only a smaller increase in gross profit. This is because in order to sustain their large growth rate Molson Coors has had to sacrifice liquidity and take on a lot more debt. The effect of this is Molson Coors has a lower current ratio, has more accounts receivable, and is less efficient in turning sales into cash. The company is well aware of their liquidity and plans to slow growth in future periods and work on becoming more liquid and paying off debt. While the company has taken on a lot of debt to pay for the acquisitions they have done a fairly good job of balancing their debt to equity ratio. Molson Coors financial strategy to grow through acquisition and effect advertisement has been a success. It is now up to the managers of Molson Coors to balance the new level of growth. Through our own analysis we have found Molson Coors value to be slightly overvalued. The price we found through the use of valuation models shows Molson Coors to be slightly below the current market price. We value Molson Coors to be a strong HOLD security. Even though almost all are models have shown that its stock should be cheaper than the current market rate, it is important to understand that many of the financials are distorted due to the merger and previous acquisitions. We have faith in the competency of the management to continue to create value for Molson Coors shareholders. Molson Coors Firm Overview Adolph Coors came to the United States in 1868 to follow a dream of starting his own brewing company. The dream is now a reality as Molson Coors is one of the third largest brewing companies in the United States and the fifth largest brewing company in the world. The Company was established in 1880 with an annual output of 3,500 barrels, and just ten years later an annual out put of 17,600 barrels. Molson Coors’s operates primarily in the alcohol beverage industry dealing mainly in beers and malt liquors. 5 Molson Coors’s main competitors are Miller and Anheuser-Busch. So in order to stay a float in the business their strategy are as follows: A) In the US. Their main focus is to re-establish consistent growth trends for Coors light. B) In Canada, continue to drive accelerated growth for Coors light and rebuild momentum behind the Molson Canadian brand C) In Europe, focus is on core larger brands. Molson Coors assets have been increasing rapidly over the past 5 yrs as shown in the graph below. There is a dramatic increase in total current assets between the years 2001 and 2002 due to Coors’s acquisition of The Carling Brewing division of Interbrew UK. year 2001 2002 2003 2004 2005 Total Current Assets (millions) 606.53 1,053.9 1,078.85 1,268.22 1,468.24 The sales volume of Molson Coors over the last five years has been increasing steadily with a recent high in volume in 2005. This is due to Coors’s Merger with Molson Brewing Company. On the other hand the sales growth over the last five years has been fluctuating and not very consistent. As illustrated in the table below. Year: Sales Volume: Sales Growth: 2001 $2,842,752,000 .01% 2002 $4,956,947,000 42.6% 2003 $5,387,220,000 7.9% 2004 $5,819,727,000 7.4% 2005 $7,417,702,000 21.5% The stock prices have fluctuated quite a bit over the last 5 years. In 2001 the stock price was 45 dollars per share and is currently 68 dollars per share. There 6 was a big drop in the stock prices in 2003, because the demand in the market for Coors was not as high. However, in 2005, Coors’s merger with Molson Brewing Company led to a record increase in stock price to 78 dollars per share. The diagram below shows the highs and lows of the stock prices. Industry Structure and Profitability Overview Rivalry Among Existing Firms Molson Coors Brewing Company is one of the largest brewers in the world. Molson Coors competes heavily on volume with more than 5.6 billion in net sales per year. Molson Coors competes in the United States with Coors Brewing Company, and in the U.K. with Coors Brewers Ltd., and is a front- running brewer in Canada with Molson Canada Brewing Company. Industry Growth The alcohol and beer industry is consistently expanding with new competitors. As a result, Molson Coors is always looking for new market share. Since Coors’s merger with Molson Brewing Company the alcohol and beer 7 industry has reached $200 billion dollars in worth. This market is ever-expanding and highly competitive. In order to compete, it is extremely important that Molson Coors seize as much market share as possible. Differentiation and market concentration are among some of the techniques used by Molson Coors in order to remain one of the main players in a highly competitive market. The larger the share of the market Molson Coors is able to acquire the easier it will be to keep costs low. Concentration and Balance of Competitors Molson Coors Brewing Company, after merging with the Canadian company Molson, is now the fifth largest brewing company by volume, competing with such brands as Anheuser- Busch, Scottish & Newcastle UK Ltd., Inbev UK Ltd., and Carlsberg UK Ltd.. While there are only about 10 major players in the world, Molson Coors holds about 42% percent of the market share in Canada and 11% percent of the market share in the United States, (ranking them #3 in the U.S.). Degree of Differentiation Differentiation is a competitive strategy used by Molson Coors in order to set them apart from other similar competitors. Molson Coors not only offers a wide variety of beer and malt liquor, but they also differentiate themselves by using only quality raw materials, and premium packaging, helping them provide services and product at lowest price possible. Below is a list of all Molson Coors Brewing Company’s products. 8 Top Brewers Ranked by Volume In the United States Company Name Ticker Symbol Sales (31 Gal Percentage of Barrels) Major Market Anheuser-Busch Inc. BUD 101,800,000 62% Miller Brewing Co. SBMRY.PK 39,660,000 24% London Stock Exchange Coors Brewing Co. TAP 22,688,000 14% Learning Economies The alcohol and beer industry within which Molson Coors Brewing Company competes includes only a few large players. Since there are only a small number of large competitors combating for as much market share as possible, the learning curve seems to be quite steep in the beer industry.