Anheuser Busch Companies (BUD)

[FUNMAN]

Just my opinion, but this article touting TAP is a great reason to own BUD. Worldwide growth is making up for all and much more, than the US sales decline.

If all companies are suffering in the U.S. at basically the same rate regarding consumption, then BUD's 50-country, worldwide footprint makes it the king of beers to own.

Moreover, they seem to be managing their debt mountain while following through on dividend increases.

They are growing organically everywhere except the U.S.A.

I want to own the worldwide leader.


Molson Coors Falls Too Far On Earnings: I'm A Buyer
May 11, 2018 8:11 AM ET


https://seekingalpha.com/article/4172803-molson-coors-falls-far-earnings-buyer


Summary

Molson Coors dropped 15% recently on a soft earnings report.

It's down on industry-wide problems, not company-specific issues.

Craft beer isn't a major obstacle for Molson Coors going forward.

TAP stock is attractive at 12x forward earnings.

This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner.

In December, I pitched Molson Coors (TAP) as my idea of the month for Cheddar TV. So far, this has not gone as I expected. TAP stock was weak - along with other beer companies - throughout the first part of 2018. And then, the company's latest earnings report kicked the selling into high gear.

Chart
TAP data by YCharts
Shares slumped 15% on a revenue number that missed expectations by a sizable amount and EPS that came up a little short of consensus (after adjusting for the European tax charge that analysts hadn't forecast). As a result, TAP stock has given back all its gains since 2015 and is now at multi-year lows. Is it time to give up on Molson Coors? Not at all, in fact, I purchased more following the latest earnings report.

Why TAP Stock Slumped
The most troubling thing - and the reason the stock was down so far - was that Molson Coor's total beer volumes dropped 3.5% for the quarter. This was a significant deceleration from its -1% unit volume last quarter and its guidance of flattish results for the next couple of years in terms of sales volume following the recent mega-merger. Before we dive into further analysis, let's get a persistent myth out of the way.

No, craft beer isn't killing TAP or other big brewers. According to a recent Washington Post article, small and independent producers made up just 13% of the US beer market. It's easy for us, as mostly high-income upper class folks to assume that our friends and community represent most of the US market. But it simply isn't the case. Craft beer was, is, and will continue to be a luxury item consumed by a niche portion of the market - and expect that niche to stall out or even shrink once a recession hits.

The Post article notes that craft beer's production growth rate is already down to 5% annually and that craft brewers are going belly-up at their fastest rate since the financial crisis. From that article:

Has craft beer peaked? In one sign that the industry has grown less frothy, more craft breweries closed in 2017 than any time in the past decade.

And while the craft beer makers saw more growth in production than the overall market last year, their pace is slowing.

A new report by the Brewers Association — a trade association representing small and independent American craft brewers — showed that craft brewers saw a 5 percent rise in production volume in 2017. Yet with that growth comes an increasingly crowded playing field, leading to more closures of small craft breweries. In 2017, there were nearly 1,000 new brewery openings nationwide and 165 closures — a closing rate of 2.6 percent. That’s a 42 percent jump from 2016, when 116 craft breweries closed.

Craft beer is a trend within a niche market, that we as Seeking Alpha members and investors are unusually exposed to due to our position in society. But don't mistake that for a cultural phenomenon sweeping so-called flyover country. Why are beer sales really declining for the major brewers? From that same article, we find that:

The total beer market went down 1 percent by volume in 2017, a decrease in about 2.4 million barrels from the previous year. Watson said the decrease in part reflects beer’s growing competition with wines and spirits.

Notably, Molson Coors volume was down 1% as well in the last quarter of 2017 (overall earnings rose due to price increases and cost savings from their merger). So, no reason for panic there - volume losses were in line with the overall industry.

This quarter, Molson Coors saw sales volume drop 3.5%. They claim some of this is due to production issues at their Golden, CO facility, some due to inventory drawdown at distributors, and some due to a further slowdown in the US beer market in part due to the weather. Importantly, they claim that they lost no share in the US against other players.

We can confirm this data point from Anheuser-Busch InBev's (BUD) recent earnings report. Their North American beer sales dropped more than 4%.



So, in comparison with its main rival in North America, Molson Coors actually outperformed for the quarter. BUD stock hasn't fallen as far as Molson Coors, since it has growth in Asia and parts of Latin America to make up for US weakness. But make no mistake, this is a sector-wide problem, and blaming Molson Coors' management for their performance this quarter isn't fair.



In any case, I see the market as wildly overreacting. As explained above, a 13% of the market player (craft) growing at 5%/year (and that rate is decelerating) hardly makes me lose sleep at night. You'll see BUD and TAP keep buying out the best independent craft brands or making their own in-house upstarts that fool many people (such as Coors with Blue Moon).

There's always the risk that the shift toward wine and liquor and away from beer will continue. I'm not sure how to forecast such a thing. Then again, the trend could swing back toward beer as well. There is also the concern that widespread marijuana legislation will cause a decline in beer consumption. Data on what happens after recreational marijuana legislation is mixed, but generally points to a moderate but observable decline in alcohol consumption in said markets.

Valuation

TAP is now selling at 12x forward earnings. To me, that sentence alone is a compelling bull case. Beer stocks often gravitate around a median of 20x earnings historically. They frequently trade at a sizable premium to the S&P 500 because earnings are dependable and consistent.

Look at how upset the market is that sales volumes are down 3.5% this quarter. In a recession, most S&P 500 companies see their sales volume plummet far more than 3.5% - yet for a beer company, a 3% decline is viewed by investors as a near existential crisis.

Regardless, a 3% sales decline is hardly a major event, even if the market acts like it is. Molson Coor's earnings are set to advance nicely to around $5.20/share this year. Management is using its earnings to pay down debt and get the balance sheet back in better shape after the recent mega-merger.

On other valuation metrics, the stock also looks cheap. Incredibly, TAP is selling under book value (something you essentially never see with consumer staples companies, let alone breweries during bull markets). Also, TAP is selling at just 1.2x sales - again, way cheap. BUD, which also derives its business primarily from mass market beers, is up at 3x sales. Why is a dollar of revenues at Anheuser-Busch worth 150% more than at TAP? Hint: it's probably not.

Over at Diageo (DEO), we see the company selling at 5.5x sales and 6.5x book value. Does Diageo have a better line of products than TAP? Sure, absolutely. Five times better? That's a hard case to make.

TAP is now selling at 12x this coming year's earnings. Earnings will continue to increase even if beer sales keep dropping by low single digits volumes due to price increases, the remaining not-yet-realized cost savings from the merger, and a reduction in interest charges as they keep paying down debt.

Given history, an alcohol company at 12x earnings with EPS continuing to rise seems seriously mispriced. The company is way undervalued against peers on just about any metric you might pick, be it earnings, free cash flow, book value, price/sales or so on. 18x this coming year's earnings would put the stock at $94. With the decline in the stock price, the yield is now up to 2.7%, which is sufficiently high to serve as a nice incentive for holding as well.

This is an updated excerpt of an Ian's Insider Corner report originally published May 6th.

Disclosure: I am/we are long TAP,DEO.