Ah, summertime, when even financial writers' thoughts turn to baseball, the beach, barbecues, and, most swiftly, to beer. This year, with a bear market in beer prices, it's getting harder than ever to resist. On sale at a supermarket near me: 12-packs of Anheuser-Busch (BUD) Natural Light and Natural Ice, just $4.99.
Price-cutting is only the most obvious symptom afflicting the world's brewers. Younger drinkers more often are choosing wine or liquor over beer. Per capita U.S. beer consumption in 2004 fell to 21.6 gallons, from 22 gallons in 1996, according to New York consulting firm Beverage Marketing. Amid this, even the stock of stalwart Anheuser-Busch is near its 2002 lows. Shares of the newest global combine, Molson Coors Brewing (TAP), which touched 76 on Feb. 9 as the Canadian and Colorado brewing dynasties merged, now sit near 63 after a poor first quarter. One reason: the National Hockey League's lost season, which drained demand in Canada. Angry at not learning of weak sales before the merger vote, some investors are suing, and the Securities & Exchange Commission wants to know what happened. Molson Coors says it did nothing wrong and is cooperating.
So don't count on a beach party on Aug. 2, when Molson Coors reports second-quarter results. If you ask me, though, the bearishness is overdone. It's not that the brewers, Molson Coors very much included, don't face problems. But most of their troubles seem reflected in the stock prices, Molson Coors's especially. On a pro forma basis -- that is, had the merger been done last year -- Molson Coors in the last four quarters took in $6.1 billion in sales. Yet its enterprise value (net debt plus equity value) barely tops $8 billion, or just 1.3 times sales, lower than rivals' multiples.
Some of that discount is deserved since Molson Coors is less profitable. Last year, for example, its pro forma operating margin came to just 11%. Anheuser-Busch's 2004 operating margin was more than twice as wide. An obvious problem has been the $765 million purchase Molson made in 2002 of Brazil's No. 2 brewer, Cervejarias Kaiser. It's now Brazil's No. 3 player and at last report still was losing money. In May, however, Molson Coors signaled that it won't throw more cash at Kaiser and may instead push Coors Light in Brazil as it does elsewhere abroad and in the U.S., where Coors Light is the No. 4 brand, according to Beverage Marketing.
For investors, management's focus on cash flow is important since consumption trends may continue to bedevil the industry. Consolidation is the key. In North America one of Coors's three breweries is closing, a big step toward annual cost savings of $175 million it expects to squeeze out of the merger by 2007. Molson Coors estimates it will have upwards of $450 million in annual free cash flow, after capital spending and dividends (the stock yields 2%), with which it can buy back stock and reduce debt.
One patient and usually smart shareholder is Longleaf Partners Funds, run by Southeastern Asset Management, a $31 billion Memphis (Tenn.) firm. Morningstar reports that Longleaf holds positions nearly six years on average; its flagship fund beat the Standard & Poor's 500-stock index by an annual average of 3.2 percentage points in the past decade. Early in 2004 two Longleaf funds bought into Coors and held on through the Molson merger. After the stock tumbled this spring, what did they do? They boosted holdings by 44%. On June 30 the funds owned more than 4 million shares.
Don't expect the stock to be revalued this summer. But with the NHL on July 22 ending its player lockout and looking to a new season, you just might see it heat up next winter.
By Robert Barker