Chit Chat Stocks - This Beer Stock Is Trading At Its Cheapest Multiple In Years (Ticker: TAP)

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Starting point is 00:00:37 trading platform where you can earn a rebate on every contract traded. That's public.com. This is paid for by public investing. Options are not suitable for all investors, carry significant risk. Full disclosures are in the podcast description. welcome to chitchat stocks on this show host ryan henderson and brett shaffer analyze businesses and riff on the world of investing as a quick reminder chitchat stocks is a ccm media group podcast anything discussed on chitchat stocks by ryan brett or any other podcast guest is not formal advice or recommendation now please enjoy this episode welcome to chit chat stocks i am one of your hosts ryan henderson and i am joined as always

Starting point is 00:01:29 by our other host here brett schaefer today we have one of our deep dive episodes we try to do these at least once a month where brett or i digs deep into a stock that we are either interested invest in, maybe already own, or just one that piques our curiosity. And today we are talking about one of the leading beer brands or beer companies in the world and sort of an umbrella of different beer brands as well. It's Molson Coors. A lot of people will probably recognize the brands as we get into them. But I guess, Brett, what inspired you to look at Molson Coors?

Starting point is 00:02:08 Yeah. Yeah. So I'll say thank you everyone for listening once again. Hopefully you enjoy these episodes. One housekeeping item. There's going to be a lot of charts on these type of episodes. So this is the perfect time to subscribe to the free newsletter to get all that info along with this episode, which we'll be publishing the day this releases. But yeah, let's get into it. Molson Coors. What inspired me to look at this is simply seeing, you know, checking out on our friends at FinChat that the EV to EBIT, EV to gross profit price to earnings was at one of its lowest levels, and perhaps even the lowest level in the last 10

Starting point is 00:02:42 years. And I was like, all right, let's dig into it. It was at a single digit EBIT. And I thought, hey, this might be interesting considering the brands have been pretty durable within their category over the last 40, 50 years. But yeah, they do own, we'll get into more details here, Coors Light, Miller Light, Molson for the Canadian listeners out there, UK brand Carling, and then some Southeastern European brands as well. But my question for you here, Ryan, as we did some good timing on this episode, actually, I didn't even think about it,

Starting point is 00:03:14 but it's going to be coming out the day before the 4th of July, one of the biggest beer drinking holidays in the United States. When I say the word Coors Light, what comes to mind for you? Cold beer. Exactly. It's funny. It's a simple advertising tag. they've done it for 40 years but it's when someone says Coors Light I just think of

Starting point is 00:03:40 the cold cans the the little blue mountains thing and then their marketing tagline that they continue to do which is just our beer is cold and it's from the Rocky Mountains and it seems to have worked yeah yeah I mean they really have done a good job like in in my head I think oh you know I like the taste but maybe I maybe I have been just swayed by the snowy commercials that they've done over the decades yeah and we will talk about whether and it's a lot different than the soft drink category whether this has been a similar strong marketing campaign over decades similar to a coca-cola and a pepsi you know where they talk about happiness and stuff like that but we'll get into what they own um like ryan mentioned

Starting point is 00:04:23 they're one of the world's beer conglomerates it's the second largest brewer in the united States where 75% of sales in the country come from three companies. There's AB InBev, Molson Coors, which we're talking about today, and then Constellation Brand. But importantly for Molson Coors, 80% of its sales come from the Americas. And the Americas just means North and South America. But within the Americas, 84% of those sales are from the United States. So just doing some back of the napkin math there. This is a US driven business. This drives the boat. It's where all the earnings power comes from. It's where all the sales power comes from. And yeah, some growth may come from the European market, the Latin American market over the next decade. But if you're looking

Starting point is 00:05:07 over the next few years, the US market is what matters and what we're going to focus on a lot today because there are some concerns that people have and that's why the stock is trading at such a low multiple. Yeah, let's get into the business here a little bit. What does Molson Coors actually own and then what ultimately drives sales for this business yeah so Coors Light Miller Light are two-thirds of their sales so they're on the Coors brand and the Miller brand yeah there's some subset of those categories but the biggest ones in that are Coors Light and Miller Light you know you have Miller High Life you have Coors Banquet but those are much smaller and then the rest coming from this other one-third are going to be the other beer category they have some

Starting point is 00:05:48 cheaper ones like Ice House, right? That's a, that's a, you know, I'd call, what do they call it? A value. Maybe I don't want to call it a subscaler, like super cheap, but, but a cheaper beer. And then they have some niche brands like Hop Valley. Then a ton of other stuff. There's also Blue Moon, which is a small part of the business, but it's considered one of the largest craft beer brands in the United States. And then if we look outside the US, 20% of sales come from Europe and Asia, mainly focused on the United Kingdom and Southeastern Europe. They own brands such as Carling, which is huge in the United Kingdom. And I will mention again that Europe could be a small growth driver if they keep executing in these markets, but the United

Starting point is 00:06:27 States is what matters. And then as a note, before we get into the history here, in 2016, Molson Coors fully acquired Miller, which cost about $12 billion. It was a debt-fueled deal, and we'll talk about the details of that later and how they've absorbed that, how it may have been a bad timing to get that full acquisition there as it was right when seltzers were about to take over the market and how it impacted their balance sheet and how they've recovered today. All right. Before we go any further, Brett, what is your favorite beer?

Starting point is 00:07:04 I like the Mexican beers myself, Pacifico, Dos Equis, Corona. The market share gainers over the last two years. Yeah, Modelo as well. Modelo is now number one in the United States, according to this chart we'll have in the newsletter. But if I'm going for a light beer, I do think Coors Light is the best for me personally. I think a lot of people on the West Coast would say the same

Starting point is 00:07:27 if we're going for those standard light beers. But I know, and this is what makes the beer industry tough and probably tougher than a lot of other markets, is it really comes down to personal preference. There's a lot of brands out there. And yeah, Coors Light is growing, but it's also, you know, there has been some periods where it's struggled and we'll get into that. It's very regional. Like that's, I think that's something that a lot of people probably

Starting point is 00:07:50 don't appreciate is we were talking about this before we hit record, you know, Coors Light's very popular out here in the Pacific Northwest, but it's not the top brand in the Southeast, the south the midwest it's there are regional beers that maybe because it's from that area and it's just kind of been a cultural thing for a while that's where it's the most popular but we've kind of alluded to it a little bit let's talk about the history how did Coors get started and maybe give some context around some of the big product launches or big drink watches. Yeah. So this is an old company. For anyone that's a Lindy type investor, this could be one that maybe piques your interest. But according to the company website,

Starting point is 00:08:38 this is how the Coors Brewery began. Quote, Adolf Coors, a penniless brewer's apprentice, stowed away on a ship from Germany in 1868 and made his way west, coming upon the perfect water of Clear Creek in Golden, Colorado at the foot of the Rocky Mountains. He opened a brewery in 1873 and a century later, in 1978, Coors Light was born. It is now one of the best-selling beers in the U.S. and enjoyed by beer drinkers in more than 25 countries worldwide. Well, I'm not sure how... It's a good story for the heritage to say that he was like an explorer out west.

Starting point is 00:09:14 He found this creek, he established this settlement, and then he built a brewery, but I don't know. TBD if that's actually true. Now, the original Coors is that gold can that people might be aware of they call it the banquet beer. It's a focus, more of a niche brand with a focus on, say, cowboy culture, ranching culture. For example, today, the brand is working with the Yellowstone TV show for advertising. You see tons of ads for traditional Coors at, say, a rodeo, for example. Now, that brand is growing, but it's not as important. But Coors Light is the important

Starting point is 00:09:48 one that has been the growth driver over the last few decades, and it can really be traced back to world war ii from the company website they have some quotes here about how in world war ii they and this is right after the uh prohibition was lifted in the united states so that was when the breweries had obviously a tough time because they couldn't legally sell beer they had to switch to non-alcoholic beverages um they tried to make a lower abv beer who was like was born and then And during World War II, they said they claimed it as an ad that it was the greatest achievement in all of brewing history. They had the same Rocky Mountain tagline and stuff like that. But during that time, it came and went quickly because the war impacted the beer.

Starting point is 00:10:32 They were forced to make beer for the troops. So it says here that materials were in shorter supply and breweries were required to send 15% of their output overseas to boost the morale of troops, which I think was an interesting anecdote. I didn't know that was the case, similar to Coca-Cola, I guess. Then in 1978, management was looking to expand beyond its single Coors product, which I think a hundred years in, they only had one product, which is a good testament to that founding management team. Now today they have so many other products and it's a totally different story, but I think that that was quite interesting.

Starting point is 00:11:05 Yeah, go ahead, Ryan. Yeah, it is funny. you think about during wartime, you usually think about industry being people taking industry resources and allocating them to wartime activities. Beer brewing is probably not the first thing that comes to mind. And so it's kind of funny, you almost don't even realize that lots of industries throughout the country were probably allocating resources to it beyond just the military support ones yeah i don't know if aluminum cans were popular for beer back then but i'm assuming the resources were shifted because you know aluminum is in a short supply

Starting point is 00:11:46 probably for those military things but yeah they were you know a single product brand until the 70s and then in 1978 they came across this old you know the management team was looking at some of their old stuff and they said hey we had this coors light idea back in world war ii but we had to shut it down because of the story i mentioned before they launched it with the same brand saying you know rocky mountain cold refreshment with uh whatever uh with a lower abv um a lighter beer as we're getting popular they were getting popular at the time and since then it's become a hit and grown into the third largest beer brand uh behind modelo and bud light in the united states today market share is estimated to be between six percent and seven percent coors light again

Starting point is 00:12:27 since then has remained consistent with its advertising since launch trying to be itself you know try tie itself to the colorado rocky mountain heritage they say stuff like as anyone who's watched a sports game and seen an advertisement has noticed beer as cold as the rockies cold activated and cold brew choose chill is their new one it's all focused on the cold beer and they have that visual imagery around that it's a weird tagline because essentially they do they control how it's cold during the process but it's really up to the consumer whether it's in their fridge or in their cooler or not but the question i have is ryan does this heritage and advertising connection give coors light a competitive advantage versus any other beer

Starting point is 00:13:07 brand out there i wouldn't i wouldn't say it's a huge competitive advantage but it's it is an advantage there i mean there's mindshare here it's hard to replicate the years of friends and family choosing that brand when if you know if you're if you're just looking at the beer aisle and you're looking across tons of different selection you'll go with the one that there's experience there's heritage there's it's still not super costly relative to other brands And yeah, I think a lot of that is hard to replicate for a startup. Yeah, I think it would be as well, especially for the light beer category. Now, this is not where they're running into any trouble.

Starting point is 00:13:58 I mean, you could probably see that within the light beer category, they maintain market share or even grown. And it's really hard for someone to come into this because you have Coors Light, Miller Light, Bud Light, and maybe the Mexican ones, Corona Light and stuff like that. I forget what they call it. But yeah, let's maybe talk about this throughout the episode because that is a big question. It's definitely not as strong as a Coca-Cola, where, you know, at the end of the day, the tastes are probably very similar. But Coca-Cola and Pepsi and stuff like that have been able to maintain that oligopoly position with some of the other players.

Starting point is 00:14:30 Now we'll talk about Miller. Miller's another one, important one as well. Keep it shorter for here. Miller was, you know, the name of the person. He was another German immigrant who started a brewery in the 1800s. miller light was launched in 1975 and i think was the first light year and has kept a similar tagline of great taste less filling ever since you probably you know remember that one ryan as well they these companies throw out a lot of commercials similar to the soft drink companies uh and other and other brands yeah if you watch american football it's hard to not know a lot of these taglines because they seem to dominate the commercials uh but let's move on a little bit to the industry dynamics. So I think a lot of people understand that there are some leading

Starting point is 00:15:14 brands in the beer space and there's some advantage to being a leading brand in that space. But let's go through the industry dynamics. What is happening right now? What is happening to alcohol overall? If you look at the multiples across the board, there are a lot of alcohol companies trading at dirt cheap multiples relative to their history so record low multiples why is it what are the concerns okay i think there are four things to understand over the last say two decades that have impacted the alcohol industry and impacted this company in particular first spirits so again that's alcohol you know whiskey uh rum tequila stuff like that that is gaining share versus beer and has steadily been getting share for a few decades. Here's some

Starting point is 00:16:05 quotes from early 2023. I won't read them all here. I'll leave some of those for the newsletter. Quote, in 2022, spirits gained market share for the 13th straight year in the fiercely competitive US beverage alcohol market as its supplies sales reached 42.1%. After years of steady growth, it marked the first time that spirit supplier revenues have surpassed beer, but just barely. The Spirit Industry Group said beer holds a 41.9% market share. Now, that's not something you want to hear from doing research when you say you see the fiercely competitive U.S. beverage alcohol market, although that might be a bit of a, you know, there's only a few companies at the end of the day that own a lot of these things. Now, the second thing is the growth of hard seltzers, which has been specifically important for beer. Now, hard seltzers essentially went from zero to $17.5 billion in worldwide sales over the last

Starting point is 00:17:01 decade. This has obviously been a headwind to the traditional carbonated alcohol beverages, such as beer. However, at least for now, seltzer volumes have peaked, and perhaps that has helped Coors Light and Miller Light as they've grown, have had some few. I think the last six quarters or so have been quite good for them. Third thing, in early 2023, Bud Light had an advertising incident that a lot of people I think are aware of. And if you don't remember, it's probably because you don't follow the news and it's fine. All you need to know as an investor is they had an incident. A lot of people are upset that drank Bud Light and a good chunk of them stopped drinking the product, drink or switch to Mexican beers, Miller Lite and Coors Lite, which I will

Starting point is 00:17:44 show a chart here that I think is interesting for all our video listeners. Let me share it quick. essentially shows that if you looked at Bud Light right before the advertising incident, its market share had gone down a little bit, but it had been pretty steady. But there was a steep drop off after this. And the gainers, which you can see here, Bud Light went from about 10% down to almost 7% within a few months. And the gainers were Modelo, Coors Light, and Miller light and they've seemed to kept this uh share ever since any thoughts on that ryan yeah it's a little hard to parse through and get a sense of like what direction it's heading just because it seems like there was a lot of competition from seltzer over the last five

Starting point is 00:18:39 years especially 10 years i guess you could say that's slowly eaten away at the margins of the average beer drinker you know more and more people trying seltzers although that growth has certainly faded and there's actually it's actually had a lot of headwinds over the last couple years if you pay attention to i think is it boston beer that owns truly and someone else owns can't remember who owns white claw yeah yeah i at least boston beer owns one of them but for molson course specifically it's you know investors should know or any listeners should know that they don't have a big exposure to one of the top brands they own stuff like busy some smaller ones you can look at all their brands on their website they've experimented they've tested they've

Starting point is 00:19:22 tried to grow some you know kind of in an experimental manner but none of them have caught fire and i'll show you a chart here from uh the kpis at finchette ryan where it looks you can totally see this decrease and then the bud light help uh on their molson cores america's volume so if we're looking at this, I'll describe it for the listeners. You have basically their volume of beverages that they're selling to distributors. From 2018, they had 72.3 million hectoliters. And then that declined down for the year ending in December 2022 to 60 million. So a steady decline. But from 2022 to the last 12 months, it's gone from 60 million back up to 63.5. So it has stabilized but you can totally see that seltzer impact from 2018 to 2022 yeah there's a lot of

Starting point is 00:20:14 just feels like there's a lot of moving parts in the alcohol industry overall because you've got on the one hand the people were that are like dedicated beer drinkers that were maybe constantly choosing bud light have a number of them have shifted at following this incident And then on the other side, there's people that have maybe not every time, but slowly shifted a little bit towards seltzers. There have been a lot of – not really as much in the beer industry. I mean, there's certainly been the craft brewers popping up more and more, but there's been – with seltzers, it's a lot of influencer-driven brands as well. You're seeing that almost like with the hard alcohol industry. We looked at Diageo a couple of months ago, and there's a lot of celebrities that would

Starting point is 00:21:03 launch tequila brands, something like that. It's not necessarily displacing the huge brands. I'm thinking about with the seltzer industry, I know there's a brand called Happy Dad that is specific to a certain influencer group. That's not going to kill Coors, but if you get these constant pop-ups of smaller brands that have cult-like followings, it's going to eat away at the margins and you're going to see probably a little bit of a gradual decline in beer consumption. So that's why I kind of say there's a lot of moving parts where it's hard to parse through and get a sense of

Starting point is 00:21:41 overall beer consumption. So I guess I'll ask you this right now. Five years from today, do you think there'll be more or less beer consumption in the United States? overall i think there will be let's go per capita per capita yeah okay so maybe we get some pot depending on how population growth works out i think it will be slightly less you know gone to my head not not a huge heartache because we've seen seltzers you know in the near term they have uh hit a near-term peak i guess and stagnated a little bit so maybe we're seeing a reversal i mean who would have predicted the switch from beer to spirits? I mean, it seems kind of unpredictable until it starts. And maybe the spirits growth, it will also stagnant. Who knows? But the thing

Starting point is 00:22:32 I would say, though, is with that decline, I would be confident that Coors Light, which we'll talk about with this distribution stuff, will gain share and maintain that share. And they also have pricing power that can go along with inflation. There's some other things here, right? You talked about the competition with seltzers. Remember, there's canned cocktails, there is the headwind of spirits slowly gaining share over the last couple of decades versus beer in the United States. But on top of that, younger people are just drinking less than older people in general. So according to the 2023 Investor Day that Molson Coors had, Gen Z is drinking 20% less than millennials at the same age. And there are also

Starting point is 00:23:11 fears, which is causing the stock to go down this year. I believe that's the narrative out there, which I've seen a lot of people discussed, that the weight loss drug usage will lead to a decline and drinking there's been some connections some studies done around that as well so that's a narrative that has formed uh that beer volumes will continue to decline in the united states and could get worse over the coming years and i think that's why the stock is trading as cheap cheapest multiple in years which is nice because it's easy to figure out why the stock is down so you have to kind of ask yourself if you agree or disagree with the question so that that's a good thing about a simple company like this yeah the other one which we haven't

Starting point is 00:23:50 even discussed, and I'd be curious if there's really any data supporting it, is with a lot of the states legalizing cannabis, I wonder if that's led at all to declining consumption of beer among younger cohorts. Yeah, that could be a good case. I did throw up some questions on Twitter slash X, and people did talk about hemp beverages, so almost cannabis-infused beverages. But I think that's got to be a little bit different. I think the overlap, if people are using cannabis a bit more because it's legal, I don't know if that's what's impacting alcohol sales.

Starting point is 00:24:24 I think it would just be the health focused stuff and alcohol in general, the switch to spirits and the switch to hard seltzers. I have a question for you, Ryan of these, I listed off some of these trends that mostly except for that Bud Light stuff and the execution within the beer category are headwinds. Which of these trends scares you the most? Yeah, it's tough. I don't – the premiumization of the alcohol industry, the shift towards spirits, I don't know if that – I think that's something that will kind of maybe ebb and flow, honestly.

Starting point is 00:25:00 I don't know if that's the most concerning. I'd probably say just the overall number of drinkers in younger cohorts going down. If I'm a shareholder, that would be the biggest concerning – the most concerning one because it's like the tobacco industry except you just don't have the same level of pricing power. So you're not able to offset a lot of those volume declines. I think the thing that concerns me the most is that I just really have no idea where beer consumption would head. now that's the industry overall but let's talk about molson core's position within the industry i guess real quick is there a trend that we've spoke about that concerns you the most yeah i agree with you i that would be the one that concerns me basically that gen z stat that we see touted out there plus the weight loss drug stuff because as you mentioned it creates so much

Starting point is 00:25:58 uncertainty which i think is scaring a lot of people and i don't know if anyone can have any hard take like you there's so many factors at play here for example i think light beer consumption is almost similar to tobacco where it might be a bit counter-cyclical so since the economy has done so well over the last 10 years you know excluding covid maybe that had an impact there right where people will say hey look i'll have some beers or you know how it is right when those type of things are counter-cyclical. But yeah, it definitely does scare me. Let's talk about alcohol distribution in the United States and how Molson Coors is going to use it to his advantage. Ryan, do you have anything else to add before I go to that?

Starting point is 00:26:39 No. Let's jump to it. Talk about Molson Coors' position in the beer industry overall and how distribution works and why it might help them. Yeah. So you might be wondering as a listener, why at the grocery store or the convenience store or the bar or the restaurant? Why is it the same brands every time? And it comes back to the fact that we have a unique distribution system in the United States for alcohol producers. So alcohol producers are required to go through independent distributors to sell to retail outlets in the country. One might argue this drives up prices because you have more regulations and you're forcing another business to become a middleman to be involved here. But the point when they made

Starting point is 00:27:21 this, which I think was after prohibition or maybe before it, was that a brewery couldn't go exclusive with a retail outlet and forced people to buy only their drink brands. So example, a Coors could say, look, we have this restaurant, you're going exclusive. If you go to this restaurant, you can only drink Coors. So Molson Coors, for example, here, even today, is mostly required to sell through distributors. Then the distributors sell to the retail outlets, which are mainly grocery stores, convenience stores, and bars. So if a retail outlet buys beer from a distributor and then it does not sell, that grocery store is going to be upset.

Starting point is 00:27:59 For example, like a Kroger. The distributor is then going to be upset with the beer brand. This is exactly what happened with Bud Light last year. They had an oversupply after the advertising incident, and it put huge stress on the distributors. Now distributors have a sour relationship with that brand. Molson Coors has taken advantage of this. Over the last 12 months, the beer distributors have greatly increased the volume coming from Coors Light and Miller Light, which I think is likely to remain indefinitely for the simple reason because a grocer, on average, is not going to get rid of a beer brand if it is selling.

Starting point is 00:28:30 So as long as Coors Light and Miller Light, Molson Coors in general, don't make a mistake, they're going to keep that shelf space and that distribution and that supply coming into the grocery stores, the bars, the restaurants, the convenience stores. and that's the most important thing because you want it to get right on the shelf right in front of the customer you know it's not going to have as much e-commerce uh disruption because of that id stuff what do you think of that right is that is that a i i think it honestly is a competitive advantage because it makes it so hard and we have a chart here in the newsletter of us crap brewery count has gone from essentially what do we have it here almost at 10x in a decade maybe even just a 5x there and despite that that's not really where the volume impact has happened for uh Coors Light or for Molson Coors in general it was from that seltzer and spirit stuff

Starting point is 00:29:23 yeah and the other part is I would assume that also presents some scale economies where if you're Molson Coors and you're giving them truck trucks full of Miller Light and Coors Light and you have number of brands where it becomes more efficient for the distributors where you're packing the trucks full of different brands you're probably getting some cost savings there relative to kind of a niche more craft brewer so definitely i do think the distribution is an advantage for them my concern around assuming any sort of market share gains is like i think the market share that Bud Light lost is probably here to stay. That's not a comment on the incident. That's a comment on distributors. They seem to be happy with the replacements here and they're going to

Starting point is 00:30:21 keep stocking those that are selling. The grocery stores are going to keep stocking those that are selling. But my guess is that after two years, they have some idea of how much Bud Light is selling today so um i don't think there's i wouldn't assume that coors light or miller light is going to see significant uh market share gains from here yeah it's not going to be the same yeah so the the thing about the distributor stuff and how it gets things stuck is that it can help you maintain your position for versus this onslaught of micro breweries and small local ones that happened over the last 15 to 20 years. But it makes it really tough to make inroads. It's going to be an incremental thing. Now, the good thing though, is that Molson Coors is the most liked

Starting point is 00:31:07 producer from the distributors currently. So in 2024, I think, yeah, they did a survey, 93% of distributors. I don't know what the actual question they asked was or how scientific the survey was, but they did a survey and they said 93% of confidence in plants to build momentum with Molson Coors in 2024. So we'll see what happens. But again, it's not going to be the same jump that they saw from 2023 to now. I have some questions around that phrasing, 93% confidence and plans to build momentum. Yeah. Does that mean they're going to add more volume through those distributors? Who knows? But look, you would much rather be Molson Coors in the United States than AB InBev right now. That's the fact of the matter.

Starting point is 00:31:58 Yeah, 100%. FinChat.io is the complete stock research platform for fundamental investors. They have all the standard financial data on more than 100,000 stocks globally. And beyond that, they have company-specific segment and KPI data on more than 1,500 stocks. So to give some examples here, you want to see Netflix's average revenue per member over the last 10 years, they've got it. You like to track YouTube's advertising revenue. They've got that too. If you want to see Celsius's revenue that comes from Costco, how much of their revenue comes from Costco, they also have that. So the breadth of FinChat segment and KPI data truly is one of a kind. I use FinChat every day to track and manage all my investments. I also use it to

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Starting point is 00:33:27 U.S. members only. Let's go a little bit through the management. Who runs the company today and what is their growth strategy if they have one? Yeah, the interesting thing about Molson Coors is that if you look at some of the trends that have happened, for example, the switch from spirits to beer, the growth of hard seltzers, the Bud Light incidents, they had no control over that, which is kind of concerning, right? That doesn't make it that great of a business. They don't control their own destiny in a way. So I'd say it's not the highest quality thing. But at this end of the day, Coca-Cola doesn't either when they lose a share of energy drinks. Now, let's go through the management. CEO is Gavin Hattersley. He's been there since 2019.

Starting point is 00:34:12 he's an accounting and finance guy. He's actually grown through the business and the multiple subsidiaries that they've now consolidated into Molson Coors to become the CEO in 2019. This was after the merger again. So he didn't, maybe he was a part of it, but he wasn't in charge when he made this merger at a maybe inopportune time right before Seltzer's takeover. And then he joined right before COVID threw everything topsy-turvy. So it's very hard to judge this management team and like i talked about how much did they actually you know they didn't cause the butt light to make that mistake it's almost like you have to just keep hitting singles and saying we're going to keep this advertising we're going to go to the same

Starting point is 00:34:53 playbook of running the same coors light type advertising and miller light type advertising every year and hopefully maintain our position there's not much they can do if you risk what if If you risk growing outside of your standard cohort, if you risk going for a different marketing message, you end up in a Bud Light type situation almost. Yeah. Luckily, Bud Light was the one that made that mistake. And I think no one's going to make that mistake for a while here. The company strategy is fine.

Starting point is 00:35:25 You know, it's fine from what I hear them talk about. They run the consistent marketing playbook. They try to increase distribution. In the last few years, Coors Light and Miller Lite have started to gain share, which I think if you go if you say COVID was kind of a weird time maybe that's a good sign about Hattersley and what he's doing here they're testing a bunch of you know non-alcohol non-beer stuff they want to continue to premiumize the volume so for example you know getting someone to switch from an ice house to a Coors Light obviously Coors Light isn't a you know super premium product but

Starting point is 00:35:57 it's they want to move people up to stuff like Blue Moon and stuff like that you know they're doing well in the UK with Carling, and they have this other upstart called Madri, M-A-D-R-I, don't know how to pronounce it. That market's fine, but again, it generates no profits for them. So I don't know how much it matters. But the one thing I did like is the finance team is performing quite well, at least this new one. So after taking on a huge chunk of debt from the merger in 2015 2016 their long-term debt went up to 11 billion dollars for a business that generates 1.4 billion dollars in free cash flow so a huge debt load to try to absorb today they've decreased that to 5 billion dollars to a much more manageable position which

Starting point is 00:36:42 i like uh debt is not all due soon is they have one that i think is even due in 2062 which they took advantage of the zerp era and they just refinanced some euro bonds of 800 million euros at a 3.8% interest rate due in 2032. As I said in the write-up here, bless the European Central Bank for letting people do that. And they've recently launched a buyback to take advantage of this potentially cheap stock, $2 billion that they plan to implement over the next five years for reference. They have a market cap of about $10 billion today. So look, that could be a big chunk. They could take down 20% of the market cap and shares outstanding have started to decline at a 2.5% rate annually since June 2023. That should continue and increase with the stock at a cheaper

Starting point is 00:37:28 level today. And then the dividend per share should start to grow again and currently yields over 3%. So I like that. What do you think of their capital return strategy with the dividend and the buyback here, Ryan, and the debt? I like it. $2 billion is nothing to shy away at. Now, typically, sometimes you'll see these authorizations and it doesn't really mean much, But with them actually buying back some stock and doing so at what would come out to 2.5% of their shares every year, you pair that with a healthy dividend that has consistently grown, I assume. You've got good returns. It actually hasn't because of the merger, but it should. They have the firepower to grow it now.

Starting point is 00:38:12 Okay. So 3% dividend yield, 2.5% on the buybacks. i call that a five and a half percent shareholder yield i do like that they're the here's my question for you it seems like the miller light acquisition actually worked out quite well they are generating they went from generating 400 million dollars in operating income to 1.7 billion and part of that is maybe some growth the brand, but also maybe some cost synergies that get included when you have multiple brands and it becomes those, like I said, economies of scale with the distributors.

Starting point is 00:39:00 Would you be concerned if you saw them do another one? Yes, because I'd be worried about what price they pay. I think the only thing that is troubling about that is they bought it at just the wrong time where they could have definitely got it at a cheaper rate. Now, the thing about this acquisition was that they already owned a minority stake in this company. So now they fully consolidated. It's very confusing. I don't honestly know all the details of it.

Starting point is 00:39:23 And I don't think anyone needs to know the full details because now it's fully consolidated under this company. But yes, it was right near the peak of, or excuse me, right when hard seltzers were about to just take off crazily. And they probably could have gotten at a cheaper multiple, although it is interesting because they already owned a minority stake. So how much of a benefit would that be? It kind of reminds me of, in a less extreme way, when Altria bought Juul, when Juul was up peak. What are you looking at here, Ryan, for the shared screen? Just pulling up some of the dividend yield, buyback yield, and actually there's shareholder

Starting point is 00:40:01 yield as well. So if you include the debt pay down, the dividend, and the share buybacks, it comes out to about but just under a 10% shareholder yield. Yeah, I think that makes sense. Now, they should be able now that they've hit their target. I think they use an adjusted debt to adjusted EBITDA or debt to EBITDA thing about two and a half times. They're not going to really pay down the debt anymore.

Starting point is 00:40:27 The interest expense is much lower today. They are going to focus solely on putting that to dividends and buybacks. So I think we should get, prospectively, we could get 10% plus dividends plus buybacks going forward, which is great. I think that's a huge highlight for the stock, especially with it trading at such a cheap multiple now. The last thing is the proxy. Executive compensation here is a mess. There are about 10 different criteria for various bonuses, talking about, quote, underlying free cash flow, which always annoys me. They have adjusted underlying operating income,

Starting point is 00:40:59 bunch of nonsense. 10% of the bonuses are based on the people and planet scorecard, which is great good that's what i want is the shareholder of a of coors light you know and for example here who else is gonna do it yeah yeah these are the people we need solving the world's biggest problems exactly just recycle your aluminum and glass aluminum cans and glass bottles and i think we'll be fine the stock rewards are based on now try to figure this one out ryan quote relatives told a shareholder return over the three-year performance period in the 90th percentile relative to the companies in the S&P 500 consumer staples index at the end of the performance period, which achieved maximum level of performance.

Starting point is 00:41:38 So apparently, Ryan, they were 90th percentile on a three-year relative total shareholder return versus the S&P 500 consumer staples index. So relative return, not great either. It's definitely a downside. But if we look at the actions on capital returns, it's good. So I don't, like, it's just kind of nonsense for the executive compensation, but I think They understand, given that this guy that runs it now is an accountant guy, he knows numbers aren't going to be the concern here. He knows how to value his stock and to increase the buyback, all that good stuff.

Starting point is 00:42:12 Yeah, I read that line that you quoted there from the proxy statement three times and really did not grasp it entirely. Exactly. There really isn't a perfect formula for CEOs that aren't founders necessarily. There's going to be some way that you could massage the numbers to hit the right incentives if you're someone who has certain hurdle rates. i do like total shareholder return over a certain time period because it kind of smooths it out and it guarantees that the executives will be there for some time but not relative not relative relative is useless i know relative when the whole industry is declining when you're benchmarking yourself against bud light who just had a rough year uh yeah i don't know don't love that but like you said their actions speak louder than words here and they're doing the right thing capital allocation wise so sometimes i kind of just throw the proxy

Starting point is 00:43:18 out the window yeah i agree i think the actions that are more important yes it would be nice if the executive compensation was great that box doesn't get checked but it doesn't you know it's not going to kill it here i'd say overall looking at this management team i like them i don't love them you know they talk reasonably they act reasonably i'm not gonna be you know i'm not gonna stay away from the stock because i believe they're a jack dorsey type one at block or where i have no confidence in in them it's not that bad it's not something where if the other two boxes that i care about which are sector growth valuation all that good stuff confidence in the moat if those boxes are checked this isn't going to keep me away yeah i i agree let's go through

Starting point is 00:44:02 the financials and maybe the balance sheet as well. Do some of the back of the napkin math here. What's it going to take to generate a good return for investors? Yeah. So as I mentioned, Molson Coors trades in a market cap of $10.3 billion. It has generated over $1 billion in operating earnings every year since the merger, which would be 2017, I believe. And over the last 12 months, it's been $1.76 billion. So you look at that, you can go $10.3 billion, $1.76 billion operating earnings. Hey, that's nice. That's pretty dang cheap. Interest expense from the debt is coming down. It's only $200 million or so on a net basis each year now. So definitely manageable, not really a concern.

Starting point is 00:44:47 Free cash flow has been over $1 billion every year since 2017, except for 2022, and was $1.4 billion over the last 12 months. It now has an earnings yield well above 10% if earnings remain stable, and they can probably reduce shares outstanding by 5% or more each year at the current multiple. Now, the question is whether these earnings will be stable. So if volumes remain stable, which they have over the last two years, but as we looked at that important chart from 2018 to 2022, they were declining by a good chunk every year. The company can grow the top line by probably 3% to 5% a year through price increases and that mix to more premium brands. the big question is ryan and any other questions you have on financials

Starting point is 00:45:30 what do the volumes look like over the next decade that's the huge uncertainty we've talked about already yeah i would think that over the next coming years you're gonna see probably my guess if i were a betting man today volumes decline from olsen course now over the last two years you've seen probably that trickle of bud light customers coming over but the five-year trends don't look quite as favorable and i would think that the bud light uh customers that they've lost probably it doesn't get much worse so i don't know i i would be wary about betting on too much volume growth what does pricing look like sorry what does pricing power look like Yeah, actually, you know, little spoiler for the listener.

Starting point is 00:46:28 Ryan said he was going to ask this question. So I do have the chart loaded up right here on FinChat. We have America's revenue since December 2018. So that's the America segment. And then I have America's volume since 2018. America's revenue has grown at 1.9% while volumes have declined by 2.5% a year. So growing at 1.9% per year, while volumes have declined at 2.5% per year. But again, volumes did start growing last quarter.

Starting point is 00:47:00 So I'd say pricing power has been decent, especially with inflation though, right? So I think they can keep up with inflation, but unlike tobacco or maybe soft drinks, they can't outpace it as easily. Brett, do me a favor and... Okay, nevermind. Share that screen again and hit... Separate y-axes because it was too hard to see. One of the numbers was too small

Starting point is 00:47:26 because the volume was calculated in hectoliters. Yeah, and how do you do that? Separate x? Yep. There we go. Yeah, there we go. So we have a better sense of the size here. Yeah, so total volumes have been declining

Starting point is 00:47:40 at about 2.5% a year despite the recent jump over the last two years. Yeah, I guess it's kind of a crapshoot on the volumes growth. that's that's the probably my biggest hang up here but total revenue growth solid kind of gives you a sense of the pricing power there let's talk about the risks as long as i think we've covered most of the financials there yeah i think so yeah i'd say one note is that they do experiment a lot and they haven't over the last five years had any sort of success on a big growth of like turning something into a truly or a white claw or i guess i don't know any other beer brands

Starting point is 00:48:19 that have really broken through. Maybe, you know, like a Modelo, obviously it's a huge one. And I would say I would be confident volumes are going to go down or not grow, excluding any new brand success because they are experimenting with a lot every year for these new ones.

Starting point is 00:48:36 And given the distribution, if something catches fire, obviously they could increase volumes by a ton. Okay, what do you see as the major risks for this business? So we've talked about these a little bit and there are two risks on this. I think there are two risks that people talk about. First, people are concerned about the one-time benefit from Bud Light that will revert in the coming

Starting point is 00:48:57 years. I've seen a lot of people when I talk about, hey, why is the stock so cheap? And there's a lot of people writing up, hey, the Bud Light's going to regain its volume. But again, when we talked about with the distribution shift, I don't think this is a concern, as we discussed above. I honestly think over the next year, volumes could still see a little benefit if the distributors restock and do their new shelving, which doesn't happen right away. But the second thing, people are worried about the broader beer and alcohol market. Gen Z and younger people drinking less, people are drinking more spirits compared to beer, and the exempting of weight loss drug narrative. I think the second one is a real concern. We talked about this entire episode. The big hang

Starting point is 00:49:37 up here is I'm not confident in the trajectory of the beer volumes over the next decade. It could be flat in the US compared to today. It could be down 20% or it could be up 20%. I have no clue this presents perhaps an opportunity for someone that has a sharper mind with this industry but it's also a ton of uncertainty okay i think we've discussed the volumes this question here kind of enough today so let's get to the i guess final question for you are you buying the stock today are you buying molson coors okay let me start out with saying i think molson coors looks cheap. It's at a 10% earnings yield. Investors can make a 10% annual return if the business stays the same. I think we could say a 15% annualized return with slight sales growth

Starting point is 00:50:27 and multiple expansion, which I wouldn't count out if sales growth remains positive for the next few years. Something that grows its sales at that level is not going to trade at less than 10 times earnings forever. And I think that's a plausible scenario. And I expect the stock's total return to be positive X inflation over the next five and 10 years. I would bet on it versus the S&P 500. Although some people care about that. I try not to care about that. Relative return, as we talked about, doesn't actually matter at the end of the day. But if I had to guess, if I had to say, are you going to choose the S&P 500 index fund or are you going to choose Molson Coors over the next five years, I'd definitely choose Molson Coors. Ryan, what would

Starting point is 00:51:18 you choose if you had to pick one? Between those two, I'd probably take Molson Coors. But we're also at an extreme multiple right now for the index. Yeah. I think there's, just when I look at my own portfolio, there's probably other companies I would buy first. There's other stocks that I maybe like better. And especially when I think about like sin stocks as a category i look at this i look at molson coors and i think why would i rather um why would i own molson coors instead of philip morris it seems to me like philip morris is has a better chance of growing volumes in the aggregate over the next five years where you don't have as much of a concern there on like the underlying trend so

Starting point is 00:52:04 yep yeah you jumped in my segment here i was gonna mention that as well uh say i guess i should answer the question i'm not going to be buying it because i i'm not as confident in the competitive advantage and the sector for any sort of predictive value on the durability of earnings over the next you know for you want to hold a stock for a long long time period now for example you mentioned right philip morris international it's in my portfolio it's in ryan's portfolio it trades at a slightly higher earnings multiple than Molson Coors. Sure, that's a factor. But on the other hand, I am confident it has better pricing power than beer. Historically, it has a better competitive moat with a historically less competitive industry. And it operates in

Starting point is 00:52:47 a stable industry from a volume perspective when you do nicotine plus tobacco. So the entire nicotine category, which they have more exposure to, is growing. Now, if I looked at the, or maybe it's not growing, but it's stable over worldwide. Now, maybe this would be a better investment if it had more spirits exposure. It's a tiny percent of their portfolio. So if this was someone like, people talked about Brown Foreman, that we should look at them. Maybe that'll be the next one I look at here. Diageo. Diageo, I just really didn't like the management team. If that had more exposure, maybe the stock's cheap enough here. But I think the reason it's under 10 times earnings is because of the beer because people are so worried about that and that

Starting point is 00:53:33 for me that always the positives for molson korsman what what price i know trading earnings multiple is not the end of the world or excuse me is not the end all be all but ryan what ebit EBIT are you buying Molson Coors? Well, I think right now, I think you can get a 10% annual return with the Coors. You've got good shareholder returns here between the dividend and the buyback, and then maybe some level, some small level of revenue growth as well. And they're going to earn probably – they have more capacity to return cash to shareholders than they're currently doing. So I would suspect that, yeah, you're looking at potentially a 10% IRR. I think 15% is a bit of a stretch.

Starting point is 00:54:29 It's hard to know what the floor is going to be on volume growth because volumes could decline a lot quicker. Maybe Bud Light could regain some of its market share. Maybe the industry as a whole is going to see volume declines. But the ceiling, I don't think it's going to grow faster than like 3% or 4% volumes annually when you look out over five years. So I think 15% seems like maybe a bit of a stretch here for an IRR or expected returns. Don't forget multiple expansion, Ryan. That's a factor, obviously. yeah i i'm not sure what exactly the multiple would be but i would say when i feel comfortable

Starting point is 00:55:18 with the same growth assumptions and i can get 15 return that's kind of what i at least when i'm just looking at my other investments that's kind of what i shoot for doesn't obviously does not work out every time um it just doesn't feel like you're getting that here yeah i think maybe seven times ebit would be that number you know it's not it's not a precise science the the it's a probabilities of outcome here but it seems like that would be more reasonable if you're looking for that 15 return now you know if 10 that's what you shoot for maybe that's even better you want something safer this could be the place to be and hard to know i think it's going to generate solid returns i would be surprised if the total return is negative over the next five years

Starting point is 00:56:05 I agree. Now, I do think people are probably listening to this and thinking, okay, 9.7 times versus 7 times EBIT. Why are we being so nitpicky over the valuation? If it were a company that was growing quickly and I thought there were a lot of tailwinds behind it, I wouldn't be as nitpicky over like 15 times earnings versus 18 times earnings because you have that growth to kind of support it. And over the long run, you have some sense of security that it's going to keep growing. When it's a business where you could be seeing overall volume declines, I think you have to be a little more nitpicky over the valuation. Yep, and when the buyback is such a big factor, or it's only been implemented for a small time period, but could be a huge factor going forward. Yeah, and the lower the multiple, I guess, the higher probability of multiple expansion. Exactly, exactly. And the buyback works even better. All right, closing thoughts, Ryan, anything on Molson Coors you want the listeners to take away? no i i thought it was really interesting on the distribution point my

Starting point is 00:57:15 my thinking here is that you've got a lot of alcohol businesses trading at record low multiples as a whole if you took that whole basket i think it probably outperforms the index because it seems like people are maybe overestimating the decline in alcohol consumption and what it'll be for the next decade but molson coors i don't know maybe i gotta look at some of the other alcohol companies before i pull the trigger on any of them yeah and i was gonna say what uh should be the next stock i research ryan do you think brown foreman i think they own jack daniels a little more spirits exposure that could be interesting uh and it looks like according to finch i hear pe or ev to ebit ebit does below 20 now so

Starting point is 00:58:02 i don't know maybe something a little sexier maybe i like i generally like fishing in industries where i have a good level of confidence that there will be growth true i know the valuations aren't as exciting but it's nice to have that little bit of a consistent tailwind. You look at Visa or MasterCard, digital payments, it's something where there's some level of growth that propels a lot of the businesses. It just excites me a little more. So I'm thinking maybe we stray away from the alcohol category for your next one. All right. All right. I will say Brown Forman is in its biggest drawdown ever, but probably deserve given the concerns people have over the category at the moment.

Starting point is 00:58:57 anything outside of this one that comes to mind that you want me to research for the next month i don't have a specific one in mind the other the other thing i would just say is i was looking at the 52 week lows list and like half of them it felt like were alcohol companies so i i think the 52 week lows is a nice place to look um there's probably maybe some alcohol companies in there is there anything that's piqued your interest that is not an alcohol stock over the last not not alcohol not really i've had a couple that i've bought this year what's funny is the one that we covered that i did research that i was that i thought i didn't have confidence in management it ended up going up 100 percent uh which was hims and hers but nothing that comes

Starting point is 00:59:45 to mind i guess yeah it's hard because we try to do one that we can listen to uh i don't know or excuse me, not that we can listen to, that listeners want to hear. That's not some super niche micro cap out there, but we'll figure it out. I'll find one to research. That'll be fun. Okay. Well, I will tease listeners with this. My stock for next week is a 430 bagger over its history and has been one of the most consistent companies with a return on invested capital above 20 they are they they've been quite the compounder so i won't say the company name but i'll leave it at that yeah look out for that next week and some more fun interviews investment um funds you know manager research reports kind of as we've been doing on these past episodes some more stock

Starting point is 01:00:43 research stuff some fun portfolio updates we'll have that all consistently coming every wednesday for any housekeeping items. Make sure, again, to subscribe to the newsletter, especially for the stock research episodes. There's going to be a ton of good stuff, probably about 10 pages of some notes and charts that you can help understand Molson Coors better. Let's hit the disclosure. We are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guest may hold securities discussed in this podcast, may hold them in the past, and may buy, sell, or hold them in the future. Thank you everyone again for tuning in

Starting point is 01:01:18 and learning about Molson Coors stock with us. We'll see you next time.

Chit Chat Stocks - This Beer Stock Is Trading At Its Cheapest Multiple In Years (Ticker: TAP)

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