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Free Cash Still Flows at Molson Coors Brewing

Molson Coors Brewing Company (TAP) is one of the world’s largest beer companies, producing the highly-recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers, notes George Putnam, editor of The Turnaround Letter.

About two-thirds of its revenues come from the United States, where it holds a 24% share of the beer market. Canada-based Molson (founded in 1786) and Colorado-based Coors (founded in 1873) combined in a 2005 merger of equals.

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Enthusiasm for its post-consolidation prospects between Molson Coors and Miller drove the shares to over $110 in October 2016, with some analysts estimating the shares could reach $120 or more. However, since then, the share price has been cut in half.

Investors looking for revenue growth (which is to say, most investors) have fled as Molson Coors’ beer volumes have been declining. Investors doubts about Molson Coors’ growth have created a bargain share price. The current EV/EBITDA multiple of 9.3x is nearly 30% below its peer average. Its 11.9x price/earnings multiple is even more of a bargain. TAP shares discount a lot of bad news.

Despite the worries, Molson Coors’ revenues have staying power. Further, Molson Coors continues to invest in growth initiatives. Not only is it actively supporting its existing brands with marketing spending, it is also building new brands and expanding its geographic reach into Latin America, Africa and the Asia Pacific region.

Perhaps more important to value investors, the company is firmly focused on increasing its profits and cash flow. It is currently wrapping up $700 million in cost-cuts over the past three years, exceeding management’s initial estimates, and it recently announced another $450 million in cuts over the next three years, equal to about 4.2% of revenues.

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This provides considerable funds to re-invest into growth initiatives and to help offset the rising input costs while still producing bottom line benefits. Additionally, an incremental $100 million in cash should be freed-up from more efficient use of its working capital.

The company’s generous cash flow, equal to about 12% of its equity value, should allow it to pare its debt to its targeted 3.75x EBITDA level by mid-year. Once reached, the management has essentially promised a dividend increase of as much as 30% later this year, providing a potential 4% yield at the current share price.

While progress toward stability may not satisfy the market’s quarter-by-quarter expectations, and the shares may continue to languish for a time, we see considerable value for patient investors. Good things tend to happen to cheap stocks of stable companies with lots of free cash flow. We recommend the  Molson Coors Brewing Company with an $82 price target.

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