7 beverage stocks to buy

On ‘The Back Page’, a weekly feature that examines the market outlook with a focus on a particular industry, The Investment Reporter recently rated seven beverage stocks as ‘buys’—including Molson Coors Brewing which it has upgraded to a ‘buy’ for long-term share price gains and modest dividends.

Beverage_StocksSince we published our February 24 issue, the 10 beverage stocks we regularly follow on ‘The Back Page’ are up an average 14 per cent. Meanwhile, the S&P/TSX Composite index declined by 3.5 per cent.

Andrew Peller Ltd. (TSX—ADW.A) and PepsiCo (NYSE—PEP) remain ‘buys’. Both are ‘dividend aristocrats’ that raise their dividends every year.

Brick Brewing (TSX—BRB), Corby Spirit & Wine (TSX—CSW.A) and Lassonde Industries (TSX—LAS.A) remain ‘buys’.  Lassonde is a ‘dividend aristocrat’. Ten Peaks Coffee (TSX—TPK) remains a ‘buy’ for long-term price gains and dividends that yield a high 3.9 per cent.

‘Hold’ Big Rock Brewery (TSX—BR). It’s losing money and pays no dividends. ‘Hold’ dividend aristocrat Coca-Cola (NYSE—KO) for its attractive and growing dividends. ‘Hold’ Cott Corp. (TSX—BCB). Its P/E ratio of 81.4 times is excessive. Cott’s net debt-to-cash-flow ratio is excessive as well.

This time we upgrade Molson Coors Brewing to a ‘buy’

Since we published our February 24 issue, Montreal- and Denver-based Molson Coors Brewing Company (NYSE—TAP) shares have fallen by 9.9 per cent. This and much higher expected earnings this year and next make them better priced. As a result, we’ve upgraded TAP to a ‘buy’ for further long-term share price gains and modest dividends.

TAP is the fifth-largest global brewer. It operates 18 breweries worldwide. The company has a portfolio of 40 brands, including Molson Canadian, Coors Light and Carling.

In 2017, TAP’s earnings are expected to more than double, to $6.45 a share (all figures are in US dollars). Based on this estimate, the shares trade at an attractively-low price-to-earnings, or P/E, ratio of only 13.4 times.

The large jump in this year’s expected earnings reflects an acquisition last October. TAP acquired the rest of joint venture MillerCoors that it did not already own. TAP plans to integrate MillerCoors. Analyst Richard Gallagher wrote: “Full ownership of this business strengthens the company’s competitive position in some attractive markets, which may well bolster [sales] volumes.” Particularly in emerging markets.

In fact, this acquisition is the main reason that TAP’s net debt-to-cash-flow is so high at 11.5 times. But as we often point out, this calculation is less relevant after a big acquisition. That’s because the debt jumps right away while higher cash flow shows up only after a full year. A better measure is TAP’s net debt-to-equity ratio. This is currently 1.03 to one.

The company is focused on debt reduction

One plus is that we expect the company to repay debt and strengthen its balance sheet. In fact, that’s why it reduced its dividend to 96 cents a share, down from a peak of $1.64 a share in the two previous years. And the company continues to cut costs.

Keep in mind, too, that much higher earnings this year and next should raise TAP’s cash flow. This would improve its net debt-to-cash-flow ratio. Next year, the company’s earnings are expected to rise by 5.6 per cent, to $6.81 a share. Based on this estimate, the shares trade at an even better P/E ratio of 12.7 times.

With higher expected earnings and a lower P/E ratio, TAP’s MGI (or Marpep Growth Index) improved to 1.6. A number above 1.0 suggests that the shares are undervalued. That is, you’re paying relatively little for the earnings per share growth.

TAP does, however, face a few headwinds. One is the high US dollar in recent years. This makes American-made beer more costly to foreigners. In addition, it reduces the size of foreign earnings and sales, after converting them into US dollars. Recently the US dollar has come down somewhat as the Bank of Canada and the European Central Bank were getting ready to raise their interest rates. Then, too, lower-than-expected economic growth south of the border may slow the pace at which the Federal Reserve raises interest rates.

A second headwind is increasing competition. That’s partly due to more distinctive beer from craft breweries as well as imported beer. Also, an aging population in North America and Europe generally favours wine over beer. What’s known as ‘Molson muscles’ (or fat) are seen as unattractive. Then again, TAP is investing more in marketing and introducing new products.

The consensus recommendation of four analysts is that Molson Coors Brewing is a ‘buy’. We agree. Buy it for further long-term share price gains and modest dividends.

This is an edited version of an article that was originally published for subscribers in the July 14, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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