Back in April, I wrote favorably about Molson Coors ($TAP) (see “Beer Stocks: Crack One Open”), noting that the brewer was significantly cheaper than Anheuser Busch InBev ($BUD) and SABMiller (SBMRY) and that it paid the best dividend of any major brewer. At 3.1%, its dividend yield at the time was nearly double that of Anheuser Busch InBev.
Since then, Molson Coors is up a modest 10%, more or less in line with the S&P 500. Meanwhile, BUD has rallied by more than 20%.
But looking longer term, we see an even starker contrast. Since the beginning of 2010, Molson Coors has trailed its “Big Beer” peers by a wide margin. Anheuser Busch InBev, SABMiller and Heineken (HINKY) are up 66%, 50%, and 30%, respectively.
But Molson Coors?
TAP has been flatter than a three-week-old keg, actually showing a slight loss over the past two years.
So, what gives? What explains the lack of investor interest in Molson Coors?
It’s really quite simple. Molson Coors missed the party in emerging markets.
Prior to its June acquisition of Eastern European brewery StarBev, Molson Coors had negligible exposure to emerging markets. Its business was limited almost exclusively to North America and the UK, where beer brewing is a slow-growth business. And outside of its trendy Blue Moon brand, Molson Coors had also largely missed out on the one promising growth outlet for the North American market: upscale premium microbrews.
The company found itself selling low-margin, mass-market beer to an aging and shrinking North American and British market. Molson Coors faced relentless competition from both Budweiser and Miller at the mass-market level, and from innumerable up-and-coming foreign and premium brands at the higher end. Not the sort of scenario that would make investors thirsty for more.
Even after the StarBev merger, Molson Coors will only sell about 14% of its volumes outside of North America and the UK.
Meanwhile, take a look at BUD. Anheuser Busch InBev sells more beer in Latin America (34% of volumes) than it does in North America (32% of volumes). Overall, emerging markets make up more than half of all beer sold.
And BUD isn’t even the best positioned of the group. Heineken is a long-term recommendation of the Sizemore Investment Letter precisely because of its exposure to emerging markets and specifically to Africa, the next great growth market. Heineken gets 21% of its profits from Africa already, and this figure is set to skyrocket as African incomes rise and millions of Africans join the ranks of the middle classes. Rival SABMiller is also a major player in Africa, and particularly in South Africa.
Heineken also made a major expansion into Southeast Asia this year with its purchase of Asia Pacific Breweries.
So, where does all of this leave Molson Coors?
With the global beer market already well on its way to consolidation, there are not a lot of attractive acquisition targets left to snag, and those that do come up are not likely to go cheaply. Realistically, Molson Coors will be primarily a North American seller of suds for the foreseeable future.
This isn’t all bad. While the Echo Boomers—the large generation of Americans in their 20s and very early 30s—do not slosh the stuff as enthusiastically as previous generations (they tend to prefer vodka-based mixed drinks), there are signs of life in the domestic market. U.S. beer shipments are actually up this year, after falling slightly for the past three years in a row. Mass-market brewing may no longer be a growth business in the United States and Canada, but it is generally pretty stable. We don’t have to worry about any of the major brewers facing financial distress any time soon.
Looking at Molson Coors’ financials, I continue to believe the stock has value as a cheap income stock. TAP trades for just 11 times expected 2013 earnings and pays a dividend of 2.9 percent—the highest of all major beer brewers. This isn’t a “home run” stock, but it’s one that is priced to offer decent returns going forward.
Bottom line: If you want growth, Heineken remains my favorite brewer. But I consider Molson Coors a worthwhile choice for a long-term dividend-focused portfolio.
This article first appeared on InvestorPlace. Sizemore Capital is long HINKY.
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