Inside Wall Street: It Could Be Party Time for Molson Coors Stock

Cheers! Yep, when it comes to the world's major brewers, there's something to toast. Their prospects for reinvigorated growth have picked up again, partly because sales volume has begun to rebound from last year's sharp drop. That's partly the result of the economic recovery that's underway -- even if moderately. So, some pros who usually are ahead of the pack in picking potential winners have singled out Molson Coors Brewing (TAP) as the brewer to bet on.

True, the recession's severe impact, exacerbated by a 9.6% U.S. unemployment rate, still lingers. And Wall Street hasn't been too eager to call for champagne -- yet. But some signs have emerged showing that the brewing group is poised to move up, according to some beer bulls.

One of them is investment manager Michael Camp, president of Northwest Criterion Asset Management. "We favor Molson Coors in large measure because of its pattern of consistently increasing earnings in the last five years," says Camp, who has accumulated shares. The stock is now trading at $47.22, down from $59 in the summer of 2008.

"We prefer Molson Coors over Anheuser-Busch InBev (BUD), the No. 1 beermaker, which has a similar pattern of growing earnings, because Molson Coors is a cheaper buy." It's trading at a price-earnings multiple of 11.7 times, compared with Anheuser's 17.7 p-e ratio and stock trading at $55. Molson Coors's currently depressed p-e is down from its high of 18.9 in June 2008.

Yet over the past five years, Molson Coors earnings have been on the rise, growing from $1.95 a share in June of 2006 to $3.75 in June of 2010. Moreover, its quarterly dividends over the same period have increased from 16 cents a share to 28 cents.

Lowering the Cost of Brewing

Molson Coors has been busy expanding through mergers and acquisitions. The current company was formed in early 2005 when Molson, a Canadian outfit that was the world's 14th-largest beer brewer, and Adolph Coors of Colorado, then the third-largest U.S. brewer, merged Two years later, the combined Molson Coors signed a joint venture with SABMiller to form MillerCoors. Apart from posting huge cost savings, the joint venture added to Molson Coors production, making it the second-largest U.S. brewer, with a 30% share of the market. Anheuser-Busch Inbev controls a 49% share.

The merger has resulted in significant cost reductions for Molson Coors, in part because the combination made it possible for the new company to produce various brands at different breweries across the country. It has reduced the cost of shipping both raw materials and finished products. Molson Coors's goal is to slash annual costs by $750 million by the end of 2012. The company says synergies and cost savings since July 1, 2008, have totaled $481 million.

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Analysts note that industry trends are stabilizing in the U.S. In addition, building up Molson Coors's market share in Canada and the U.K. "spell a modestly improved earnings and cash flow outlook for Molson Coors," says Mark Swatzberg, analyst at investment firm Stifel Nicolaus, who rates the stock a buy. He has increased his 12-month price target of $48 a share to $50, and he's boosted his earnings estimates to $3.41 a share for 2010 from $3.38, and his 2011 forecast to $3.66 from $3.55.

"We also consider the company's [p-e] multiple undemanding and, therefore, expect Molson Coors shares to continue their recent trend of sector outperformance over the balance of 2010," says Swartzberg. Rumors have been swirling that Molson Coors might be interested in acquiring Foster Group's (FBRWY) Carlton & United Breweries unit. Neither Foster's nor Molson Coors have commented on the speculation.

Investors who've already snapped up Molson Coors shares argue that it's better to get in early before the large institutional investors convince Wall Street and individuals that it's time to drink more beer -- and buy Molson Coors's attractive stock.