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Upslope Capital Goes Long On Molson Coors Brewing Co (NYSE: TAP)

Colorado-based investment firm Upslope Capital Management sees a value in Molson Coors Brewing Co (NYSE: TAP), a Colorado-based brewing firm with a market cap of $14.43 billion. In its Q2 investor letters (you can download a copy here), Upslope Capital discussed its investment thesis on Molson Coors. Here’s what the investment firm said about the stock:

TAP is one of the largest brewers in the world, producing beer under the Coors, Miller, Blue Moon, and Leinenkugel brands (among others). “Macro brewers,” including TAP, have experienced significant volume declines (offset, in part, by price) and share loss to craft brewers in recent years. The consensus view – which I don’t dispute, but view as well-baked into TAP’s stock price – is that macro beer is in permanent, secular decline. As such, this is a “tactical” investment (i.e. it represents great value in a moderate “quality” business, and I will be even more disciplined on valuation than usual). The thesis:

Attractive, cash-flowing business on sale: while TAP undoubtedly has long-term challenges, the business generates very strong and surprisingly steady free cash flow due to its competitive position and track record of cost and pricing discipline. The stock currently trades at a double-digit yield to free cash flow and is near its peak historical discount to the S&P 500 on a P/E basis.

Value dislocation due to short-term issues: during Q1 TAP faced a near-perfect storm of shorter-term issues that exacerbated fears about the durability of the business and led to a significant price/value dislocation in the stock (the stock fell 17% in two days). Recently, TAP was the single cheapest large cap consumer staple stock.

Management appears to have the right priorities: management has repeatedly emphasized that they will not “chase” volumes at the expense of profitability. While they continue to aim to grow revenues, their focus on profitability over top-line growth seems a positive for shareholders.

Key risks: secular challenges are real, high debt load (though I believe it’s manageable, given the strong cash generation), family-controlled business, inflationary headwinds (e.g. rising aluminum packaging costs), expanding legalization of marijuana could place further pressure on macro beer in general (or encourage management to reach for ill-advised acquisitions).

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Molson Coors Brewing Co (NYSE: TAP) operates through MillerCoors, Molson Coors Canada, Molson Coors Europe and Molson Coors International. Shares of the company are down 22.34% so far this year. Over the past three months, the share price has dropped 9.25%, while the stock has plummeted 27.04% over the past 12 months. According to a report in Motley Fool by Travis Hoium, TAP and other beer producers are facing negative impacts of the 10% tariff imposed by the Trump administration on aluminum imports from Canada, China, and the European Union. Tariffs will increase costs for beer cans, which could shrink margins and lower profits.

Meanwhile, Molson Coors isn’t a very popular stock among hedge funds tracked by Insider Monkey. Our database shows that 24 funds held TAP in their portfolios at the end of the fourth quarter of 2017, compared to 31 funds at the end of the third quarter of 2017.

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