Jason Stipp: I'm Jason Stipp for Morningstar. It's hard to find fault with a close to 70% market gain since the bottom last year, but I guess one downside is fewer bargains for those bargain-hunters.
Here with me to talk a little bit about the situation today and where he has found opportunity is Morningstar's Paul Larson. He's editor of Morningstar StockInvestor newsletter. And he's also an equity strategist and our resident core stock-picker. Thanks so much for joining me, Paul.
Paul Larson: Great, thanks for having me, Jason.
Stipp: So, first question for you. You were just telling me a moment ago about the universe of wide-moat 5-star stocks. What has happened to that universe in the last year?
Larson: It has greatly shrunk. A year ago we had a menu of nearly 100 wide-moat stocks that had 5-star ratings. And today, that menu has shrunk down to--today we only have 15 wide-moat stocks that have 5-star ratings on them. So the opportunities are certainly far fewer than they once were.
Stipp: What a difference a year makes. So, for you, you run two portfolios, and your hunting ground is typically wide-moat stocks. What have you been doing in the last few weeks, few months, where have you been looking if that opportunity set is so much smaller today?
Larson: Right. Well, with the thinner opportunities among the wide-moat stocks, I think it has forced me to go fishing in waters that I otherwise wouldn't be dipping my pole in, and one of those areas I've been looking is higher quality narrow-moat stocks.
And I have found one opportunity that I think is worth buying. I actually bought it a couple weeks ago in the model portfolio, the Tortoise portfolio, in StockInvestor. And the company I bought is Molson Coors, ticker TAP.
Stipp: Molson Coors is not as big as the Anheuser-Buschs of the world, but it still has a pretty solid position in Canada, for example. Tell us a little bit about their market position and where you see them in the beer universe.
Larson: This is a second-tier beer company. This is not a giant like Anheuser Busch-InBev, or AmBev, but still a pretty decent company. They get a little more than half of their sales from Canada, and in Canada, the Molson brand is actually very, very strong. They have in excess of a 40% market share in Canada. So their Canada business is a very, very solid business.
Here in the U.S., they're a little bit smaller, although they just entered a joint venture with SAB/Miller, and their joint venture here in the U.S. is called Miller-Coors. And the business here has about 30% market share in their joint venture with SAB.
And then they have a smaller business in the U.K., which is--we don't think has an economic moat.
Stipp: OK, so, U.S., U.K., Canada, these are good markets to have a good position in, but they're also not necessarily fast-growing markets. I mean, people who drink beer here drink beer, and the growth prospects for beer might not be that great in those markets. What does the growth look like for Molson Coors?
Larson: Growth is actually, in terms of volume, negative right now. Volumes were down in the low single digits last year, and this is primarily because people are moving from mass market beers to more of a craft beer.
Stipp: The microbrew.
Larson: Exactly. And so volume, the top line growth, real, is not there. They did get a little bit from pricing, but revenue was basically flat last year. But this is not a revenue growth story.
Stipp: OK, so, if it's not revenue growth, where are you seeing the value here? What is the thing to be excited about?
Larson: The thing to be excited about is the cost cutting, and this is really where the action is. I mentioned the joint venture Miller-Coors here in the US, and this is a joint venture that is really taking a hatchet to distribution costs. Coors used to be brewed only in Colorado and distributed around the country from that one brewery in Colorado.
And now that they have this joint venture, they can brew the Coors brand of products from wherever there's an SAB/Miller brewery. And so you can imagine if you're drinking Coors in Miami, you can maybe have it brewed in, say, Atlanta as opposed to Colorado, and really taking out the transportation cost.
And when you look at the bottom line, this is a joint venture that's taken out close to $200 million in distribution costs, and for a company that before the JV had only about $700 million in operating profit. That's close to a 30% jump in profit that they expect just from cutting cost.
Stipp: That's quite a large, large chunk of cost taken out. So tell me a little bit then about the valuation picture here. It looks like that they're making some progress on cutting costs, but based on where the stock price is, where does that leave you as your potential return as a stock investor?
Larson: Right. The valuation is also quite attractive in my view, and that's one of the reasons why I pulled the trigger. The stock is trading at roughly 11 times forward earnings, very reasonable multiple. Also, on a free cash yield, this is a company that does generate a lot of free cash flow, and on a free cash yield basis, they have a yield near 9% today. Given the low risk, low uncertainty, low valuation, it's a perfect Tortoise stock, in my opinion.
Stipp: Well, it certainly sounds like a great opportunity for stock investors, hopefully something they can raise a glass to in the future. Thanks so much for joining me, Paul.
Larson: Thanks for having me.
Stipp: To learn more about StockInvestor, visit http://msi.morningstar.com. Thanks for watching.