MillerCoors: Don't Be Late To The Party
by Hilary Kramer
What happens when two companies make similar products, sell to similar customers in a limited marketplace, and use similar raw materials? Aside from being able to trade on your good name, the real difference in profit potential between the market leader and the competition is the size of your operation. Anheuser-Busch (BUD), the leader in American beer sales, has been able to control its almost 50% share of the market because none of its competition could compete with its operating costs -- especially with regard to distribution -- because no other companies were capable of working on the same scale.
But that's all about to change. Molson Coors Brewing Company (TAP), recently announced that it is merging its U.S. and Puerto Rican operations of SABMiller, which will give the new company (MillerCoors) a 30% share of the American beer market -- and finally make its operation competitive with Anheuser-Busch . Economy of scale in both production and distribution means that the company estimates a savings of $500 million annually in expenses (and as Molson's current annual operating expenses hover around $220 million, that's a LOT of savings) -- putting the company in a great position to brew up some real trouble for Busch.
Of course, there's still the brand recognition problem (although it's not like Miller Light and Coors aren't household names). Busch spends more on advertising that Miller and Molson combined. But the benefits to the bottom line from a streamlined operation should mean that MillerCoors will start showing higher profits soon . Don't make the mistake of being late to the party.
Type of Stock: Molson Coors Brewing Company is a manufacturer and distributor of beer and other beverages in the United States, Canada and the United Kingdom.
Price Target: Sell-side analysts are valuing this stock at $70 a share -- making the current price in the mid-$50s a bargain. I'd buy now. After all, beer is fairly recession resistant.