Wide Moat 5 Star Stock Universe Changes

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 Stock Investor 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.

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?

Paul 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.

Jason 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?

Paul 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 Stock Investor. And the company I bought is
Molson Coors, ticker TAP.

Jason 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.

Paul 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.

Jason 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?

Paul 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.

Jason Stipp: The microbrew.

Paul 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.

Jason Stipp: Okay, so, if it's not revenue growth, where are you seeing the value
here? What is the thing to be excited about?

Paul 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.

Jason 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?

Paul 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.

Jason 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.

Paul Larson: Thanks for having me.

Jason Stipp: To learn more about Stock Investor, visit
http://msi.morningstar.com. Thanks for watching.