The Rocky Mountain Beer: It s All Tapped Out.

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1 Brent Ozenbaugh Jennifer Pray Meredith Price Lindsey Price Financial Summary (In Millions except for per share data) Price: $67.10 Price Target: $ Week Range: $ Shares Outstanding: 36 Market Cap.: 3693 Beta: 0.65 EPS (FY 2003): 4.33 EPS (FY 2004 est.): yr Growth in EPS: 13.0% P/E Ratio (FY 2003): v Ind. P/E Ratio (FY 2004 est.): PEG: 0.91 Gross Margin: 42.2% v. 40% Ind. Oper. Margin: 20.3% v. 20.0% Ind. ROE: 14.1% v. 61% Ind. ROA: 12.4% v. 11% Ind. Source: Value Line, Multex Investor Company Profile Coors Adolph is primarily engaged in the manufacture, marketing, and sale of beer and other beverage products. The Company categorizes its operations into two operating segments: the Americas and Europe. The Americas segment primarily consists of production, marketing, and sales of the Coors family of brands in the United States and its territories. This segment also includes the Coors Light business in Canada that is conducted through a partnership investment with Molson, Inc. The Europe segment consists of the Companyʹs production and sale of the Coors Brewers Limited (CBL) brands principally in the United Kingdom, but also in other parts of the world, and its joint venture arrangement relating to the production and distribution of Grolsch in the United Kingdom and Republic of Ireland. Coors Adolph Co. SELL Class B NYSE: RKY April 27, 2004 The Rocky Mountain Beer: It s All Tapped Out. Fundamental Highlights Will not be able to meet the targeted 3% growth rate in the slowing beer industry Delayed and poorly executed response to product innovation trends Highest industry costs per barrel with no indication of changing structure International market growth not expected Valuation Highlights Overvalued by 11% on a DCF basis Weak gross and operating margins in comparison to industry ROE and ROA are substantially lower than industry Exhibit 1

2 Investment Thesis Consumer Staples Shares of consumer staples are expected to maintain steady dependability this year as their necessity tends to stabilize sales, even through a potential unexpected economic downturn. However, being non-cyclical, these companies are not always among the strong performers when the economy and the market come back. There do appear to be some positive upcoming trends that may help certain companies provide above-average capital appreciation over the next 12 months. Within this highly fragmented market, it is best to favor the stocks of companies that produced aboveaverage earnings growth, have products that are leaders among competitors, and have a repeated history of successfully launch[ing] new products and exploit[ing] existing distribution channels. Coors has not been aggressive in these key areas and therefore is a bad bet for the staples sub-sector. -Standard & Poor s The Outlook Volume 76, Number 5, February 4, 2004 Domestic Beer Market The biggest factor hurting the U.S. beer industry in 2004 is the health and lowcarbohydrate dieting trend. Data indicates that taxable domestic shipments (i.e. excluding imports) for January 2004 fell by 3.8% vs. 2.2% decline in January Total domestic shipments should increase 1% in Improving shipment growth is a major catalyst for improved valuations. Furthermore, higher beer prices do not seem to be a significant driver of weaker beer volume growth. Product innovation, consumption among faster growing ethnic groups, and less impact from the lowcarbohydrate trend have driven strong spirits and wine growth. We see Coors Light s brand equity slipping as wholesaler attention is shifting from Coors Light to Miller Light, a result of the low carbohydrate craze. Although volumes have come under a bit of pressure, a favorable pricing environment has aided the domestic beer industry. There is no evidence that RKY is gaining any traction in this relatively weak industry. In fact, RKY has lost.5% share in the past four weeks. Industry Business Model Within the Domestic Beer Industry we have noticed lower volume sales and higher prices. Anheuser-Busch s (A-B) model involves initiating price hikes twice per year. They continue this strategy while maintaining over 50% market share. Coors light, on the other hand, seems to rely on volume growth and synergies resulting in cost reductions. In a year of sluggish industry growth, we see A-B having a better business model. A-B s solid and consistent 12% EPS growth now spans five years with 2004 as the next in line. This growth is driven primarily by strong pricing growth, expected to be up 2.5% in We anticipate that the combination of higher prices and product mix to be able to support the earnings profile. A-B is expected to continue to gain market share, even in the weak beverage sub-sector. Although the industry volume declined by 3.3% in January 2003, sales to retailers for A-B was up 1-2%. (A.G. Edwards). Valuation Summary According to our DCF analysis, Coors is overvalued at $ Our sensitivity analysis indicates that even with conservative assumptions, RKY will not be able to realize the necessary cost savings needed to compete in the beer industry. In terms of financial ration analysis, Coors is also weak with low margins and low ROA, ROE. 2

3 Market Overview Market Growth BUD, the industry leader, expects 1% industry growth in 2004, despite shifts to spirits and wine driven by the lowcarbohydrate craze. Given that 25% of industry sales are from bars/restaurants, any factors affecting these activities can negatively affect the market as well. The market has benefited from pricing trends in the past, but economic factors can affect the markets ability to maintain these trends. Trends abroad are also significant, given that Coors Brewers Limited (formed from Carling Brewers, bought in 2002) had 20% of UK sales volume in The UK is a mature market, declining by 0.7% annually. Competition Coors does not occupy a distinct competitive position. They trail BUD in market share and expected growth. In addition, BUD is the leader in product innovation and international expansion, particularly in emerging markets. RKY is not positioned to gain competitive advantage in the future. The Company s focus on maintaining Rocky Mountain image does not sufficiently address developing trends in the industry. Revenue Growth Given sluggish industry growth, brewers are increasingly dependent on innovation to drive revenue growth. Aspen Edge, Coors s answer to the lowcarbohydrate trend, is too late in the game, and fails to capitalize on brand equity like Michelob Ultra and Miller Lite. We think Aspen is not Coors answer to reduce their dependence on Coors Light. Costs Because RKY currently brews 90% of its beer in Golden, Co., freight costs are a significant factor. Coors is targeting a $150 million reduction in costs over the next 3-5 years. We do not expect them to meet this goal without opening new breweries. Management has yet to articulate strategies for significant costcutting. We see a number of issues such as rising fuel cost and decreasing work hours within the trucking industry as an impediment. Financial Ratio Analysis RKY s ROE is well below competitors (RKY-14.21%, BUD-74.2%, ABV-30.7%, DEO-60.4%). It is also below the industry average of 60.1%. Operating margins are also low comparatively (RKY-20.3%, BUD-34.5%, ABV- 47.3%, DEO-26.0%). RKY s PEG is slightly below average PEG, which is not convincing given BUD s competitive advantages and volatility of earnings. RKY s 4 th quarter earnings give investors a false sense of security. Earnings were boosted by favorable currencies and a lower tax rate, not improving fundamentals. Valuation Based on the current stock price, revenues must grow at 3% annually into perpetuity to satisfy our discounted cash flow analysis. Additionally, we have assumed that the market believes that Coors must be able to recognize close to $100 million in cost savings in the next 3-5 years. Using a WACC discounting of levered free cash flows and a generous cost savings assumption of $75 million, we feel Coors is fairly valued at $ Our sensitivity analysis attempts to capture the $150 million in cost reductions that RKY management proposes for the next 3-5 years. This analysis reveals that the market consensus of cost reductions is pushing the $100 Million mark. We believe that a best case scenario for Coors would be realizing half of these cost savings. Our model also uses a 3% revenue growth rate. 3

4 This is comprised of the expected industry growth of 1% on top of price increases of 2%. We assume that Coors maintains current market share, despite the recent market preference toward Miller and Anheuser-Busch. We also assumed that Coors would maintain their current capital structure, which was highly levered after the acquisition of Carling in Despite these generous assumptions, we still find Coors to be overvalued. We also believe that Coors possesses weak fundamentals compared to the companies within the industry. Gross Margin 42% vs. 55% for comparables Operating Margin 20% vs. 28% Comparable ROE and ROA well below comparables average RKY has an attractive PEG. However, it is dependent on enormous earnings growth. We worry about volume struggles in the United States. Additionally, Coors reported.98 EPS in the 4 th quarter, which was well above consensus estimates. None of these recent positives reflect improving business fundamentals. Sales to wholesalers declined 2.7% and sales to retailers declined 2.6%. The unexpected earnings can be attributed to an improved tax rate, currency issues, and inventory levels. We feel the boost in earnings has given the market a false sense of confidence in Coors projected earnings. Consequently, we recommend the sell of this holding. 4

5 Exhibit 2 RKY Stock Performance Relative to BUD and the S&P Prior to 2001, BUD and RKY performed almost identically relative to the S&P. In mid 2001, the stocks diverged. Consequently, BUD has outperformed RKY over the last two years. The performance gap between the two stocks has been consistent or gradually increasing since the divergence. Given that BUD and RKY, both industry leaders with significant market share, are currently outperforming the S&P, the beer industry remains a solid sub-sector for investment. However, this chart supports the conclusion that BUD is a better bet in 2004 than RKY. 5

6 Exhibit 3 Consumer Staples, Food & Beverages, Beverages (Alcoholic) Equity Profiles Page 1 of 2 (Dollars in Millions) Analyst: B. Ozenbaugh Company Name Coors Anheuser Busch Constellation Brands Boston Beer Company Companhia de Bebidas das Americas Diageo plc Comps Average Ticker Footnote RKY BUD STZ SAM ABV DEO (Stock Data): Stock Price As Of: 2/17/2004 2/17/2004 2/17/2004 2/17/2004 2/27/2004 2/27/2004 Stock Price 25 $64.68 $51.95 $35.41 $17.55 $23.00 $55.03 Common Shares Outstanding Market Capitalization (MV of Equity) 27 $ 2, $ 42, $ 3, $ $ 8, $ 44, Net Debt 28 $ 1, $ 6, $ 2, $ (19.60) $ 1, $ 9, Total Mkt. Capitalization (Tot. Net Debt+MV of Equity) 29 $ 3, $ 49, $ 5, $ $ 10, $ 53, (Financial Ratios excl. debt ratios-see Risk Section) LFY Gross Margin % 46.3% 30.1% 61.8% 60.4% 76.2% 55.0% LFY EBITDA Margin % 34.5% 19.4% 11.2% 47.3% 26.0% 27.7% ROE % 74.2% 9.2% 14.9% 30.7% 60.4% 37.9% ROA % 27.1% 14.7% 16.8% 22.2% 13.4% 18.8% Receivable Turnover Inventory Turnover Current Ratio (Growth/Return): Historical 3 Year Revenue Growth Rate % 4.3% 1.4% 5.2% -1.9% -7.4% 0.3% Historical 3 Year EPS Growth Rate % 12.2% 18.0% -1.0% NA NA 9.7% Projected ROE (NFY) % 53.0% 14.0% 14.5% NA NA 27.2% CFY - NFY EPS Growth Rate % 11.7% 1.9% 6.3% NA 9.1% 7.2% Proj. Growth in EPS 5 Years % 10.0% 17.0% 11.0% 28.3% 7.5% 14.8% Dividend Yield % 1.8% 0.0% 0.0% 3.8% 3.4% 1.8% VL Timeliness (Risk): Beta VL Safety NA NA LT Debt / Market Capitalization (MV of Equity) LT Debt / Common Equity (BV of Equity) (Valuation): MV of Equity / Book Value LTM Price / EPS Ratio ("P/E") NA CFY Price / EPS Ratio ("P/E") NA NFY Price / EPS Ratio ("P/E") NA Relative P/E (CFY) NA NA 0.94 CFY P/E to CFY-NFY EPS Growth Rate NA CFY P/E to Proj. Growth in EPS 5 Years NA

7 Exhibit 4: DCF Analysis Adolph Coors Projected Financials Summary Income Statement, Balance Sheet and Cash Flow Statement (Dollars in Millions, Except Per Share Data) Analyst: Ozenbaugh Timeline end of Terminal (a) Revenue Implied $3,776 $3,890 $4,006 $4,126 $4,250 $4,378 $4,509 $4,644 $4,784 $4,644 Cost of Good Sold Growth 2,415 2,487 2,549 2,613 2,678 2,745 2,814 2,898 2,985 2,898 Gross Profit ,362 1,403 1,457 1,514 1,572 1,633 1,695 1,746 1,799 1,746 SGA 1,057 1,088 1,119 1,152 1,185 1,220 1,255 1,291 1,329 1,291 EBITDA Depreciation EBIT Interest Expense EBT Taxes Earnings Depreciation "Cash Flow" (b) Cash From Investing Activities 5 WC Capital Expenditures FCF U FCF (EBIT(1-t)+Dep'n-DWC-CapEx) U FCF (FCF-t*Int) $269 $46 $59 $73 $88 $104 $120 $128 $136 $128 Cash From Financing Activities Debt , could repeat interest payments here E FCF $1,632 -$26 $24 $38 $53 $68 $84 $92 $100 $92 E FCF goes to dividends and repurchases Income Statement Assumptions: Ratio of CapEx/Depr Revenue Growth 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% COGS Growth 2.9% 3.0% 3.0% 2.5% 2.5% 2.5% 2.5% 2.5% 3.0% 3.0% 3.0% SGA Growth 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% Depreciation/Book Assets 9.4% Debt Interest Rate 5.1% Tax Rate 36.0% Partial Balance Sheet 971 2,365 2,381 2,399 2,416 2,434 2,451 2,469 2,487 2,505 Working Capital (c) Long Term Net Assets ,315 2,331 2,347 2,362 2,378 2,394 2,410 2,427 2,443 2,426 Equity ,025 1,032 1,040 1,047 1,055 1,062 1,070 1,078 1,070 Debt (long term times 1.1) ,383 1,357 1,367 1,377 1,386 1,397 1,407 1,417 1,427 1, % 56.97% 56.97% 56.97% 56.97% 56.97% 56.97% 56.97% 56.97% 56.97% (a) Timeline -1 and 0 numbers were taken from the 2002/2003 Composite numbers. (b) Cash Flow per the Composite report defined as Net Profit plus Depreciation and Amortization. (c) Cur. Asset - Cur Liab + Lt. Debt Due (set at 1.3% of Revenue) Sensitivity Analysis 5 year total cost cutting % of COGS Intrinsic Value WACC) % % % % % %

8 Adoplh Coors Risk and Required Return Information Imputs into Various Costs of Capital (Dollars in Millions, Except Per Share Data) Debt Cost of Capital Calculation (actual): Debt Rates Percent of Principal Before After Tax Tot. Mkt. Cap. Long Term and Short Term Debt $ 1,383 (a) 5.1% 3.3% (b) 36.6% Debt Type % 0.0% 0.0% Debt Type % 0.0% 0.0% Total $ 1, % Implicit cost of debt according to CAPM: 4.0% Equity Cost of Capital Calculation (actual): Total Value of Equity $ 2,400 ( c) 63.4% Total Market Capitalization As of 2002 $ 3, % Actual Unlevered Risk Free Rate 2.5% 2.5% Market Premium 6.0% 6.0% Beta Debt 0.25 Beta Equity Beta - Adjusted Market Premium 5.0% 4.0% Various Costs of Capital R(e) - required return for equity as levered 7.5% R(u) - required return for firm if unlevered 6.52% WACC 6.60% AT-WACC 5.93% (a) Represents the Composite 2002 Total LT Debt Plus ST Debt. (b) Composite 2002 Total Interest (Gross) Divided by Composite 2002 LT Debt and ST Debt Multiplied by (1-Tax) = 64.0% ( c) Represents Composite Total Shares Outstanding as of 2003 of multiplied by Recent Price of $ Adolph Coors Levered Free Cash Flow "L FCF" Discounted Cash Flow Analysis - WACC (Dollars in Millions, Except Per Share Data) Timeline Terminal Present Value of LFCF: LFCF $269 $72 $84 $98 $113 $129 $146 $154 $163 $ % $ % $ % $ % $ % $ Present Value of LFCF Terminal Value: Terminal Growth in LFCF 2.50% 2.75% 3.00% 3.25% 3.50% 8.6% $1, $1, $1, $1, $1, % $1, $2, $2, $2, $2, % $2, $2, $2, $3, $3, % $3, $3, $4, $4, $5, % $5, $6, $7, $8, $10, Total Enterprise Value: Terminal Growth in LFCF 2.50% 2.75% 3.00% 3.25% 3.50% 8.6% $2, $2, $2, $2, $2, % $2, $2, $2, $2, $3, % $3, $3, $3, $3, $4, % $4, $4, $4, $5, $6, % $6, $7, $8, $9, $11, Less Total Debt $1,383 Total Equity Value: Terminal Growth in LFCF 2.5% 2.8% 3.0% 3.3% 3.5% 8.6% $ $ $ $ $1, % $1, $1, $1, $1, $1, % $1, $2, $2, $2, $2, % $2, $3, $3, $4, $4, % $4, $5, $6, $8, $10, Total Equity Value Per Share (a): Terminal Growth in LFCF 2.5% 2.75% 3.0% 3.3% 3.5% 8.6% $21.40 $23.20 $25.17 $27.31 $ % $33.22 $35.96 $39.01 $42.41 $ % $50.75 $55.30 $60.49 $66.46 $ % $79.52 $88.14 $98.41 $ $ % $ $ $ $ $ (a) Total Shares Outstanding From 2003 Composite equals