Additional Thoughts on Earnings Multiples
Last week we discussed what we like about the EV/EBITDA multiple, and described some of its strengths and weaknesses. We recently read a comment by a noted investor who also uses this metric, and we thought we’d pass along to you the common-sense description that he mentioned – that the enterprise value is what you would pay to buy the business “free and clear,” on a debt-free basis. If you wanted to pay off the debt, that is part of the purchase price. You would get to keep any cash on the balance sheet, so that is in effect a reduction in the purchase price.
EBITDA, or earnings before interest, taxes, depreciation and amortization, is a straight-forward measure (not a perfect measure, though) of a company’s cash operating profits. But, like seemingly all metrics published by company managements, it is usually adjusted for unusual items that may be non-recurring. These adjustments may be sensible in cases where a truly one-time cost distorts the company’s financial picture. But, investors should be wary. We’ve seen managements generously remove costs that clearly are either recurring “non-recurring costs” or are actual (but unflattering) operating costs.
An extreme and humorous example was provided a few years ago by WeWork Company. In its pre-initial public offering regulatory filing, the real estate rental company said the most appropriate way to value it was on a “community-adjusted EBITDA” basis. This made-up metric removed marketing, administrative, development and other costs. On this basis, WeWork was highly profitable. Of course, when calculated more conventionally, the company was generating huge losses.
Some commentators have lambasted the entire concept of using anything other than GAAP earnings, which are derived using the Generally Accepted Accounting Principles determined by auditors. Pointing out the ever-increasing range of expenses that are removed, one wag said that we are approaching the ultimate in adjusted earnings metrics, which might be called “EBAC,” or earnings before any costs.
Humor aside, it’s important to use several valuation tools, and know where they are useful and how they can be manipulated. We try to assess valuation from many angles, knowing that most of the time we will be reasonably close but never perfect.
Earnings season has started. If you have the time and inclination, listen to the management call that accompanies each report. You can find these under the company’s “Investor Relations” tab on their website. The calls are webcast and open to the public. Most are available for a few weeks or longer for those not able to listen to the live webcast. The management and brokerage analysts often use a lot of jargon, which can make it difficult to follow sometimes.
Fortunately, the companies also provide a slide deck that highlights the results in a fairly straightforward manner (although they usually de-emphasize the “low-lights”). Often, clicking through a slide deck can quickly help you become more familiar with your company and its operations, which not only can help you keep your resolve when things slip but also provide a fascinating window into what your company is doing and its priorities.
Share prices in the table reflect Tuesday (April 13) closing prices. Please note that prices in the discussion below are based on mid-day April 13 prices.
Note to new subscribers: You can find additional color on recent earnings and other news on recommended companies in prior editions of the Cabot Undervalued Stocks Advisor on the Cabot website.
Send questions and comments to Bruce@CabotWealth.com.
UPCOMING EARNINGS RELEASES
April 14: U.S. Bancorp (USB)
April 19: Coca-Cola (KO)
April 20: JetBlue (JBLU)
April 22: Dow (DOW)
April 27: Sensata Technologies (ST)
April 29: Merck (MRK)
April 29: Bristol Myers Squibb (BMY)
April 29: Molson Coors (TAP)
TODAY’S PORTFOLIO CHANGES
U.S. Bancorp (USB) – Moving from Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES (April 7 letter)
Tyson (TSN) – Moving from Buy to Hold.
GROWTH/INCOME PORTFOLIO
Bristol Myers Squibb Company (BMY) is a New York-based $142 billion (market cap) global biopharmaceutical company with over $45 billion in revenues. In recent years it has divested several major businesses to focus on high-value pharmaceuticals. BMY shares sell at a low absolute valuation and a sharp discount relative to peers due to worries over upcoming patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026).
The shares are attractive for two reasons, described in more detail in the April 7 letter. First, low expectations (low valuation) minimize the downside risk should the anticipated weak fundamentals actually arrive, yet if the fundamental reality is stronger than feared the shares offer considerable upside potential.
Second, Bristol is taking smart and aggressive steps to minimize its fundamental risk through a multi-pronged revenue-and-profit-replacement strategy. Importantly, the underlying demand for its “key three” products is strong, such that the primary issue is pricing, not volumes. To extend its pricing strength (through patent protection), it has signed deals with several potential generics competitors.
Additionally, its acquisitions of Celgene and MyoKardia provide new growth potential that complements Bristol’s research expertise. Lastly, Bristol has a robust pipeline of internally-developed treatments that offer potentially sizeable new revenues. All-in, it is likely that the worst-case scenario is for flat revenues over the next 3-5 years. Any indication that revenues could sustainably grow should boost BMY’s share price considerably.
Also mitigating the risk, the company is aggressively cutting its costs, including the announced $2.5 billion efficiency program.
Earnings for 2021 are estimated to increase 16%, although tapering to 6-8% in future years. The company is positioned, backed by management guidance, to generate between $45 billion and $50 billion in cash flow over the three years of 2021-2023. This sum is equal to 35% of the company’s $136 billion market value. The balance sheet carries $16 billion in cash and its debt is only 2x EBITDA.
BMY shares are getting some incrementally positive Street attention. Brokerage firm Truist (part of the company formed by the SunTrust and BB&T bank merger) upgraded the shares to a Buy on rising optimism about its drug pipeline, while JPMorgan spoke optimistically about its long-term prospects while reducing 1Q revenue and earnings estimates due to near-term headwinds in its vaccine franchises.
BMY shares ticked up about 2% in the past week and have about 23% upside to our 78 price target. The stock hasn’t moved much in over a year, yet the company continues to generate about $7/share in free cash flow, about $2 of which is paid out in dividends. We remain patient with BMY shares.
The stock trades at a low 8.5x estimated 2021 earnings of $7.49 (unchanged from last week). On 2022 estimated earnings of $8.05 (down 2 cents), the shares trade at 7.9x. Either we are completely wrong about the company’s fundamental strength, or the market must eventually recognize Bristol’s earnings stability and power. We believe the earning power, low valuation and 3.1% dividend yield that is well-covered by enormous free cash flow make a compelling story. STRONG BUY.
Cisco Systems (CSCO) generates about 72% of its $48 billion in revenues from equipment sales, including gear that connects and manages data and communications networks. Other revenues are generated from application software, security software and related services, providing customers a valuable one-stop-shop. Cisco is shifting toward a software and subscription model and ramping new products, helped by its strong reputation and its entrenched position within its customers’ infrastructure.
The emergence of cloud computing has reduced the need for Cisco’s gear, leading to a stagnant/depressed share price. Cisco’s prospects are starting to improve under CEO Chuck Robbins (since 2015). The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet.
Cisco was named an Official Technology Partner of the NFL. We see little direct revenue benefit but larger indirect benefits from the favorable publicity due to the league’s high profile. The financial or other terms of the deal were not disclosed.
CSCO shares slipped 1% in the past week and have about 6% upside to our 55 price target. While we generally would move the shares to a Hold due to the limited upside, we believe Cisco’s earnings potential is higher than currently estimated, which leaves room for more upside to the shares.
The shares trade at 16.0x estimated FY2021 earnings of $3.23 (up a cent in the past week). On FY2022 earnings (which ends in July 2022) of $3.43 (unchanged), the shares trade for 15.1x. On an EV/EBITDA basis on FY2021 estimates, the shares trade at a discounted 11.1x multiple. CSCO shares offer a 2.9% dividend yield. We continue to like Cisco. BUY.
Coca-Cola (KO) is best-known for its iconic soft drinks but nearly 40% of its revenues come from non-soda brands across the non-alcoholic spectrum, including PowerAde, Fuze Tea, Glaceau, Dasani, Minute Maid and Schweppes. Its vast global distribution system offers it the capability of reaching essentially every human on the planet.
Coca-Cola’s longer-term picture looks bright despite the clouded near-term outlook due to the pandemic as well as the secular trend away from sugary sodas, high exposure to foreign currencies and always-aggressive competition. Another overhang is the tax dispute that could cost as much as $12 billion – we don’t see an immediate resolution but consider $12 billion to be a worst-case scenario.
Relatively new CEO James Quincey (2017) is reinvigorating the company by narrowing its oversized brand portfolio, boosting its innovation and improving its efficiency. The company is also working to improve its image (and reality) of selling sugar-intensive beverages that are packaged in environmentally-insensitive plastic. Coca-Cola is supported by a sturdy balance sheet. Its growth investing, debt service and $0.42/share quarterly dividend are well-covered by free cash flow.
Consensus estimates point to 10% revenue and earnings per share growth in 2021.
Coca-Cola’s CEO (along with other CEOs) waded into the debate over Georgia’s voting laws. We’re not going to opine on this other than to say that investors will want to be aware of the potential opportunities and risks when CEOs take public stances on such matters. From a fundamental perspective, it is impossible to determine the size and direction of its effect on the company’s revenues, profits and share valuation.
KO shares were flat again the past week and have about 20% upside to our 64 price target. While the valuation is not statistically cheap, at 24.9x estimated 2021 earnings of $2.14 (down a cent in the past week) and 22.8x estimated 2022 earnings of $2.33 (unchanged), the shares are undervalued while also offering an attractive 3.2% dividend yield. BUY.
Dow Inc. (DOW) merged with DuPont in 2017 to temporarily create DowDuPont, then split into three companies in 2019 based roughly along product lines. The new Dow is the world’s largest producer of ethylene/polyethylene, the most widely used plastics. Dow is primarily a cash-flow story driven by three forces: 1) petrochemical prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; 2) volume sold, largely driven by global economic conditions, and 3) ongoing efficiency improvements (a never-ending quest of all commodity companies to maintain their margins).
Dow continues to participate in the economic recovery. For 2021, analysts estimate revenue growth to be 15%, aided by higher prices and volumes. The strong U.S. dollar may be a modest headwind as it makes revenues produced in other currencies less valuable when translated into dollars. Generous free cash flow will partly be used to trim Dow’s debt.
There was no significant company news in the past week.
Dow shares fell 3% this past week and have about 12% upside to our recently raised 70 price target. The shares trade at 15.9x estimated 2022 earnings of $3.94, although these earnings are more than a year away. This estimate rose 5% in the past week as analysts become more optimistic about the economic re-opening underway. The 2021 earnings estimate rose a strong 8% in the past week.
The high 4.5% dividend yield is particularly appealing for income-oriented investors. Dow currently is more than covering its dividend and management makes a convincing case that it will be sustained. HOLD.
Merck (MRK) – Pharmaceutical maker Merck focuses on oncology, vaccines, antibiotics and animal health. The shares sell at a significant discount to its peers, as Keytruda, a blockbuster oncology treatment representing about 30% of total revenues, will face generic competition in late 2028. Also, hanging over the stock is possible generic competition for its Januvia diabetes treatment starting in 2022, and the possibility of government price controls.
Keytruda remains an impressive franchise that is growing at a 20+% annual rate. The company is becoming more aggressive about replacing the potentially lost revenues, even though it has nearly seven years to accomplish this. The new CEO, previously the CFO, will likely accelerate Merck’s acquisitive program, which adds both risk and return potential to the Merck story.
To tighten its focus, Merck will spin off its Women’s Health, biosimilars and various legacy branded operations, to be named Organon, by mid-year 2021. These businesses currently generate roughly 15% of Merck’s total revenues yet comprise half of its product roster. We estimate that Organon is worth about $3.75 per MRK share. The spin-off will produce an $8-$9 billion cash inflow to Merck. Longer term, we see the company spinning out or selling its animal health business. Merck has a solid balance sheet and is highly profitable. Merck’s earnings for 2021 and 2022 are estimated to increase by about 10%. Longer term, the low valuation, strong balance sheet and sturdy cash flows provide real value. The 3.4% dividend yield pays investors to wait.
There was no significant company news in the past week.
Merck shares rose about 1% this past week and have about 37% upside to our 105 price target. Valuation is an attractive 11.7x this year’s estimated earnings of $6.51 (unchanged in the past week). Merck produces generous free cash flow to fund its current dividend as well as likely future dividend increases, although its shift to a more acquisition-driven strategy will slow the pace of increases. BUY.
Tyson Foods (TSN) is one of the world’s largest food companies, with nearly $43 billion in revenue. Beef products generate about 36% of total revenues, while chicken (31%), pork (10%), and prepared/other contribute the remaining revenues. It has the #1 domestic position in beef and chicken with roughly 21% market share in each. Its well-known brands include Tyson, Jimmy Dean, Hillshire Farms, Ball Park, Wright and Aidells. Tyson’s long-term growth strategy is to participate in the growing global demand for protein. The company has more work to do to convince investors that its future is brighter, particularly as it is more of a commodity company (and hence has lower margins) compared to its food processor peers. Dean Banks, the new CEO, who previously was an Alphabet/Google executive, is starting to make necessary changes.
Tyson’s fiscal 2021 earnings (ends in September) are estimated to increase about 1%, but accelerate to the 10% range in future years. Fiscal 2021 will be hindered by subdued volumes and pricing. The Prepared Foods segment will likely see higher profits but this is a small segment for Tyson. Faster domestic and neighboring country (Mexico in particular) re-openings should help lift chicken and other meat prices and volumes.
Tyson officially opened its new $425 million poultry plant, its first in 25 years, in Tennessee. The facility will add hatchery, feed mill, and processing capacity to Tyson’s chicken operations.
The stock rose 2% in the past week and has 6% upside to our recently raised 82 price target. While the near-term outlook is mixed, the new management is likely being conservative with its forward guidance. However, we are reducing our rating to a HOLD given the relatively modest upside to our target. If the earnings report indicates that the company’s earning power is noticeably higher, we will re-evaluate our price target.
Valuation is reasonable at 13.5x estimated 2021 earnings of $5.73 (up 2 cents in the past week). Currently the stock offers a 2.3% dividend yield. HOLD.
U.S. Bancorp (USB), with a $70 billion market value, is one of the largest banks in the country. It focuses is on consumer and commercial banking through its 2,730 branches in the Midwest, southwest and western United States. It also offers a range of wealth management and payments services. Unlike majors JP Morgan, Bank of America and Goldman Sachs, U.S. Bancorp has essentially no investment banking or trading operations. USB shares remain out of favor due to worries about a potential surge in pandemic-driven credit losses and weaker earnings due to the low interest rate environment.
USB shares (like most bank shares) continue to trade with the 10-year Treasury yield. Rising interest rates combined with a stronger economy make the bank more valuable. The yield currently sits at 1.66%, essentially unchanged from last week, despite the strong 2.6% increase in the CPI price index reported on Tuesday morning. For reference, the yield was 1.88% at year-end 2019, just before the pandemic. Short-term interest rates have remained essentially unchanged.
The bank will report earnings on Wednesday, April 14th. Consensus estimates are for $0.96/share in earnings. Its 2021 earnings are expected to increase about 30% compared to the pandemic-weakened 2020 results, with future earnings growth of perhaps 7-10%.
There was no significant company news in the past week.
USB shares rose 1% in the past week and have about 2% upside to our 58 price target. As the upside to our price target is now almost spent, we are moving our rating to a Hold. Following first quarter earnings, we will re-evaluate this Hold rating.
Valuation is 13.2x estimated 2022 earnings of $4.30 (up a nickel in the past week). On a price/tangible book value basis, USB shares trade at a 2.4x multiple of the $24.85 tangible book value. This ratio ignores the value of the bank’s payments, investment management and other service businesses that have low tangible book values but produce steady and strong earnings. For perspective, JPMorgan, considered the highest quality and best-managed bank, with sizeable capital markets operations, also trades at 2.4x tangible book value. Currently, USB stock offers a 3.0% dividend yield. Given the limited upside potential, due to valuation, we are moving USB shares to a HOLD.
BUY LOW OPPORTUNITIES PORTFOLIO
Aviva, plc (AVVIY) – Based in London, England, Aviva is a major European insurance company specializing in life insurance, savings and investment management products. Its market cap is about $21 billion. Long a mediocre company, the frustrated board last July installed Amanda Blanc as the new CEO, with the task of fixing the business. She is aggressively re-focusing the company on its core geographic markets (UK, Ireland, Canada). Divestitures of its operations elsewhere, including across Asia and Europe, are nearly completed. The turnaround also includes improving Aviva’s product competitiveness, rebuilding its financial strength and trimming its bloated costs. The new leadership reduced the company’s recurring dividend, but to a more predictable and sustainable level, along with what is likely to be a modest but upward trajectory. Details on our thesis are described in the April 7 letter.
Recent results show healthy full-year operating profits. Its surplus cash flow, partly from divestitures, will be directed toward debt reduction and the recurring dividend. As it is over-capitalized, Aviva will pay out potentially sizeable special dividends to shareholders.
There was no significant company news in the past week.
Aviva shares slipped 2% this past week and have about 25% upside to our 14 price target. The stock trades at 7.6x estimated 2021 earnings per ADS of $1.47 (down 3 cents this past week) and about 91% of tangible book value. AVVIY shares offer an attractive and likely solid and recurring 5.2% dividend yield. BUY.
Barrick Gold (GOLD) – Barrick is one of the world’s largest and highest quality producers of gold. Based in Toronto, Canada, the company has mining operations around the world, with about 50% of production in North America, 32% in Africa and the Middle East and 18% in Latin America and Asia Pacific. The company also has smaller copper mining operations. Barrick’s market capitalization is about $37 billion. This stock is out of favor (a classic contrarian trait) as investors have a dim view of the industry and as gold prices have weakened since mid-2020. See our note in the April 7 letter for more details on our thesis.
Our thesis is based on two points. First, that Barrick will continue to generate strong free cash flow at current gold prices, continue to improve its operating performance and return much of that free cash flow to investors while making minor but sensible acquisitions. The company is focused on restraint, transparency and financial discipline. Barrick’s chairman is a former Goldman Sachs president whose signature achievement has been slashing costs and paying down Barrick’s entire $13 billion of net debt. The operations are led by the highly capable new CEO, Mark Bristow, whose Randgold Resources produced impressive returns for shareholders.
Demonstrating its commitment, the company will pay $0.42/share in special distributions this year, in addition to its regular $0.09/share quarterly dividend. The combined dividends this year will produce a 3.7% yield.
Second, Barrick shares offer optionality – if the enormous fiscal stimulus, rising taxes and heavy central bank bond-buying produces stagflation and low interest rates, then the price of gold will move upward and lift Barrick’s shares with it. Given their attractive valuation, the shares don’t need this second (optionality) point to work – it offers extra upside.
Major risks include the possibility of a decline in gold prices, production problems at its mines, making a major acquisition and/or an expropriation of one or more of its mines.
Barrick and the government of Papua New Guinea (PNG) have signed an agreement on the Porgera mine. The PNG government will now take 53% of the economic benefits of the mine, up from about 25% previously. Barrick’s local subsidiary BNL (half-owned by a Chinese entity) will take the remaining 47% and continue to operate the mine. Under the new 10-year agreement, local landowners received an increased allocation of the economic benefits, and the PNG can repurchase BNL’s stake at fair market value after the agreement expires. For Barrick, its effective economic interest declines from about 37.5% to 12.5%. All-in, an acceptable agreement but not one that we hope to see at other mines.
Barrick shares rose 1% this past week and have about 28% upside to our 27 price target. The stock trades at a sizeable discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and at a modest premium to its $25/share net asset value. Commodity gold rose fractionally to $1,743 this past week.
On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.7% dividend yield. BUY.
General Motors (GM) under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well-run and (almost) respected auto maker. The company has smartly exited many chronically unprofitable geographies (notably Europe) and trimmed its passenger car roster while boosting its North American market share with increasingly competitive vehicles, particularly light trucks. We consider its electric and autonomous vehicle efforts to be near industry-leading. We would say it is perhaps 75% of the way through its gas-powered vehicle turnaround, and is well-positioned but in the very early stages of its EV development. GM’s balance sheet is sturdy, with Automotive segment cash exceeding Automotive debt. Its credit operations are well-capitalized but may yet be tested as the pandemic unfolds.
General Motors is estimated to produce about 14% higher revenues in 2021, but earnings are expected to increase only about 6% (to about $5.21) due to near-term headwinds from tight semiconductor chip supplies. GM Financial will likely continue to be a sizeable profit generator.
GM’s shares are likely to start trading on the prospects for President Biden’s $2 trillion infrastructure bill. Estimates point to as much as $100 billion in federal support for electric vehicles – GM would be a major beneficiary. If the bill isn’t passed, or is passed in a diluted format, GM shares could be vulnerable.
The chip shortage appears to be spreading, and although GM has said its 2021 guidance factors in $2 billion in direct and indirect impacts, we have no way of knowing what conditions are included in this guidance.
One optimistic piece of information is that GM said they plan to boost their marketing spending to pre-pandemic levels. This points to the company’s flexibility to dial down marketing this year to make its earnings guidance.
GM shares fell 6% in the past week and have 6% upside to our 62 price target. We are on the border of selling this stock, given the risks, but for now are keeping the Hold rating. GM reports on May 5. If the report is strong, reflecting strong volumes and pricing, the shares will likely surge. If the report is disappointing, the shares will slump, perhaps significantly. We have no way of predicting the quarter, and are not in the business of relying on a binary outcome of an upcoming report. On any meaningful strength in the shares, we could move to a Sell.
On a P/E basis, the shares trade at 9.3x estimated calendar 2022 earnings of $6.29 (unchanged this past week). The P/E multiple is helpful, but not a precise measure of GM’s value, as it has numerous valuable assets that generate no earnings (like its Cruise unit, which is developing self-driving cars and produces a loss), its nascent battery operations, its Lyft stake and other businesses with a complex reporting structure, nor does it factor in GM’s high but unearning cash balance which offsets its interest-bearing debt. However, it is useful as a rule-of-thumb metric, and provides some indication of the direction of earnings estimates, and so we will continue its use here.
Our 62 price target is based on a more detailed analysis of GM’s various components and their underlying valuation. HOLD.
JetBlue Airlines (JBLU) is a low-cost airlines company. Started in 1999, the company serves nearly 100 destinations in the United States, the Caribbean and Latin America. The company’s revenues of $8.1 billion in 2019 compared to about $45 billion for legacy carriers like United, American and Delta, and were about a third of Southwest Airlines ($22 billion). Its low fares and high customer service ratings have built strong brand loyalty, while low costs have helped JetBlue produce high margins. Its TrueBlue mileage awards program, which sells miles to credit card issuers, is a recurring source of profits.
We believe consumers (and eventually business travelers) are likely to return to flying. JetBlue has aggressively cut its cash outflow to endure through the downturn. Although its $4.4 billion debt is elevated, its $2.0 billion cash balance gives the airline plenty of time to recover. JBLU shares carry more risk than the typical CUSA stock.
JetBlue’s revenues currently are projected to take until 2023 to fully recover to their 2019 level. EBITDA (earnings before interest, taxes, depreciation and amortization, which is a measure of cash operating earnings), is estimated to fully recover by 2022. JetBlue has improved its cost structure during the pandemic, helping rebuild profits sooner than revenues.
TSA traffic remains strong, at about 60% of the approximately comparable week in 2019. Our informal research into airfares points to elevated prices over the next month or two, suggesting that lower volumes doesn’t necessarily mean lower revenues and profits. Demand even with high prices appears robust this year.
Two new discount airlines were announced recently. Avelo Airlines, based in Burbank, California, will start flying on April 28 between eleven small airports in the western United States. The company has top talent and high-quality Boeing 737 jets. Breeze Airways will start flying this year, led by JetBlue founder David Neeleman, although its destination roster hasn’t been released yet.
The two companies, both credible contenders, suggest that JetBlue and the entire airline industry will see new competition. These new airlines have the ability to expand into additional airports to compete directly against JetBlue. This puts a damper on our long-term interest in JetBlue, but we will retain our Hold rating for now. Like GM, JetBlue’s position in our portfolio is increasingly driven by its upcoming earnings report, a situation that we generally are not comfortable with. We are keeping JBLU shares on a short leash.
JBLU shares fell 4% this past week and have about 8% upside to our recently raised 22 price target.
The stock trades at 9.2x estimated 2023 earnings of $2.22. This estimate rose about 5% in the past week. We are watching the 2021 estimated loss per share to quantify near-term conditions. This estimate improved to $(2.47), by 3 cents, compared to a week ago. On an EV/EBITDA basis, the shares trade at 5.4x estimated 2023 EBITDA. HOLD.
Molson Coors Beverage Company (TAP) – The thesis for this company is straight-forward – a reasonably stable company whose shares sell at an overly-discounted price. One of the world’s largest beverage companies, Molson Coors produces the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its $10 billion in net revenues are produced in the United States, where it holds a 24% share of the beer market.
Investors’ primary worry about Molson Coors is its lack of meaningful (or any) revenue growth as produces relatively few of the fast-growing hard seltzers and other trendier beverages. Our view is that the company’s revenues are resilient, it produces generous cash flow and is reducing its debt, traits that are value-accretive and underpriced by the market. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products.
Molson is estimated to produce about 5% revenue growth and a 3% decline in per share earnings in 2021. Profit growth is projected to increase to a 5-8% rate in future years. Weakness this year is closely related to the sluggish re-opening of the European economies, along with higher commodity and marketing costs. The company will likely re-instate its dividend later this year, which could provide a 2.7% yield.
The risk of fresh lockdowns and delayed re-openings in Germany and other European countries will likely push out the full recovery of MolsonCoors.
The company will add Julia Brown, a supply chain executive, to its board of directors to replace the retiring Iain Napier.
TAP shares slipped 1% in the past week and have about 14% upside to our 59 price target. Earnings estimates were unchanged this past week. TAP shares trade at 13.6x estimated 2021 earnings of $3.81.
On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.0x current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.
For investors looking for a stable company trading at a low valuation, TAP shares continue to have contrarian appeal. Patience is the key with Molson Coors. We think the value is solid although it might take a year or two to be fully recognized by the market. BUY.
Sensata Technologies (ST) is a $3 billion (revenues) producer of an exceptionally broad range (47,000 unique products) of sensors used by automotive, industrial, heavy vehicle and aerospace customers. These products are typically critical components, yet since they represent a tiny percentage of the end-products’ total cost, they generally can yield high profit margins. Also, they tend to have relatively high switching costs – vehicle makers are reluctant to switch to another supplier that may have lower prices but lower or unproven quality. Sensata is showing healthy revenue growth (+7% in the fourth quarter), produces strong profits and free cash flow, has a reasonably sturdy balance sheet (debt/EBITDA of about 3.5x) and a solid management team. The company was founded in 1916, owned by Texas Instruments for decades, and returned to public ownership in 2010.
Sensata’s growth prospects look appealing. The company is leveraged to the automobile cycle (about 60% of revenues), which provides cyclical growth, plus added growth as Sensata usually grows faster than the industry. It should benefit from overall economic growth as it serves heavy/off-road (trucking and construction), industrial and aerospace customers. As vehicles become more electrified, Sensata’s products will be used for more applications, further driving revenues. Recently, Sensata acquired Lithium Balance, which provides it with a valuable entre into the electric vehicle battery industry.
Risks include a possible automotive cycle slowdown, chip supply issues, geopolitical issues with China and difficulty integrating its acquisitions.
Revenues this year are projected to increase by about 17%, driven by a cyclical rebound, then taper to a 6% rate in future years. Profit growth of 49% in 2021, also boosted by the recovery, is estimated to taper to about 13% in future years.
There was no significant company news in the past week.
ST shares fell 3% this past week. The shares can twitch with the prices of other chip stocks, and weakness in the auto industry outlook can also weigh on the shares. ST shares have about 30% upside to our 75 price target.
The stock trades at 15.0x estimated 2022 earnings of $3.84 (unchanged this past week). On an EV/EBITDA basis, ST trades at 12.2x estimated 2022 EBITDA. BUY.
