This deeply-discounted beverage company’s latest quarterly earnings were more than double the analysts’ estimates. It looks like a steal at current prices.
Molson Coors Brewing Company (TAP)
From Cabot Stock of the Week
The thesis for Molson Coors is straightforward—a reasonably stable company whose shares sell at a highly 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. Canada produces about 13% of its revenues, with the balance coming largely from Europe.
For a simple business, the company’s history is a bit complicated. In 2005, after years of speculation, two old-line brewing companies, Canada-based Molson (founded in 1786) and Colorado-based Coors (founded in 1873), combined in a merger of equals. In 2016, the company completed its multi-step acquisition of Miller’s global operations.
Enthusiasm for its post-consolidation prospects drove TAP shares to over 110 in October 2016. Supporting the stock was a modestly favorable revenue outlook, substantial opportunities to reduce redundant costs and $2.4 billion in tax benefits. However, since then, the share price has declined, initially due to a lack of growth, weak post-merger integration and continued margin pressure, with more recent weakness coming from Covid-19 stay-at-home orders that temporarily dried up much of the company’s revenues. Elevated debt also weighs on the shares.
However, Molson Coors’ annual revenues will likely remain relatively stable, backed by its highly recognized and popular brands. While revenues will dip from about $10.6 billion last year to perhaps $9.6 billion this year, they will likely recover to $10.2 billion next year. Cash operating profits have also been steady at around $2.3 billion (dipping to perhaps $2.0 billion this year). The profit margin is a healthy 21%, helping the company to generate free cash flow of about $1.0 billion in a typical year. Encouragingly, even with the global closing of restaurants, pubs and sports venues due to the pandemic, second quarter sales fell only 15% from a year ago. Cost-cutting measures and a temporary pullback in marketing spending allowed the company to generate an increase in quarterly profits compared to a year ago.
While its $8.7 billion debt is modestly elevated, at about 4.2x cash operating profits (compared to perhaps 3.5-4.0x being appropriate), it is partly offset by $800 million in cash and can be readily serviced by Molson Coors’ cash flow. The company has an investment grade credit rating, which it has pledged to keep, which is helping to keep the interest rate on its debt relatively low.
In October 2019, the company promoted its U.S. head to oversee the entire company. He is leading an efficiency program to cut as much as $150 million in annual run-rate costs, which includes more fully integrating the combined companies as well as accelerating new product introductions.
Molson Coors had raised its dividend by 39% a year ago, as its cash flow had reached its targeted levels, but suspended it due to the pandemic. We anticipate that the company will resume paying a dividend mid-next year. We think a $0.35 quarterly dividend is possible, providing a generous 3.8% yield on the current price.
At 37, the shares trade at a highly discounted 10.2x estimated 2020 earnings of $3.61/share, and about 9.5x estimated 2021 earnings of $3.87/share. This compares to multiples of 15x and higher for its beer-producing peers. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates, again a sizeable discount to its peers. These multiples are also among the lowest in the consumer staples sector. In a market filled with companies that carry the curse of high expectations, TAP offers the blessing of low expectations. BUY.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, August 24, 2020