Molson Coors - An Undervalued And Creative Play For Marijuana Exposure

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Includes: BUD, CGC, HEXO, STZ, TAP, TLRY
by: Knight Investments
Summary

Molson Coors Offers investors an attractive entry price at current levels and economic conditions.

Investors looking for marijuana industry exposure can look to Molson Coors for low risk entrance without playing highflyers like CGC or TLRY.

Molson Coors will report earnings on 02/12/19, what investors can expect going forward.

Molson Coors (NYSE: TAP) is an adult beverage company involving Molson of Canada (founded in 1786) and Coors of United States (founded in 1873). The companies merged in 2005 creating a top 10 brewer with a footprint primarily dominant in the US and Canada. To put the company in prospective to Anheuser Busch Inbev NV (NYSE: BUD), BUD has a market cap of 128.32 billion dollars. TAP has a market cap of 14.04 billion, reflecting roughly 1/9th of the size of the worlds largest brewing company.

Current Valuation:

In October of 2016, TAP reached at all-time high, around $111 per share. At todays price, TAP is trading at $64.94, reflecting over a 41% decline in stock price over the past 2.25 years. Another key metric used to determine proper valuation of a company is P/E ratio. According to Zack’s, TAP is sitting right around 13 P/E. As mentioned, the October 2016 stock price highs were right in step with the PE ratio of the following chart.

https://static.seekingalpha.com/uploads/2019/2/10/47093006-15498132647133584.png

Source: (Molson Coors Brewing Company (TAP) Pe Ratio (TTM) - Zacks.com)

Why did the stock perform so poorly over the past several years? It is a mixture of three main factors. The first, TAP (and other industry peers) have relatively high debt levels with maturity dates due in 2019. As the table will reflect, TAP has slightly over 1.5 billion due in 2019 and the debt continues to average down for the following 4 years after 2019.

https://static.seekingalpha.com/uploads/2019/2/10/47093006-1549813265541386.png

Source TAP 2017 10-k

I don’t view this debt as problematic, as the company has total sales/revenue of 11 billion USD FY 2017. As I will mention later in this article, the company does have total liabilities of 16.81 billion, which is composed of mostly longer term debt. TAP is well equipped with their total revenue to tackle the debt this year. Please note, the revenue growth shown in the table below is primarily composed of inorganic growth, and large increases are due to acquisitions made.

Source: Market Watch

The second reason why the stock price has taken a beating recently is due to peers within the industry. In late 2018, BUD announced a dividend cut as a method of dealing with their mountain of debt that reached 109 billion dollars. After the announcement, shares of BUD dropped 10% on the bad news, and TAP was continuously pulled down by being in the same industry. It is important to note that TAP carries much less debt. According to TAP’s 10-k, in 2017 their total liabilities were 16.81 billion, a far less burdensome debt compared to BUD.

The third reason why shares of TAP have been battered down recently is because competitor sales have been growing at a more rapid rate. More specifically, craft beer sales have been trending northward. Historically speaking, craft beer sales tend to fluctuate with the economy. In strong economic times, and when the stock market rallies, craft beer sales show strength. Coincidentally, the economy started to show strength in late 2016 shortly after the presidential election. As the majority of investors on SeekingAlpha are fairly in agreement, we’ve been in a fairly aggressive bull cycle for well over 10 years now (with the exception of the December dip). I predict that if we see any economic consolidation or weakness in the economy, craft beer sales will slow down and the Canadian/American consumer will likely revert to buying less expensive alcohol, which would be favorable for Molson Coors.

Cashing in on the Marijuana Craze:

It’s no surprise that recently marijuana stocks have been exploding in popularity with the recent legalization in Canada and the widespread acceptance of recreational and medical use in the United States. We have seen several such stocks gain exponentially in the market recently. Most notably, Tilray, Inc (NYSE: TLRY) which sparked euphoria amongst investors in October of 2018. Canopy Growth Corporation (NYSE: CGC) is also experiencing large volume and significant gains.

Many investors feel like the valuation on these marijuana stocks have gotten too rich in value, or feel a lack of security in purchasing a relatively new industry, that still has major regulatory hurdles, especially in the United States, as marijuana is still against federal law.

On August 1st 2018, Molson Coors (the Canadian division) announced a partnership with Hexo, the Hydropothecary Corporation. Per their website,

“Hydropothecary is an award-winning medical cannabis producer located on a 143-acre farm in Gatineau, Quebec, in the National Capital Region. Our focus is on product innovation, advanced natural growing techniques, client health and safety, and exceptional customer service. We take our commitment to customers seriously, offering exceptional packaging, courier delivery in Canada.”

The partnership with TAP seeks to deliver non-alcoholic beverages infused with marijuana. It’s not just TAP making such strategic partnerships in the industry. BUD recently announced a partnership with TLRY to also create infused beverages. Most notably, Constellation Brands (NYSE: STZ) invested 4 billion dollars into CGC to also take stake in the company and own 37.9% of the company. STZ even has the ability to exercise all existing and new warrants to yield over a 50% ownership taking control of CGC, if the industry shows viability.

For investors who do not want direct exposure to the industry for the reasons listed above, a position in TAP will yield exposure in a low risk fashion. I personally also like the fact that TAP is focusing on the Canadian market initially to avoid any federal regulatory hurdles that may arise if they did this venture in the United States.

Earnings Released Next Week:

On January 21st TAP released recent news that informed investors they will report fourth quarter and full year earnings on February 12th. Earnings will be released at 7:00am EST and a webcast at 11:00am EST.

Investors should be very excited about getting their hands on the new 10-K to be released. I fully expect management to formulate a strategy to tackle their debt and show investors that they will not follow the same fate as BUD’s dividend, which soured investors in the industry.

Worst case scenario, I expect the dividend to continue strong at $0.41, which is paid quarterly and has been since early 2015. I would like to see management talk about the debt, then discuss their future plans to increase dividend payout, to create a clear line in the sand against the industry leader. At the most, I guess investors could get a dividend increase within 12 months after the high 2019 debt is paid off.

Conclusion:

The market has seen an impressive bull over the past several years. At times, it seems like there are no more qualities companies to invest in where valuations aren’t absurd. TAP offers investors an attractive 13.47 PE ratio which is very inexpensive historically. The stock is at an attractive price due to debt fears and the “large” amount due in 2019. Due to the mismanaged dividend by BUD and recent reduction, investors have started to vacate this consumer industry fearing the worst isn’t yet over. Craft beer does pose a threat to the industry, but overall consumption is up amongst TAP brands, and as consumer spending tightens, we can view past historical trends that craft beer sales will slow down and less expensive alternatives will help drive sales further.

The marijuana industry is experiencing growing pains in its infancy with volatile valuations and highly speculative investments. Exposure to the industry is likely safest going through TAP, STZ or BUD for the partnerships for infused beverages.

When investors get their hands on the 10-k to be released later this week, I expect management to give strong guidance due to consumer spending habits, global brand strength and investors gaining confidence in the industry again.

Disclosure: I am/we are long TAP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.