Molson Coors Is Still A Buy After The Dividend Bump

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About: Molson Coors Brewing Company (TAP)
by: Wolf Report
Summary

The foreseen dividend bump has materialized, bringing Molson Coors up to an impressive 4%+ yield.

There's still ample room for upside once more positives materialize in the company's sales - which in 2Q19 were actually down by quite a bit.

Bottom line - Molson Coors demands every dividend investor's attention - and in my opinion, you should give the company more than a quick once-over.

In my previous article on Molson Coors (TAP), titled "Tapping Molson Coors' Incredible Potential", I went bullish on the company and clarified my long position. While the stock did drop from the levels presented therein, it has since begun a small recovery back up towards June 2019 levels. After a bad 2Q19, a dividend bump and some news coming out now, I believe it to be a good time to revisit the company for a thesis update.

Let's take a look at what's happened in the wonderful world of beer for the past few months - and if the company still presents as appealing an opportunity as it did a few months back.

Bildresultat för Molson Coors

A weak 2Q19 meets forward potential for the rest of the year

No doubt about it - and as some authors have already touched upon, 2Q19 was a bit of a bad quarter for the company. It's never a good thing when (almost) your only business is the brewing, distribution, and sale of beer and your sales drop due to volume declines, of all things.

Let's quickly run through some of the cornerstones of the results here before moving onto more color.

  • Sales decline of 4.4% (2.9% in constant currency), due to volume decline.
  • Net sales/hectoliter increase of 2.7% due to favorable pricing in all segments and a continued focus on premium brands/portfolio.
  • Worldwide volume decrease due to a decline in all segments, partially as a global trend due to unfavorable weather and World Cup effects (in certain geographies).
  • Cost of goods sold increased by 8.8% due to unrealized losses, FX/inflation, volume deleveraging and package cost increases, as well as CapEx costs for a furnace rebuild.
  • All this leading to a 22.3% net income increase (GAAP), EBITDA decrease of 12.8%, and a 15% decrease in FCF.

(Source: Molson Coors 2Q19 Presentation)

So, these numbers look rather glum - even though the company has some acceptable reasons for a part of the negative results we're seeing here. The overall picture of the second quarter was, in my view, a continued premiumization of the portfolio for the company, however, offset by overall, unacceptable volume declines and CapEx.

Or, in a different way of putting it, the company sales mix and premiumization efforts are right where we want them, and together with the debt repayment of almost half a billion U.S. dollars, the company could be said to be where we want it overall.

The problem is that the company isn't selling enough beer at this time. And that's a bit of a problem for a company where selling beer is how they make "our" cash.

Let's put some color on these results.

(Source: Molson Coors 2Q19 Presentation)

The company has delivered on $700M of cost savings until now, with another $450M of cost savings incoming until 2022. Molson Coors has modernized its breweries, and work has gone very well in the premiumization department. Most importantly, the de-leveraging, the nr. 1 priority in its current ambitions, has gone according to plan.

(Source: Molson Coors 2Q19 Presentation)

So despite the weak industry over the quarter, things can be said to actually be going pretty well - the sales mix is where we want it, now the company just needs to bring the numbers in sales back up. Numbers which this quarter were affected by some seasonal effects unlikely to continue pressuring sales quite as much going forward.

Also important, the long-awaited dividend bump has arrived, making certain that your risk in investing in Molson Coors is now spiced with significantly higher rewards going forward.

This means that unless you consider this quarter and the results therein to be thesis-breaking for some reason, my original thesis for investing in the company is still very much intact.

Let's revisit that thesis at current numbers.

Valuation - an update

(Source: F.A.S.T Graphs)

While the company has only increased earnings at an average of 2.15% annually over the past 10 years, the company's status as a consumer staple is important to remember. Another important number is 11.59 - which is the very low valuation that TAP is currently being traded at in relation to company earnings, and hasn't been the case for a number of years.

While only managing to modestly outperform the S&P over the past 20 years (by 0.4%), the company nonetheless provided twice the dividends of the S&P 500 and grew dividends on average at a rate of 9.6% per year if we look at a 20-year history. However, characteristic for TAP is that these growths always came in spurts, rather than a linear development, as we're liable to want.

During 2005, for instance, the dividend was bumped 56% - followed by 2 years of 0% growth. Then again almost 20% for 3 years in a row, before growing more modestly. This is simply part of Molson Coors character and needs to be taken into consideration prior to investing. The reason for these spurts is the company's strategies until now, where periods of modest growth is interrupted by debt-breaking M&As that has the company paying back the debt for years before being able to once again grow the dividend.

(Source: F.A.S.T Graphs)

As I've said in virtually every article I've written - I don't consider market-assigned premiums to be valid in 99% of the cases I review. Nor do I consider them relevant here.

We'll go by standard valuation metrics, and these nonetheless manage to show a significant, market-beating upside of 13.03% at a return per year simply to the valuation we saw about 2 years ago.

While I consider more soft quarters to be quite possible - in part due to analyst expectations, but also to research involving more investments on part of the company, I do consider the very modest single-digit growth the company's own forecasting guides to be likely.

It's finding and investing in undervalued companies that is my ambition - not necessarily investing in companies which promise explosive growth, or 10%+ yields. As such, I consider the company a candidate here, due to it being a consumer staple stock active worldwide with many market-leading brands of beer, currently being traded at a multiple of ~11 times earnings.

And it is the company's valuation, combined with how far it has come in its restructuring, resulting in a potential upside here which forms the basis of my thesis.

Thesis

To me, investing in Molson Coors is a bit of a no-brainer. The company is a consumer staple currently being traded at a discount both to market-assigned premium as well as historical value and what can be considered "standard" valuation. While there are certain risks present in the thesis, namely in the form of the somewhat-high indebtedness and the risk that the current softness in sales volume continues, these are things I consider proportionate or favorable to the reward offered here.

The potential reward taken for your risk is a 13% annual rate of growth including dividends until 2022, and this is considering only a return to standard valuation for Molson Coors. Given the company's track record and the developing favorable sales mix and premiumization, I not only consider the company likely to return to these valuations - I consider the company likely to exceed them by quite a margin, going forward.

To be clear, my time period for this investment is not merely years, but decades. More quarters of softness won't faze me one bit - they'll make me invest more, as I'm convinced of my thesis and the company's forward potential. While I invested a sizeable chunk back in June, I'm willing to extend my position at the right price - and provided we get another drop like the one in July/August, this may very well happen.

The upside here is, simply put, very compelling.

I believe Molson Coors to be a rare undervalued consumer staples company - and the downsides to either be temporary or not worth considering in terms of the larger picture.

That is why I maintain my bullish view and my recommendation to "BUY" the stock at this time.

Recommendation

At valuations of ~11.5 times earnings, I consider Molson Coors Brewing Company to be a "BUY". A 4.3% yield for this sort of company is extremely rare - and not only is the company covering this dividend, but it's also likely to grow going forward. As always, I recommend careful position sizing to avoid overexposure here.

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.

Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.