Molson Coors Is A Value Play You'll Want To TAP, Here's Why
- Molson Coors is a company in turnaround mode, as it transforms itself from a global beer company into a beverage company.
- Management has made meaningful progress towards debt reduction in recent years, and I see a path for dividend increases down the line.
- Meanwhile, the stock trades rather cheaply compared to its historical valuation and that of its peers.
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Molson Coors (NYSE:TAP) has seen its share of ups and downs in recent years, and the past 12 months have been no different. At present, TAP is trading well below its 52-week high of $61.48, and the stock has returned just 7% over the past year, well below the 27% return of the S&P 500 (SPY) over the same timeframe. In this article, I highlight reasons for why TAP is a solid value Buy, so let’s get started.
Molson Coors Is A Value Play You’ll Want To TAP, Here’s Why
Molson Coors is the fifth-largest global beer producer, and the number two producer in the U.S. and Canada along with many Central European markets. Its iconic beer brands include Coors, Coors Light, Carling, Blue Moon, and Miller Lite, among others. Over the trailing 12 months, Molson Coors generated $10 billion in total revenue.
Molson Coors is a business in transition, as 24 months ago, management led by the new CEO at the time, Gavin Hattersley, announced a revitalization plan to put the company on track to deliver sustainable top and bottom-line growth. I see this as having been much needed, as the company has faced secular challenges in the beer segment from changing consumer tastes as well as from intense peer competition.
It appears that turnaround efforts are starting to bear fruit, as TAP has seen success in its ‘Above Premium’ portfolio, with this segment now surpassing 25% of TAP’s total sales revenue. In addition, TAP has grown share of the U.S. Above Premium segment for 2 straight quarters for the first time in over 5 years.
The company is also making good headway in the non-alcohol beverage segment, as it sold nearly 2 million cases in the U.S. in the first nine months of 2021. During the third quarter, TAP’s net sales increased by 2.5% (1% on a constant currency basis).
It’s also demonstrated pricing power in an inflationary environment, growing net sales revenue per hectoliter by 3.6% YoY during Q3. This was driven by strong pricing as well as a favorable brand mix due to portfolio premiumization, and favorable on-premise sales as restaurants and pubs have reopened.
However, this is not to say that Molson Coors doesn’t come with challenges, as adjusted EBITDA declined by 10.9% YoY in its latest reported quarter, driven by higher SG&A, transportation, and cost of goods sold. Like any other manufacturing company, TAP also faces risks from supply chain disruptions stemming from Omicron, and from competitive pressures in newer categories such as hard seltzer.
Looking forward, I’m encouraged by the company’s steps to address the competitive beer landscape by the progress made in non-alcohol categories. This is reflected by TAP’s headway into the water, energy, and coffee segments, as noted by management during the recent conference call:
“We continue to drive towards our $1 billion revenue ambition for our emerging growth business by 2023. We have launched into categories where we think we can create scale offerings like water, energy and coffee.
First, of course, is our partnership with Zoa, which has been making some serious noise since its launch just over 6 months ago. It's the #1 new energy franchise in 2021, and it's already a top 20 energy drink brand. Zoa already has 31,000 buying outlets and over 115,000 points of distribution with more coming online every day. There's a lot of upside for this brand.
We have the distribution partnership for La Colombe's incredible lineup of ready-to-drink coffee, one of the fastest-growing spaces in the beverage industry. And thanks to our early success with distribution in large national retailers, we've also unlocked national distribution of La Colombe in grocery and mass channel stores for early 2022. Growing beyond the beer aisle is no longer an aspiration. We're doing it, and we're driving scale.” – CEO of Molson Coors
Meanwhile, TAP has made meaningful progress towards shoring up its balance sheet with a $2.2 billion reduction in long-term debt since 2018. It carries a BBB- credit rating and a net debt to EBITDA ratio of 3.0x, sitting well below the 4.2x from 2018.
TAP provides a 1.4% dividend yield at present, and it’s well-covered by a very low 16% payout ratio. While the dividend has yet to fully recover to its pre-pandemic rate, I would expect to see a raise after further debt reduction and with more clarity in the COVID landscape.
I see value in TAP at the current price of $48.9 with a PE ratio of just 11.6, sitting well below its normal PE of 14.5 over the past decade. Sell side analysts have a consensus Buy rating, with an average price target of $54, and Morningstar has a fair value estimate of $66.
(Source: FAST Graphs)
Lastly, TAP appears to be cheap compared to its peers. As shown below, it carries an EV/EBITDA of 7.6x, sitting well below the 11.6 – 17.9x range of peers Anheuser-Busch InBev (BUD), Heineken (OTCQX:HEINY), and Constellation Brands (STZ).
(Source: Seeking Alpha)
Molson Coors has seen its share of challenges in recent years. Management, however, is making meaningful progress towards developing new brands and categories that resonate with modern consumers.
The company has also seen substantial debt reduction in recent years, and I see a path for dividend increases down the line. Meanwhile, TAP trades rather cheaply compared to both its historical valuation and to its peers. I see value in TAP for potentially strong long-term returns.
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This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 14 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in TAP over the next 72 hours. 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.
This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
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