I last wrote about Molson Coors (NYSE: TAP) stock a little over two months ago. At the time shares of the beer giant were changing hands for around $70; down some 35% from their 2016 highs. Since that article was published the stock has tanked even further and it is now going for under $60. I maintain that you will not find any better value stock in the large-cap defensive space right now.
First of all let’s take a minute to examine Molson’s fall from grace. As far as I can see the main culprits come in four parts. Firstly, it has been a victim of its own success in terms of valuation. Between the start of 2012 and end of 2015 the average P/E ratio of Molson stock was around 25x annual profits. Today you pay just 11x earnings to own that same stock. Forget anything business related for a second and just think about that fact. We are talking about a 50% hit just because the market decides that $1 of profit is only worth $11 today rather than the $25 it was apparently worth a few years back.
Secondly, there has been a bit of stagnation within the underlying business. Back in the second quarter of 2017 Molson Coors sold around 26.4 million hectoliters worth of brands like Carling and Coors across the world. In this year’s comparable quarter that number had dropped some 2.5% to around 25.7 million hectoliters. Underlying EBITDA was also down by a similar percentage.
Thirdly, debt levels here are high following the acquisition of the rest of the MillerCoors joint venture from SABMiller. Net debt stands at something like $10 billion against the $1.2 billion profit machine. The final reason is a more general macro related one: interest rates and bond yields are on the up, so I guess it makes sense that defensive stocks are on a bit of a downward trend right now.
Now in general terms points two and three are probably the legitimate ones in terms of the underlying business. I won’t talk too much about debt because it was the focus of the last piece. Suffice to say I think that slashing the annual $320 million interest bill provides plenty of opportunity to naturally boost earnings per share. Doubly so given that the business should throw off over $1 billion in free cash this year (that’s even after dividend commitments are taken into account).
As for the second point, the valuation seems to have overshot any reasonable level of concern. As it stands you can buy the stock at a 9% earnings yield. From what I can see that is alongside the cheapest this stock has ever yielded, including during the 2007-09 financial crisis. Analysts’ estimates and the company’s own forecasts don’t point to any significant erosion in earnings power. Indeed the company itself is guiding for $1.5 billion in free cash flow this year. That is around $6.95 per share versus a current share price of under $60.
I don’t see many defensive stocks out there offering the prospects of double digit returns as clearly as this one. In the meantime you get a 3% dividend yield with payouts that will grow ahead of inflation on any medium (or long) length time scale. Time to load up the truck.