As regular readers will know, Molson Coors (TAP) had its issues even before COVID hit. In very broad terms I think you can boil those down to two points. Firstly, the company took on a bunch of debt to buy out the rest of the MillerCoors JV in 2016. Debt net of cash clocked in at circa $11.5b at its peak, roughly equivalent to 4.5-5x annual EBITDA. Obviously that then necessitated a period of deleveraging in order to get the balance sheet back into good shape. The good news on that score was that Molson was throwing off over $1b in annual post-dividend free cash flow, so while the debt load may have looked high, the path toward dealing with it also looked pretty straightforward. Net debt duly fell by around $3b between year-end 2016 and year-end 2019.
The second issue is that the company is battling secular volume declines in its core product category. Folks just don’t drink beer like they used to, and doubly so when it comes to the younger age groups. That means mainstream lager brands, and their owners like Molson, have felt a pinch. Given the brewers carry a lot of fixed costs – with the largest advantages they posses often stemming from volume – that means they also carry a lot of operating leverage in their businesses. Or put another way, volume declines hitting the top line would go on to produce an even larger hit to profit. Same story the other way around incidentally. Check out how much of a money spinner a firm like AmBev, which dominates volume in certain South American markets like Brazil, is.
The above notwithstanding, Molson remains a decent enough business. Ownership of iconic stodgier brands like Miller and Coors still make it the number two player in the United States on a volume basis, while the company also owns some attractive assets in certain European markets. All said and done, that makes the firm a money spinner capable of pumping out relatively large amounts cash. That surplus cash then affords it the flexibility to put right its problems – debt reduction most obviously, but also investing in its brands and getting exposure to better performing parts of the beverage market, and so on.
Europe Woes Capped Off A Tough 2020
When Molson featured here in Q1 of last year, it was on the basis that it represented a fairly defensive play. Its North American business skews more to the off-trade in any case, but the USA did not really shut down to the extent that many others nations did either. As you’d expect, off-premise did indeed put in some decent numbers, with off-trade sales of Miller Lite and Coors Light, the firm’s biggest brands, increasing circa 8.5% and 6% respectively in the United States last year. Still, North American brand volume declined 5% overall to 61m hectoliters. That was offset somewhat by higher unit pricing – with total North American sales registering $8.2b versus $8.6b in 2019. North American EBITDA fell 2% to $1.97b.
The really ugly numbers came over in Europe. The firm is much more exposed to the on-trade there, while many of those nations also imposed very strict lockdowns. Indeed, shutdowns over the winter meant that the Q4 numbers were actually much worse than the year as a whole. European volume fell 18% in 2020, with sales falling even further because the on-trade is more lucrative. 2020 EBITDA attributable to Europe collapsed by 60% to just $126.5m.
Put all that together, and a fairly tough year emerges in terms of the headline numbers. Still, a tough year in the world of Molson Coors usually still means a bunch of excess cash generation. Total sales fell nearly 9% to $9.7b, with free cash flow clocking in at over $1.1b for the year. Underlying EPS came in at $3.92 per share – equal to underlying profit of circa $850m. The firm reports Q1 2021 earnings in a couple of weeks.
Dividends To Resume In 2021
Folks will recall that Molson slashed its dividend during the height of the uncertainty last year. It did pay out the first quarter 2020 payment – worth $0.57 per share, or $125m in aggregate terms – meaning that savings associated with the dividend cut work out to three quarters’ worth of distributions, or around $370m in cash terms.
As it turned out, net debt went on to fall by the same amount as 2020 free cash flow, with the outflow from the first quarter dividend roughly balanced by cash received from the sale of its brewery in Irwindale, California to Pabst. Granted, that is perhaps quite annoying for income investors, but at least it accelerated debt reduction efforts here. Dividends are on track to resume in the second half of this year according to management.
Stock Is Still Cheap
Molson Coors stock currently trades at around the $52.95 mark at time of writing. That represents a circa 40% gain on the last time it featured here back in August 2020. The stock has also recovered virtually all of its COVID losses. Yeah, that’s not a particularly high bar given the strong performance of the wider stock market, but I’ll take it.
Now, 2021 looks set to be a fairly weak year. The situation is muddied somewhat as Europe was still in a rough place with respect to lockdowns in Q1. Still, revenue should grow versus a subdued 2020 baseline, with management also guiding for a significant increase in marketing spending. That implies another year of fairly staid numbers on the profit front based on the straight math – and a quick look at analyst estimates duly points to flat-ish EPS in the $3.90 area. On the plus side, and given the dividend situation, that also implies another year of decent excess cash generation and therefore debt reduction too.
At the risk of sounding like a broken record on this name, I remain optimistic here. Molson has its issues – the low single-digit volume declines in its core portfolio category being the most pressing one. Still, the stock trades at a price-earnings ratio of just 13, so the current market price more than reflects that. The company is also getting to grips with positioning its beverage portfolio toward better growth prospects like hard seltzer. If Molson can finally stabilize volume – maybe eke out 1-2% annual growth – then the stock can deliver very solid returns from here.
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