Molson Coors: Time To Load Up

by The Compound Investor

I last wrote about Molson Coors (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. The stock has tanked even further since then and 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, which comes in four parts. Firstly, it has been a victim of its own success in terms of valuation. I mean, the stock traded at an average PE ratio of around 25 between 2012 and 2015. 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 worth $11 today rather than the $25 it was worth a few years back.

Secondly, there has been a bit of stagnation within the underlying business. Molson sold around 25.7 million hectoliters worth of beer worldwide in the second quarter of 2018. That represents a circa 2.5% drop on the 26.4 million hectoliters sold in the comparable quarter last year. Underlying EBITDA was 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 $10b here against a $1.2b annual 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.

Valuation

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 that slashing the $320m annual interest bill provides plenty of opportunity to boost earnings per share – and doubly so given the business should throw off over $1b in free cash this year. Note that figure is post-dividend commitments too.

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. That appears to be alongside the cheapest this stock has ever yielded, including during the 2007-09 financial crisis. Note that 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 $1.5b in free cash flow this year, or circa $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 growing ahead of inflation on any medium (or long) length time scale. Time to load up the truck.

Note

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