Molson Coors: A Brewing Buy

09/17/2020 5:00 am EST

Focus: CONSUMER

Timothy Lutts

Publisher, Cabot Heritage Corporation

The thesis for Molson Coors Brewing (TAP) is straightforward—a reasonably stable company whose shares sell at a highly discounted price, suggests Timothy Lutts, editor of Cabot Stock of the Week.

In 2005, after years of speculation, two old-line brewing companies, Canada-based Molson (founded in 1786) and Colorado-based Coors (founded in 1873), combined in a merger of equals.

Enthusiasm for its post-consolidation prospects drove TAP shares to over $110 in October 2016.  Since then, the share price has declined, initially due to a lack of growth, weak post-merger integration and continued margin pressure, with more recent weakness coming from Covid-19 stay-at-home orders.

However, Molson Coors’ annual revenues will likely remain relatively stable, backed by its highly recognized and popular brands.

While revenues will dip from about $10.6 billion last year to perhaps $9.6 billion this year, they will likely recover to $10.2 billion next year. The profit margin is a healthy 21%, helping the company to generate free cash flow of about $1.0 billion in a typical year.

Molson Coors had raised its dividend by 39% a year ago, as its cash flow had reached its targeted levels, but suspended it due to the pandemic. We anticipate that the company will resume paying a dividend mid-next year. We think a $0.35 quarterly dividend is possible, providing a generous 3.8% yield on the current price.

The shares trade at a highly discounted 10.2x estimated 2020 earnings of $3.61/share, and about 9.5x estimated 2021 earnings of $3.87/share. This compares to multiples of 15x and higher for its beer-producing peers.

On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates, again a sizeable discount to its peers.

These multiples are also among the lowest in the consumer staples sector. In a market filled with companies that carry the curse of high expectations, TAP offers the blessing of low expectations.

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