If you are looking for valued stocks amidst the volatility in the market these days, then today’s article is for you. And specifically, we are looking at Molson Coors stock.
Molson Coors Stock Price Trend
Source: Yahoo Finance / Molson Coors Beverage Company
Take a look at this 5-year share price chart. Even prior to the market crash in March 2020 when the covid-19 outbreak happened, the company’s stock price had been trending downwards.
In fact, its share price has recovered to near pre-covid levels at around the $50 range. But we think that it is still undervalued at this moment in time.
So, do finish the article to understand why we say so.
Molson Coors Stock Business Overview
Before that, just a little background. Molson Coors Beverage Company’s history spans more than 2 centuries. Its primary business is in manufacturing, marketing, and selling beer and other malt beverage products.
The company has grown mainly by mergers and acquisitions. The key one being the merger between Molson of Canada and Coors of the United States back in 2005, that gives the company its shape today.
One of the more recent big acquisitions happened in 2016, when Molson Coors acquired the remaining 58% stake in MillerCoors for $12 billion, making it the single owner of MillerCoors.
It was actually induced by a separate merger between Anheuser-Busch InBev and SABMiller. SABMiller had to sell off its 58% stake in MillerCoors to Molson Coors as part of the antitrust concerns and regulatory requirement.
So, this acquisition by Molson Coors actually represented the largest transaction in the company’s history.
Source: Molson Coors Investor Relations February 2021 / Who is Moslon Coors
In fact, this have made Molson Coors the 5th largest beer company in the world. It is also the second largest brewer by volume in North America, and parts of Europe, where it operates.
Source: Molson Coors Investor Relations February 2021 / Global Footprint
Some of its iconic beer brands include Coors Lite, Miller Lite, Molson Canadian and Blue Moon, etc.
Why Is Molson Coors Stock Price Depressed
So, what happened, why has the company’s share price been trending downwards?
Well, there were mainly 2 key issues.
Source: GuruFocus / Molson Coors Is a Steal
First, because of the big acquisition of MillerCoors, it added more than $8 billion in debt to Molson Coors’ balance sheet. You can see the spike in the debt level to around $12 billion back in 2016 from the chart above.
Change In Consumer Preferences
Secondly, there has been a change in consumer demand and preference over the years. Notably, we saw a decline in popularity of mass beer brands, in favour of craft beer and other alcoholic beverages.
Source: Molson Coors Annual Report 2020 / North America Beer Industry Overview
Take a look at the table which summarizes the percentage market share by volume of beer and other alcohol beverages, including wine and spirits, as a component of the overall North America alcohol market over the last 5 years.
You can see a consistent decline in preference for beer over the years.
Source: Molson Coors Annual Report 2020 / Europe Beer Industry Overview
Similarly, we can observe a slight decline for the Europe side as well. Though demand for beer is more resistant comparatively.
However, I don’t think the habit and behavior for consumption of beer is going to change too drastically moving forward, even though there’s been some slight decline in the recent years.
Eroding Market Shares
What’s a greater concern is Molson Coors’ eroding shares in the beer market.
Source: Molson Coors Annual Report 2020 / North America Competitive Position
Take a look at the percentage share of the North American beer market represented by Molson Coors (MCBC), Anheuser-Busch InBev (ABI) and other brewers over the last five years.
You can see an observable and steady decline in Molson Coors’ market share from 26% in 2016 to 22% in 2020.
Source: Molson Coors Annual Report 2020 / Europe Competitive Position
Similarly, for the company’s Europe operations, their primary competitors are Heineken, Asahi, ABI and Carlsberg, which have gained shares over the past 5 years.
Comparatively, Molson Coors’ proportion of the beer market shares in Europe has declined slightly in the recent years.
Source: Stockrow / Molson Coors Beverage Company Revenues Chart
The company’s revenue captured these shifts in consumer preferences and eroding market shares as well.
The sharp jump in 2018, was due to the recognition in revenue from the acquisition of the stakes in MillerCoors for fiscal year 2017.
Thereafter, you can see Molson Coors’ declining revenues over the past few years. It is especially impacted by the pandemic in fiscal year 2020 reported in 2021.
Has The Market Over Penalized Molson Coors Stock?
So, has the market over penalized the company?
We think the short answer is yes. The fundamentals of the company still remained strong.
Particularly, we want to highlight Molson Coors’ strong operating cash flow and free cash flow.
To understand this, let’s take a look at the company’s financial performance in 2020.
For instance, during fiscal year 2020, the company was badly hit by the pandemic. Closures of bars and restaurants have severely impacted its on-premise sales. And these are higher margin business compared to off-premise sales to convenience stores, grocery stores, liquor stores and other retail outlets.
This is particularly impactful for its business in Europe and the UK, where the UK contributed about 55% to the company’s Europe net sales in 2019.
Within which, about 50-55% of Europe net sales in 2019 were generated from the on-premise channel.
Reason for highlighting this is because the coronavirus pandemic has adversely impacted the on-premise business.
The pandemic has resulted in widespread government-imposed restrictions related to closures of bars and restaurants in Europe and the UK.
This had effectively ceased the on-premise part of the business entirely during the first lockdown in Q2 2020. And subsequently the second lockdown during the fourth quarter of 2020.
As a result, a hefty $1.5 billion non-cash goodwill impairment charge for its European business was written-down. Total goodwill impairment came to around $1.7 billion for 2020.
Strong Free Cash Flow
Source: Yahoo Finance / GuruFocus Checking in on Molson Coors
Consequently, you can see the company reported a net loss of $949 million for fiscal year 2020.
Yet, observe that Molson Coors’ free cash flow remained relatively strong at more than $1b billion, albeit a slight decline from the previous year.
At the current share price of about $46, free cash flow yield works out to be about 11%.
Source: Simply Wall Street / Molson Coors Beverage Company
Next, because of the strong cash flow from its business, the company had been able to reduce its debt substantially over the past few years.
Source: Molson Coors Q4 & FY 2020 Results & Outlook Presentation / Debt Levels
In 2020 alone, Molson Coors paid off $1.1 billion in debt. And it is now on track to reduce its leverage ratio to less than 3 by 2022.
This will create a stronger balance sheet for the company moving forward.
Signs of Positive Performance For Molson Coors Stock
Aside from its debt improvements, we are seeing some good news in its latest performance report for 2020 as well.
Source: Molson Coors Q4 & FY 2020 Results & Outlook Presentation / Brands Growth
For instance, the company’s iconic brands Miller Lite and Coors Light registered a 8.6% and 6.1% growth in market shares respectively in the US off-premise market.
Besides growing its core brands, the company continues to evolve their strategy to appeal to the ever-changing preference of consumers. They continue to broaden the range of products and offerings in their portfolio.
Source: Molson Coors Q4 & FY 2020 Results & Outlook Presentation / Hard Seltzers and Above Premium Beer Market Share
These expanded offerings include hard seltzers and a variety of non-alcoholic offerings.
Source: Molson Coors Q4 & FY 2020 Results & Outlook Presentation / New Growth Categories
So all these improvements, be it the healthier balance sheet, or the improving product offerings and growth in the recent reporting, seems to indicate that Molson Coors is well positioned to come back stronger after the pandemic subsides.
However, with all the risks of changing consumer preferences, and the company’s strategy to diversify beyond its core business in beer, one may still be skeptical about Molson Coors’ ability to win back its market share.
Source: Molson Coors Investor Relations February 2021 / Underlying Free Cash Flow
So, I want to highlight again that the Molson Coors’ strong underlying free cash flow generation will give the company the financial resources to win back market share in its core business and diversify successfully to other non-alcoholic beverages
On an absolute valuation basis, we think that the company is at least decently valued. It is not overvalued like many stocks that we see in today’s market. At current valuation, we think that we are buying at a discount by not paying for future growth.
Source: Molson Coors Annual Report 2020 / Comparison of Five-Year Cumulative Total Return
On a relative basis, when compared to its peers valuation and its recent past, Molson Coors stock is considered undervalued as well. We think that there is at least another potential 30% to 50% upside.
So, definitely, a company of great value to add to my watchlist, and you can consider as well. Also, not forgetting that management is expecting to reinstate a dividend in the second half of 2021.
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