Brewing Giant Molson Coors Stock At A Decade Low: Enter For 30% Gains?

TAP: Molson Coors Brewing logo
TAP
Molson Coors Brewing

Molson Coors Beverage stock (NYSE: TAP) currently stands at a 10-year low. At the current price of $34 per share, we believe TAP’s stock is undervalued and has the potential to rise by about 30%. The stock price of Molson Coors – a company that manufactures, markets, and sells beer and other malt beverage products in the United States, Canada, Europe, and internationally – has lost over 40% of its value since its February high and has not seen any recovery. In comparison, the S&P has recovered about 42% since late March.

The stock is currently 58% below the level at which it was at the end of 2017. We believe that the US government’s announcement of a string of measures to keep businesses afloat and expectations of a rise in consumer demand and reduction in supply bottlenecks as the global lockdowns are gradually lifted, provides a significant upside to the stock price. Our dashboard What Factors Drove -58% Change In Molson Coors Stock Between 2017 And Now? provides the key numbers behind our thinking.

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The stock price decline during the 2017 to 2019 period is justified by the 3.8% decrease in revenues as the demand for beer has been decreasing worldwide due to changing consumer preferences. This was completely offset by 5.6% increase in profitability, as net income margin went up from 8.8% in 2017 to 9.3% in 2019. On a per share basis, earnings went up slightly from $4.48 in 2017 to $4.54 in 2019.

However, the stock price continued to fall which was also reflected in the P/E multiple dropping from 18x at the end of 2017 to 12x at the end of 2019. The decline in multiple was driven by the company losing market share in not just seltzers, wine and spirits, but with it also falling behind within the beer industry. The consumers have been shifting to premium brands, of which the company has only about 8% exposure in the US. The P/E multiple fell further in 2020 following the outbreak of the coronavirus crisis and currently stands at less than 8x. We believe that the P/E ratio has the potential to rise up to 2019 levels as the economy opens up, thus driving the stock price higher.

What’s the likely trigger for an upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. However, only a partial impact of the crisis was reflected in TAP’s Q1 2020 results where its revenue declined by 9% on y-o-y basis. The full impact of the crisis is likely to be felt in the Q2 results, where the company is expected to report a sharp decline in sales and earnings. The widespread closing of restaurants and bars, plus the cancellation of sporting events, concerts, and nearly every other form of public entertainment across key markets like the U.S. and Canada, led to a plunge in beer sales, thus affecting the stock price adversely.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lockdowns is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up, and in addition to that, reduction of supply bottlenecks is expected to help a company which has a global supply network (22% of the total revenues comes from non-US markets) to increase its volume. This could be reflected in the form of a pick up in revenue toward the end of 2020, followed by revenue growth in FY2021. Additionally, the company’s margins are also expected to continue the growing trend in 2021. Rising demand and smoother supply is likely to lead to a rise in the company’s P/E multiple, which could drive the stock higher to about $45, reflecting an opportunity for a potential 30% growth in investor wealth.

While Molson Coors’ stock is expected to rise, which S&P 500 component stocks have been consistent outperformers of the benchmark index? Our Consistent Outperformers: TDG, INTU, ROST, FISV, Have Beaten The S&P500 For 10 Years Running.

For further insight in to the alcoholic as well as non-alcoholic beverages space, see how Diageo compares with Anheuser-Busch InBev and also take a look at the comparative analysis of Coca-Cola vs. PepsiCo

 

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