Molson Coors Stays Flat As Market Rises, But The Tide Is Set To Turn

We believe Molson Coors stock (NYSE: TAP) may be a good opportunity at the present time. TAP trades near $35 currently and is, in fact, down 35% so far this year (from $54 at the beginning of 2020). It traded at $58 in February 2020 – just before the coronavirus pandemic hit the world – and is currently 40% below that level as well. TAP stock is still trading close to its March lows of little less than $35. The stock has underperformed the broader market with the S&P 500 rising 52% from its March lows. But the gradual opening up of the economy is expected to lead to recovery in consumer spending in the coming quarters while supply constraints also ease. With bars and restaurants opening up, revenue and margins are likely to improve in 2021, which could drive the stock 20% higher from here. Our conclusion is based on our comparative analysis of Molson Coors stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 55% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how TAP stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

TAP and S&P 500 Performance Over 2007-08 Financial Crisis

TAP stock declined from levels of about $51 in September 2007 (pre-crisis peak) to levels of $35 in March 2009 (as the markets bottomed out), implying TAP stock lost 31% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of close to $45 in early 2010, rising by 28% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

TAP Fundamentals Over Recent Years Have Been Strong

TAP revenues increased from $5.1 billion in 2015 to $13 billion in 2019. Despite higher revenues, margins declined over recent years with EPS decreasing from $2.11 in 2015 to $1.12 in 2019 mainly due to goodwill impairment recorded in 2019. However, the company’s Q2 revenues saw a 15% y-o-y decline, as 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. Earnings came in at $0.90/share as against $1.52/share in the year-ago period, mainly due to lower revenue, along with higher interest and tax expense.

Does TAP Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

TAP’s total debt decreased from $12.1 billion in 2016 to $8.7 billion at the end of Q2 2020, while its total cash went up from $0.6 billion to $0.8 billion over the same period. TAP generated healthy cash from operation of $1.1 billion in the first six months of 2020. The company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

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. to buoy market expectations. As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. Also, 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. As investors focus their attention on expected 2021 results, we believe Molson Coors Brewing stock has the potential for modest gains of around 20% once fears surrounding the Covid outbreak are put to rest.

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