If you watch overseas markets while trading in the U.S. is closed, you were probably expecting a big move from the stock on Monday after the U.S. and China agreed to restart trade negotiations. Investors all over the world seem to be anxious to take even the slightest hint that a trade compromise could come sooner than later as a reason to stay bullish about the market. That’s why it really wasn’t that surprising to see the market open higher Monday morning in a big way. By the end of the day, however momentum had tapered off a bit as investors came around to the fact that merely restarting talks, while better than what we’ve seen since the beginning of May, still means that there is a long way to go, and that an actual compromise could still be a long ways off.
The backdrop of trade tensions provide an interesting basis for arguments for and against a defensive approach the markets right now. I noted one opinion earlier today that pointed out that from the beginning of his administration, Donald Trump has used the stock market as an indicator of the success his pro-big business methods have yielded. That means that as long as the market keeps finding reasons to keep pushing the market higher – and lately, the Fed has been adding to that speculation by publicly stating it is prepared to take steps, including cutting interest rates, to keep the economy growing – Trump and his negotiators may be more inclined to keep playing hardball with China. The implication is that it would actually take another significant correction – perhaps one that, this time pushes the market into official bear market territory – to actually motivate Trump enough to start making useful concessions with America’s largest trading partner. That kind of decline takes time to materialize; even in a period of higher-than-normal volatility, for example, it still took the market three months in the last quarter of 2018 to test bear market lows. If that notion is correct, then the current wave of optimism about trade is probably premature, and we may be more likely to see the market drop, following the “buy rumor, sell the news” mantra that so often seems to work out in the short term.
If the market does begin to correct in the near term, defensive stocks are probably a smart place to start looking for places you can use to keep your money working for you. That includes stocks in the Consumer Staples sector, which also includes the Beverages industry, where American brewers like Molson Coors Brewing Co (TAP) are found. This is a segment of the American economy that generally does pretty well even when economic difficulties arise, and TAP includes global operations with two of the most recognizable beer brands in the world, Miller and Coors along with Canadian brand Molson and others. The counter to the argument for stocks like TAP can be found in an interesting point that I also found recently that pointed out that during the latest rally to a new market high, cyclical stocks that normally follow the major market indices to those highs, including technology and industrials, have trailed normally defensive sectors, like Consumer Staples. There is some logic to the idea; from a December 2018 low, the sector is up a little over 20% as measured by the S&P 500 Consumer Staples Sector SPDR ETF (XLP).
This is a phenomenon that is pretty unusual for late-stage market rallies, and if the perspective it offers is correct, it could mean that the sector is already close to being played out. If that is true, stocks like TAP could actually represent more risk than they do opportunity. TAP itself has not followed the sector trend, since it near to multi-year lows set just a couple of weeks ago in the low $50 range. Does that mean the stock could still offer a useful value opportunity, or does it present the same kind of near-term the risk that the sector does?
Fundamental and Value Profile
Molson Coors Brewing Company (MCBC) is a holding company. The Company operates as a brewer. The Company’s segments include MillerCoors LLC (United States segment), operating in the United States; Molson Coors Canada (Canada segment), operating in Canada; Molson Coors Europe (Europe segment), operating in Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Republic of Ireland, Romania, Serbia, the United Kingdom and various other European countries; Molson Coors International (Molson Coors International segment), operating in various other countries, and Corporate. The Company brews, markets, sells and distributes a range of beer brands. The Company offers a portfolio of owned and partner brands, including Carling, Coors Light, Miller Lite, Molson Canadian and Staropramen, as well as craft and specialty beers, such as the Blue Moon Brewing Company brands, the Jacob Leinenkugel Brewing Company brands, Creemore Springs, Cobra and Doom Bar. TAP’s current market cap is $11 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased a little over 8%, while sales declined -2.37%. In the last quarter, the decline in earnings and sales accelerated, with earnings at -38% and sales at -7.42%. TAP’s margin profile is healthy, but declining with Net Income over the last twelve months that was 9.21% of Revenues, but deteriorated in the last quarter to 6.57%.
Free Cash Flow: TAP’s free cash flow is healthy, at a little over $1.3 billion for the trailing twelve month period. That translates to a Free Cash Flow yield of 10.8%.
Debt to Equity: TAP has a debt/equity ratio of .61, a relatively low number that indicates the company operates with a generally conservative philosophy about leverage. Despite their impressive margin profile, the company doesn’t have great liquidity, with cash and liquid assets that have declined from about $750 million at the end of 2018 to $234.4 million in the last quarter, against $8.5 billion billion in long-term debt. It is true that since the end of 2018 the company has cleared more than $1 billion in long-term debt from their balance sheet. For the time being, their balance sheet indicates operating profits are more than adequate to service the debt they carry, however if Net Income doesn’t begin to stabilize and the company’s cash position improves, TAP could face liquidity issues in the quarters ahead.
Dividend: TAP pays an annual dividend of $1.64 per share, which translates to a yield of 2.93% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TAP is $64.25 per share and translates to a Price/Book ratio of ..87 at the stock’s current price. Their historical Price/Book average is 1.68, which suggests that the stock is trading at a discount right now of more than 91.6%. Their Price/Cash Flow ratio offers an even more optimistic perspective, since it is currently running 248% below its historical averages. Between the two measurements, the long-term target price, based strictly off of value analysis could lie anywhere in a range between $107 and $139 per share. The low end of that range is about where the stock’s all-time highs, reached in late 2016 lie.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above shows the entirety of the stock’s downward trend over the last two years. Since the beginning of June, the stock appears to have begun to consolidate around support at the trend low, just a little above $53 per share. The stock has immediate resistance in the $58 to $59 range, but would probably need to break above $59, to about $60 to offer any kind of sustainable downward trend. If the stock’s current support level doesn’t hold, its next most likely support range would likely be around $48 based on pivots last seen in 2013.
Near-term Keys: Given the strength of the downward trend, a short-term trade on the bullish side is very speculative right now, no matter whether you want to buy the stock outright or work with call options. A drop below the stock’s current support at $53 could be an interesting signal to short the stock or start using put options, with a target price in the $47 to $48 range. The truth is that the best opportunity in this stock right now lies on the value side for the patient, long-term investor that isn’t afraid of the ride if the stock does continue to slip back a bit.