TAP might be ready to reverse its downward trend – what about its value?

Moving into a new year includes things like New Year’s resolutions, plans for vacations or weekend getaways, and if you live in a cold-weather area of the U.S. as I do, a little bit of longing for warmer climes where you can sit in the sun with family and friends, put some meat on the grill and load a cooler with ice and beverages to enjoy. Of course, the ongoing pandemic that simply refuses to go away continues to put in a crimp in many of those plans. It doesn’t mean we can do some, or even most of those things, but it does mean that we need to adjust expectations, timing, and plans to work within the world we live in.

It’s tiring, to be sure, to keep coronavirus in any discussion, whether it is about social activities, business events or investing opportunities. I think that is one of the reasons that after the initial shock of the pandemic’s onset faded, economic activity in so many parts of the economy found ways to adjust and to keep things going. Even in some of the most severely impacted industries like dining, hospitality, and more, a lot of businesses have been forced to innovate and find creative ways to remain relevant and survive. There are a lot of interesting success stories to be had – but as an investor, the reality of the pandemic’s continued impact is something that you simply can’t ignore. That has become more and more apparent as some of the difficulties associated with social distancing and safety requirements that impacted production capacity early on have carried long-term residual effects that are still being felt throughout the supply chain in practically every single sector and industry of the economy. It’s manifested enough of an inflationary impact that the Fed is planning three interest rate increases this year, and that is something that is certain to keep economic uncertainty elevated.

Economic uncertainty is a big reason that defensive-oriented stocks have remained an important part of my investing focus, and that is why one of the sectors that I have been paying the most attention to for most of the past three years (even before COVID became a thing) has been Consumer Staples. I like a number of industries in this sector, like Food Products and Grocery stores, which represent businesses that consumers still have to engage with even when times are difficult. That includes the so-called “sin stocks” – companies like TAP that provide alcoholic beverages along with other products that have historically continued to generate strong revenues even as consumers are forced to start tightening their belts. I think of this industry in a similar light as snack foods, where these products offer a “comfort factor” that consumers make a point to include in their household budgets.

Molson Coors Brewing Company (TAP) is a stock in this industry that offers a good example of the kind of resilience these companies can see in these kinds of strange times. Even as the virus has raged, TAP has managed to maintain healthy free cash flow and improve their operating margin. That doesn’t mean they’ve been immune from the pandemic – the company suspended their dividend payout early in 2020 to help maintain that balance sheet strength, and were not able to reinstate it until the middle of 2021. Last year also saw the stock extend a downward trend from a June peak at around $61 to a November low at around $42, and hold in that lower end of its range through most of  December. 2022 has seen the stock start to rebound, however and earlier this week it even looked like it might be set to reverse that downward trend. Are the stock’s fundamentals, combined with the stock’s still-high discount to historical levels, enough to make the stock a useful new value opportunity? Let’s find out.

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 $10.6 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased a little over 8%, while sales increased 1.69%. In the last quarter, earnings grew by 10.76% while sales declined -3.61%. TAP’s historically narrow margin profile turned negative over the last year, but appears to be turning the corner following the last earnings report. Net Income over the last twelve months was -4.46% of Revenues, but strengthened sharply in the last quarter to 16.05%.

Free Cash Flow: TAP’s free cash flow is healthy, at $1.16 billion for the trailing twelve month period. That translates to a useful Free Cash Flow yield of 10.92%.

Debt to Equity: TAP has a debt/equity ratio of .49, a relatively low number that indicates the company operates with a generally conservative philosophy towards leverage. Despite their impressive margin profile, the company doesn’t have great liquidity, with cash and liquid assets of about $616.3 million against $6.6 billion in long-term debt. It is worth noting at the end of 2020, cash was about $731 million while long-term debt was around $7.1 billion – meaning that while liquidity has dropped, long-term has also been reduced by about $500 million. It is also true that since the end of 2018 the company has cleared more than $2.2 billion in long-term debt from their balance sheet – even while factoring in the difficulties of pandemic pressures over the last two years.

Dividend: TAP pays a dividend of $1.36 per share, per year, and which translates to an annualized dividend yield of 2.76% 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 I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $57.50 per share. That means that TAP is undervalued by about 17% from its current price, and a compelling discount price at around $50 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above displays the stock’s price activity over the last year. The red diagonal line traces the downward trend from a June 2020 peak at around $61.50 to a low in October at around $42.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Beginning in mid-December, the stock started to pick up bullish momentum, rising from that low to a new peak this week at around $51 per share. The stock is dropping from that point, with the 38.2% retracement line at around $50 acting as immediate resistance, and current support at around $48. A drop below $48 could have additional downside to about $45 before finding next support, with additional downside to $42 if bearish momentum accelerates. A push above $50 with healthy volume should give the stock room to test next resistance between $52 and $54.

Near-term Keys: The value proposition on TAP is interesting, but not quite compelling. The company’s fundamentals are generally good, but I would like to see improvements in liquidity and continued progress in Net Income before taking the stock seriously as a useful value candidate. If you prefer to work with short-term trading strategies, you could use a push above $50 as a signal to buy the stock or to work with call options, using $52 to $54 as useful target prices for a bullish trade. A drop below $48 could offer a signal to think about shorting the stock or working with put options, using $45 to $42 as useful targets on a bearish trade.