TAP is up 20% year-to-date. Is there any value left?

Market uncertainty can be a scary thing to do deal with, and if you haven’t been investing for a very long time, it might seem even more mysterious and dangerous. One of the thing that does to a lot of investors is to make them more hesitant about taking on new positions. I think that’s a pretty natural reaction, especially when we see the market start to reverse existing trends. After testing deep correction territory in the first two months of this year, the S&P rallied in the early part of March but has dropped back again in the last two weeks. I see a lot of the whipsaw action, which is keeping the index still well below its late 2021 highs as a reflection of continued broad market uncertainty coming from continued concerns about inflation and interest rates. The Fed’s stated intention to raise interest rates multiple time this year to curb inflation growth that hasn’t been seen in forty years certainly begs the question of whether this is a case of too little, too late. If it is, it’s reasonable to suggest not only that we’ll see increases on an accelerated schedule, but also at higher levels than the standard quarter-point that have become the Fed’s normal incremental adjustment. That has investors worrying that the Fed will push the economy right into a new, prolonged recession.

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 uncertain times. Despite ongoing pressures over the last two years that really only start with the pandemic, TAP has managed to maintain healthy free cash flow. 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. The new year has seen the stock build a new upward trend that has already seen the stock increase in value by more than 20% For a value-driven investor like myself, that rally automatically brings up the question – has the stock now passed the point of useful value? 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 $12.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased by 102.5%, while sales increased 15%. In the last quarter, earnings declined by almost -54% while sales declined -7%. TAP’s historically narrow margin profile turned negative during the pandemic, but turned positive at the end of 2021; more recently it is showing some new signs of weakness, driven in my opinion by rising costs that are emblematic of broad market and economic conditions. Net Income over the last twelve months was 9.78% of Revenues, but weakened in the last quarter to 3.05%.

Free Cash Flow: TAP’s free cash flow is healthy, at $1.07 billion for the trailing twelve month period. That translates to a useful Free Cash Flow yield of 8.92%. This number has tapered a bit over the last few quarters, from $1.2 billion a year ago.

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. The company doesn’t have great liquidity, with cash and liquid assets of about $637.4 million against $6.65 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 a little over $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 and other pressures over the last two years.

Dividend: TAP pays a dividend of $1.52 per share, per year, and which translates to an annualized dividend yield of 2.73% at the stock’s current price. After reinstating its dividend in the final quarter of 2020, management increased its payout from $1.36 per share after the most recent earnings report. The reinstatement and the increase are a confirmation of management’s confidence.

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 $56.50 per share. That means that TAP is fairly valued right now, with a compelling discount price at around $45 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 2021 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. The stock’s new upward trend has pushed the stock above the 61.8% retracement where last resistance was seen at around $54 per share, and now marks current support. Immediate resistance is expected between $58.50 and $59, around the 88.6% retracement line, with room to test the stock’s 52-week high at around $61.50 if bullish momentum picks up. A drop below $54 should find next support at around $52, roughly inline with the 50% retracement line and consistent with previous pivot highs seen in January of this year and August of last year.

Near-term Keys: The stock’s latest rally has been useful for those who bought into the stock earlier in the year, but unfortunately has pushed the stock to its fair value target, which suggests that from a long-term perspective any additional upside associated with the company’s fundamental strength is limited. Concerns about the company’s liquidity and weakening Net Income are also reasons to keep the stock on a watch list, but wait for a better opportunity down the road. If you prefer to work with short-term trading strategies, you could use the stock’s break above $54 could be a signal to buy the stock or to work with call options, using $58.50 as a useful, initial target price on a bullish trade. A drop below $54 could offer a signal to think about shorting the stock or working with put options, using $52 as a practical, quick-hit profit target on a bearish trade.

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