TAP - Molson Coors: Cheers After A Hangover At Its Competitor

2023-07-17 13:12:23 ET

Summary

• Molson Coors Beverage Company has seen a modest recovery coming out of the pandemic.
• The company has been struggling along until its major beer competitor Anheuser-Busch InBev SA/NV made a major marketing mistake in recent weeks.
• This short-term windfall should become apparent in the coming quarterly results, but given the underwhelming operational performance, current enthusiasm seems to provide a nice exit opportunity.

Towards the end of 2020, I called Molson Coors Beverage Company ( TAP ) an appealing stock in this premium article. This came after the company had seen a few tough years since the acquisition of the remaining stake in the Molson Coors joint venture, with leverage gradually being addressed. This observation, some operating momentum, and a modest valuation meant that I warmed up to the shares at the time.

A Quick Trip Down Memory Lane

Molson Coors is the result of the 2007 merger between Canadian-based Molson and U.S.-based Coors. The deal created a $4 billion business in 2014, being awarded a lofty $18 billion valuation at the time on the back of the growth potential and expansion (opportunities) in Eastern Europe.

With Anheuser-Busch InBev SA/NV (BUD) tying up with SABMiller in 2014, it sparked another round of M&A frenzy in the beer industry, as Molson Coors participated by acquiring the remained 58% stake in the joint venture Miller Coors in 2015. With expectations across the industry running high, shares ran to the $100 mark at the time, creating the ideal situation for a hangover in the years to follow.

Following the deal, Molson Coors was saddled with $11.5 billion in net debt, a big number in relation to a $2.5 billion EBITDA number, as the pro forma business grew to $11 billion in sales and earnings around $4.50 per share.

With growth trailing expectations, as sales actually fell to $10.6 billion through 2019, it was clear that investors were not too happy with the developments. Lower sales (certainly adjusted for inflation) reduced the ability to deleverage, although net debt has come down to $8.5 billion, in part due to a modest dividend payout ratio.

Shares traded at $50 pre-pandemic, as a 20 times earnings multiple had fallen to 12 times, on the back of lackluster operating performance, as investors feared that the company had missed the boat on trends like seltzer and alcohol-free alternatives. On top of that came the pandemic, which hurt the results, as much of Molson´s beer is consumed out of home, with the pandemic triggering a further pullback in the shares to the $30s at the time.

With sales trends flattening out in the second half of 2020 and earnings actually up amidst a decline in operating expenses, the company was deleveraging rapidly, with net debt down to $7.6 billion, making me a bit upbeat with earnings power reported at $4.50 per share and shares trading at $45. I hoped that a low valuation multiple would recover over time, amidst a better operating performance, as the company even announced some partnerships to take advantage of the seltzer opportunities.

Doing A Bit Better

Since late 2020, shares of Molson Coors have largely traded in a $45-$60 range as the trend of stabilization continued. Since May of this year, shares have risen to fresh highs around $67, but this move seems more induced by the actions of its major rival, Anheuser-Busch InBev.

After sales fell to $9.7 billion in 2020, revenues rose in a relative modest fashion, with sales up 6.5% to $10.3 billion in 2021. Adjusted earnings per share rose similarly to $4.15 per share, even as underlying EBITDA fell 2% and change to $2.1 billion, though net debt was down to $6.5 billion

In February of this year, the company posted a relatively modest 4.1% increase in 2022 sales to $10.7 billion, in generally an inflationary environment. Inflationary pressures made that net earnings fell a percent to $892 million, with adjusted earnings per share slipping five cents to $4.10 per share. Adjusted EBITDA slipped another 2% to $2.0 billion, albeit that net debt fell just below $6.0 billion.

The 2023 guidance provided was not too inspiring, with sales and underlying income both seen up in low single digits. After posting a 6% increase in first quarter sales, the company was happily reconfirming the full year guidance.

The recovery coming out of the pandemic feels a bit soft, but fortunately it has been its major competitor which has provided a lifeline to Molson Coors here. This came as InBev executed a controversial marketing campaign around Bud Light, driving a double-digit sales increase in Molson Coors´ brands according to weekly Nielsen data, as consumers ran away from Bud Light. The resulting boycott shaved off some 30% from Bud Light sales, with those volumes appearing elsewhere at competitors, as these trends are now going on for quite a few weeks already, perhaps longer than anticipated at the start of the controversy.

This means that the second quarter will see a big boom, which is positive for Molson Coors, although the question is how long-term market share can be kept, or how slowly the gains will flow back to InBev over time. Nonetheless, it is a welcomed boom for the company and investors, but likely largely a one-time boom.

What Now?

While the situation above mostly provides a short-term boom, with hopefully a somewhat longer tail with a smaller impact, the issue is that the overall Molson Coors Beverage Company performance post the pandemic feels a bit underwhelming.

Other than continued deleveraging, there is not that much to like about Molson Coors Beverage Company stock here, with shares up 50% over the past two and a half years. Amidst the modest performance, I am hoping to cut out of my position here at highs of $70 surrounding the Bud Light controversy, as a ten times earnings multiple has expanded to a 15 times multiple here.

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