While the market as represented by that imperfect measure the S&P 500 has not only recovered from the pandemic-induced bear market, but is also hitting new highs, there is plenty of value left. While the "Robinhooders" and "Compounder Bros" chase after growth and tech stock, us bottom-feeding, deep-value vultures can find plenty of fallen angels to keep us busy. As for value investors, our day will come. It always does. Markets are cyclical if nothing else. A 50-cent dollar never goes out of style.
One such 50-cent dollar is Molson Coors Beverage Co. (TAP, Financial). The brewer owns iconic beer brands like Coors Lite, Miller & Molson Canadian, Ricards, Blue Moon and many others. The company has grown by mergers and acqusitions. The current form of Molson Coors is the result of a merger between Molson of Canada and Coors of the United States in 2005. It is the United States' second-largest and the world's fifth-largest brewer by volume.
Molson Coors' balance sheet expanded dramatically after the merger of Anheuser-Busch InBev (BUD) and SABMiller in October 2016. As part of the regulatory approval process, Anheuser-Busch had to divest its Miller brands by selling its stake in MillerCoors to Molson Coors. The latter acquisition saddled the company with over $8 billion in debt. The debt, together with the decline in popularity of mass beer brands (in favour of craft beer), has crushed the stock price.
On top of all dealing with this debt, the coronavirus pandemic hit. A big portion of the company's business occurs in restaurants and pubs (the in-premise business). Given that the hospitality business has been almost totally shut down, it has further driven the stock price down.
The stock was trading around $54 and already depressed at the start of the pandemic in late February and now is around $37, a drop of a little over 30%. (The share price was over $100 in 2016.) This drop implies that the company has suffered a permanent loss of business of 30% for the rest of its life. I think this is illogical and an opportunity for investors who can think of the long term. Pandemics, even a global one, are temporary and will abate in time, even if there is a second wave.
If you look at the operating cash flow line, it has not suffered as much. With trailing 12-month free cash flow at around $1.5 billion and a market cap of approximately $8.1 billion, we are looking at a free cash yield of roughly 19%. To get this set of iconic brands at this kind of free cash flow yield is like taking candy from a baby.
Well, what about all that debt? The company has been reducing debt steadily since the Miller acquisition. As can be seen from the chart above, debt has been reduced from over $11 billion to roughly $8 billion currently. In other words, the company has reduced debt by over $3 billion in less than four years. Given the cash flow, debt is arguably not a problem. Now that the company has temporarily eliminated its dividend, it can direct even more of its cash to reduce debt and build the business back up in the post-pandemic world. Given all our other troubles, we will need more beer, not less.
In conclusion, I think the company is undervalued by at least 50%. The pandemic is a temporary phenomenon, but beer is forever. I think this stock will be over $80 in three years. I am backing up my truck to load up on the stock.
Disclosure: The author is long Molson Coors.
Read more here:
- Food Inflation: The 1st, 2nd and 3rd Derivative Effects​
- Transcontinental: A Free Cash Flow and Deleverage Story
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