Molson Coors Is a Steal

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. (NYSE:TAP). 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.

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• TAP 30-Year Financial Data
• The intrinsic value of TAP
• Peter Lynch Chart of TAP

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.

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