Molson Coors Beverage Co. (TAP, Financial) continues to recover from the pandemic and has recently shot up to new multi-year highs. I believe this uptrend should continue, though at a slower pace. Molson Coors is also a post-acquisition deleveraging story similar to Anheuser Busch-Inbev (BUD, Financial), which I wrote about previously, but Molson Coors is further along the process.
Acquisition and company history
Molson Coors went for scale when Anheuser-Busch Inbev was forced to divest the MillerCoors joint venture business in North America when it acquired SABMiller in 2016 to receive regulatory approval in the U.S. The Beer business is a scale business so this makes sense.
Anheuser-Busch gave up SABMiller's ownership of the Miller brands by selling its 58% stake in MillerCoors to Molson Coors for $12 billion. Previously, MillerCoors was owned by SABMiller and Denver-based Molson Coors in a joint venture. Molson Coors took on a large amount of debt to fund the acquisition.
After the acquisition, integration was initially problematic as is typical with large mergers and then in 2020 Covid-19 hit, driving the share price down as the company's on premises (bars and restaurants) business dried up. The debt and covid related drop in sales scared the market as investors panicked. There was also the huge popularity of non-beer alcoholic beverages like, Truly and White Claw coolers among younger demographics during that period (which has since abated) as well as the increased adoption of craft beers (which is still going strong, and now looks like a secular trend).
Recovering fundamentals
The company is now putting these problems behind it as the pandemic recovery proceeds, and it readjusts to the competitive threats. Profits margins are coming back and Molson Coors is rapidly deleveraging (the company has paid down about $5.5 billion in debt over the past six and a half years). Dividends, which were cut to cope with the Covid-19 crisis, have been reinstated and profitability is improving. The company is even buying back some stock. As such, the company is much improved fundamentally compared to five years ago.
Molson Coors' operating margins, which dipped slightly in 2022 as the company fought back for market share, are expected to get back to historical levels.
The table below shows improvements in Molson Coors' revenue and free cash flow from last year. The stock has responded strongly, having climbed over 35% year to date. While earnings per share was negative in the recent quarter due to non-cash charges and adjustments, Wall Street analysts are projecting continued improvement over the next couple of years. The forward price-earnings ratio is about 16, which looks fairly valued in my opinion.
| Growth Rates (Per Share) | Annuals (Year End) | Analyst Estimate | |||||||
| Fiscal Period | 10-Year | 5-Year | 1-Year | Dec 20 | Dec 21 | Dec 22 | Dec 23 | Dec 24 | Dec 25 |
| Revenue | 11.30% | -1.10% | 2.40% | 9,654 | 10,279.7 | 10,701 | 11,139 | 11,146 | 11,218 |
| EPS without NRI | - | - | -124.10% | -4.38 | 4.62 | -0.81 | 4.15 | 4.37 | 4.5 |
| EBIT | 13.40% | -6.60% | -39.70% | -369.3 | 1,499.3 | 188.1 | 1,375 | 1,420 | 1,448 |
| EBITDA | -1.50% | -17.50% | -66.70% | 552.7 | 2,285.4 | 872.9 | 1,902 | 2,153 | 2,190 |
| Free Cash Flow | 1.90% | -9.90% | 4.60% | 1,120.9 | 1,050.9 | 840.6 | - | - | - |
| Dividends | -3.70% | -11.50% | 46.20% | 0.57 | 0.68 | 1.52 | 1.63 | 1.72 | 1.79 |
| Book Value | 4.30% | -0.70% | -5.90% | 57.07 | 61.83 | 58.67 | - | - | - |
| Price (Total Return) | 5.30% | 1.90% | 35.20% | 45.19 | 46.35 | 51.52 | - | - | - |
Valuation
A comparative analysis of selected major mass brewers is given below. Note Molson Coors' price-sales ratio is lower than its peers and its operating margin is also low. This would mean that the company is underearning compared to its potential and there is considerable scope for improvement.
| Ticker | Company | CurrentPrice | PE Ratio(TTM) | PB Ratio | PS Ratio | EV-to-EBITDA | OperatingMargin % |
| TAP | Molson Coors Beverage Co | 66.28 | At Loss | 1.13 | 1.33 | 26.60 | 8.68 |
| HEINY | Heineken NV | 52.19 | 20.54 | 2.81 | 1.92 | 10.63 | 14.73 |
| SAM | Boston Beer Co Inc | 332.84 | 68.49 | 3.92 | 1.98 | 20.73 | 5.31 |
| BUD | Anheuser-Busch InBev SA/NV | 58.21 | 15.61 | 1.57 | 1.99 | 12.82 | 25.05 |
Molson Coors' share price has a long way to go to catch up to 2016 stock price levels and valuation ratios, which in retrospect looks like a bubble. According to the price at median price-sales ratio chart below, Molson Coors could be trading at over $100 if it were to trade with its median historical price-sales ratio. However, it is uncertain if the valuation ratios will get back to peak levels any time soon.
Gurufocus has devised a proprietary metric called projected free cash flow (FCF) value to deal with situations where earnings per share and free cash flow are erratic. Essentially, the metric takes 80% of the book value and adds it to the present value of free cash flow averaged over six years. Based on the projected FCF method, Molson Coors' intrinsic value estimate is $96.40 at this time. While this may look somewhat optimistic currently, I personally think a fair value in the $80's is reasonable.
On a discounted cash flow basis, using free cash flow as a starting point, the stock looks fairly valued based on the following assumptions:
 |  |
Conclusion
Overall, Molson Coors looks like it has recovered nicely. It is certainly not the bargain it was last year. However, the stock is still undervalued by my estimates at its current levels, so I believe there is some gas left in the tank to power the brewer to another 20% gain in the next two to three years. Plus, we now have a growing dividend and a significantly deleveraged company which is much safer than before. Once the company reaches a comfortable debt level it can start to buy back stock. I am thus sticking with my investment in the stock for now.
