Molson Coors Brewing Company (NYSE:TAP) has dealt with decreasing demand for beer in general and increasing competition. Sources of competition include upstart microbreweries who offer intriguing alternatives to better-known beers and other types beverages.
This competition has pushed its stock valuation to 52-week lows, despite increasing revenues and net profits. However, with revenue and profits increasing and valuations lower than industry peers, the case for investing in Molson Coors appears solid.
TAP Stock Can Grow Despite Falling Consumption
Molson Coors is a beer conglomerate, encompassing the Molson Canadian and Coors brands that bear their name. The Denver-based company also owns Miller Brewing, Blue Moon, Bass Ale, and many other brands. Its most significant acquisition came from its primary competitor, Anheuser Busch InBev NV (NYSE:BUD).
Anheuser Busch merged with SABMiller in 2016. To complete the merger, BUD divested its 58% stake in its joint venture with Molson Coors in 2016. As a result, TAP stock acquired full control of MillerCoors. TAP became the largest brewer in the United States and the third largest globally as a result, with MillerCoors becoming its U.S. business unit of Molson Coors.
Even with its size, TAP stock faces external challenges. Generation Z, defined as those born in 1996 and after, have begun leaving college. Unlike the generations that preceded them, Generation Z tends to drink less, and the older generations are in life stages that do not lend themselves to high levels of alcohol consumption. Even when Generation Z chooses to drink, they’re the first generation to show a preference for spirits over beer. Moreover, beer consumption is also falling worldwide.
However, options for growth still exist. The industry can follow in the footsteps of the tobacco industry. Despite a decades-long trend of falling tobacco consumption, Altria Group, Inc. (NYSE:MO) has experienced a trend of dividend and stock price increases that spans decades. Its current dividend, $2.64 per share, approximates the split-adjusted price of the stock itself in 1996 when adjusted for dividends. This growth has occurred primarily without pursuing the international markets in which Molson Coors already has a presence.
TAP Stock Offers a Lower Valuation and Dividend Growth
The company appears to be following this trend. Although revenue and net income have increased and fallen over the years, TAP stock is on tap to more than double its revenue and nearly quadruple net income from 2012 levels. Revenue and profits fell steadily between 2013 and 2015 with profits falling from $3.08 to $1.93 per share in that period.
Net profit rebounded on its MillerCoors Acquisition, though this value was skewed in the fourth quarter of 2016 when it realized a one-time $2.4 billion net present value adjustment. Still, TAP stock earned a $1.49 per share in diluted earnings per share in the second quarter of 2017, up from 80 cents in the second quarter of 2016.
The adjustment also impacted the price to earnings (PE) ratio, however even with an adjustment, Molson Coors still appears undervalued in comparison with its peers. Consensus earnings for 2017 are expected to be about $4.34 per share. This would give TAP stock a PE ratio of around 19. Competitors such as Boston Beer Company, Inc. (NYSE:SAM), and Constellation Brands, Inc. (NYSE:STZ) all have PE ratios above 20.
The prospect for long-term dividend growth is also compelling. The company has increased the dividend in most years since 2007, the year the dividend stood at 64 cents. Today, the company pays $1.64 per share in dividends, representing a payout ratio of just under 2%. The 2016 earnings figure represents a sustainable dividend payout ratio of approximately 18%.
Molson Coors Fares Well Against Competitors
Despite unfavorable demographic trends and falling beer consumption, Molson Coors valuation is creating a buy case scenario. While it’s true that beer has lost ground relative to other beverages, the full acquisition of MillerCoors increased profits substantially. Even with stock price growth over the last five years, PE ratios stand below other beer industry peers.
With its acquisition and its steadily increasing dividend, the stock’s decline to 52-week lows creates a compelling, low-cost opportunity to invest in the beer industry.
As of this writing, Will Healy did not own a position in any of the stocks mentioned here.