Interest rate fears are making the market jittery - that could be a good thing for defensive stocks like TAP

October 9, 2018

Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

Over the last few days, one of the things that has put the market a little bit on edge is concern that interest rates could be forced higher sooner than possible. Fed chair Jay Powell gave investors room to start feeling anxious last week when during a televised question and answer session, he said that the Fed has a long ways to go yet before rates reach a level where they are neither restrictive nor accommodative. He even went so far as to say that the Fed no longer needs the policies used to pull the economy out of the financial crisis that started the Great Recession of ten years ago. That seems to have put the fear of interest rates that may be forced to increase more quickly than the Fed has been forecasting for more than a year. Since then, the 10-year yield and the 30-year yield have both been rising at an accelerated rate – and that is just from investor’s initial reactions. Rising concern about the Chinese economy, and the impact tariffs are having on slowing it down, have also weighed on the market.

In previous posts over the last few months, I’ve written about the value of paying attention to defensively-oriented stocks; these are companies in industries that tend to benefit from healthy revenues even when the broader economy is declining or when investor uncertainty is increasing. It’s pretty common to see investors stage a “flight to quality” when they think the market is about to reverse lower, but that doesn’t just mean selling out of stocks and buying bonds. For smart investors, it often also means buying dividend-paying stocks in these defensive industries. Healthcare and utilities are two examples, and food stocks are another. You might not expect it, but that also extends to many of the so-called “sin stocks,” like Molson Coors Brewing Company (TAP). TAP in particular is very interesting right now, with a very solid fundamental profile that belies the stock’s extended, two-year downward trend that has seen it lose about 50% in overall value.

It isn’t a given that stocks in these defensive industries won’t decrease in value if the market turns bearish; the fact is that a broad market decline will usually translate to lower stock prices in virtually every sector. The advantage that you can find in some of these defensive industries, however is that since they tend to come more into favor when the rest of market is on edge, their valuation levels are usually more attractive than stocks that have been following the market indices to the latest set of all-time highs. That automatically lowers these stock’s likely exposure to market-based risk. If you can combine that element with strong fundamentals, a healthy dividend to add a passive component, and an attractive value proposition, you will usually be able to come out of the end of a broad market downturn ahead of the game compares to other more aggressive, growth-focused strategies. Let’s take a look at TAP to see why I think this is an interesting stock to pay attention to right now.



Fundamental and Value Profile

Molson Coors Brewing Company (MCBC) is a holding company. The Company operates as a brewer. The Company’s segments include MillerCoors LLC (United States segment), operating in the United States; Molson Coors Canada (Canada segment), operating in Canada; Molson Coors Europe (Europe segment), operating in Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Republic of Ireland, Romania, Serbia, the United Kingdom and various other European countries; Molson Coors International (Molson Coors International segment), operating in various other countries, and Corporate. The Company brews, markets, sells and distributes a range of beer brands. The Company offers a portfolio of owned and partner brands, including Carling, Coors Light, Miller Lite, Molson Canadian and Staropramen, as well as craft and specialty beers, such as the Blue Moon Brewing Company brands, the Jacob Leinenkugel Brewing Company brands, Creemore Springs, Cobra and Doom Bar. TAP’s current market cap is $12.3 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased a little over 13%, while sales growth was basically flat, increasing not quite 1%. In the last quarter, earnings nearly tripled, while sales increased a little over 33%. TAP’s margin profile is impressive, with Net Income over the last twelve months that was 14.5% of Revenues, and only slightly lower in the last quarter at 13.7%.
  • Free Cash Flow: TAP’s free cash flow is healthy, at more than $1.75 billion for the trailing twelve month period and translates to a Free Cash Flow yield of a little more than 14%.
  • Debt to Equity: TAP has a debt/equity ratio of .69, a relatively low number that indicates the company operates with a generally conservative philosophy about leverage. Despite their impressive margin profile, the company doesn’t have great liquidity, with a little less than $800 million compared to nearly $9.5 billion in long-term debt; however their balance sheet indicates operating profits are more than adequate to service the debt they carry.
  • Dividend: TAP pays an annual dividend of $1.64 per share, which translates to a yield of 2.61% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TAP is $63.93 per share and translates to a Price/Book ratio of .98 at the stock’s current price. Their historical Price/Book average is 1.74, which suggests that the stock is trading at a discount right now of about 77%. Their Price/Cash Flow ratio offers an even more optimistic perspective, since it is currently running 118% below its historical averages. Between the two measurements, the long-term target price, based strictly off of value analysis could lie anywhere in a range between $111.23 and $137 per share. The low end of that range is about where the stock’s all-time highs, reached in late 2016 lie.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The chart above shows the entirety of the stock downward trend over the last two years; the red diagonal line traces that trend all the way to its low point, reached in May of this year at around $59 per share. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock staged a very short-term rally from May to July from that trend bottom, but more recently has dropped back near to that low. For now, the $59 to $60 level appears to be providing solid support for the stock; if it continues to consolidate in the range the stock has followed between support at $59 and resistance around $70, the more like the stock will be to eventually break above the range and reverse the downward trend.
  • Near-term Keys: Given the strength of the downward trend, a short-term trade on the bullish side is very speculative right now, no matter whether you want to buy the stock outright or work with call options. However, if you are willing to speculate, you could use the distance from the stock’s current price to its nearest resistance around $70 to establish an interesting profit short-term bullish target price. A drop below the stock’s current support at $59 could be an interesting signal to short the stock or start using put options, with support in the $52 to $53 based on pivot levels last seen in 2013. The truth is that the best opportunity in this stock right now lies on the value side for the patient, long-term investor that isn’t afraid of the ride if the stock does slip back a bit.