As the stock market moves deeper into correction territory and challenges the lowest support levels it reached earlier this year, a natural question becomes what a smart investor should do with your money. Do you take everything out of the market and sit on the sidelines until things start to settle down again? The ultra-conservative approach would be to do exactly that. The truth, of course is that if the market continues to drop, and even moves into bear market territory, saying in the market or looking for new stocks to buy does mean that you have to be willing accept the chance the stocks you hold could move even lower.
For a lot of people, value-based investing is a counter-intuitive concept. Buying on the cheap sounds nice in theory, but when you’ve been looking at stocks that have been dropping and may even be at extreme lows, the natural question most investors ask is how much lower it is going to go. It seems so much easier to buy a stock when you can see it’s already been going up for a while, because the odds that it should keep going up are generally much higher.
The evidence for value investing is actually pretty solid, especially when market uncertainty is increasing. While most investors are running for the exits, smart value investors are taking advantage of the opportunity to buy up stocks they like on the cheap. Warren Buffet himself likes to call value investing buying “a good stock at a nice price.” That doesn’t just mean looking for stocks that are trading at historical lows, but also identifying companies that have a strength to their underlying business that implies the stock should be worth significantly more than it is right now.
Molson Coors Brewing Company (TAP) is a stock that I think has an interesting story to tell, even under current market conditions. Beverage companies like TAP tend to hold up pretty well even when market and economic conditions get tighter, but this is a company that is also moving aggressively to expand its product portfolio; they recently announced plans to extend their reach, particularly in Canada into cannabis-infused beverages to take advantage of the expected growth industry from legalization of recreational marijuana in that country. Their fundamental profile it generally solid, and their value proposition looks very compelling 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 $11.9 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased more than 37%, while sales growth was mostly flat, increasing about 2%. In the last quarter, earnings and sales declined, with earnings at -2.13% and sales at -5.11%. TAP’s margin profile is impressive, with Net Income over the last twelve months that was 12% of Revenues, and only slightly lower in the last quarter at 11.5%.
- Free Cash Flow: TAP’s free cash flow is healthy, at more than $1.8 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 .64, 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 $750 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 2.7% 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 $65.29 per share and translates to a Price/Book ratio of .92 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 more than 87%. 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 $113 and $132 per share. The low end of that range is about where the stock’s all-time highs, reached in late 2016 lie.
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. Since May, the stock has set up an interesting consolidation range between $59 at immediate support (or about $55 if you prefer to use the stock’s October low) and resistance is between $66 and $69 per share. Seeing this kind of consolidation range hold up for more than six months at the end of a protracted downward trend is interesting, and should generally be taken as a sign the stock is likely at the bottom end of its downward trend; however the stock would need to break above $69 to actually reverse the long-term downward trend. A drop below $55 would reconfirm the bearish trend and could see the stock drop into the low $50’s – a level the stock hasn’t seen since late 2013.
- 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. 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 range 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.