Has Molson Coors Stock Peaked After 50% Recovery?

Having fallen to almost a decade low of $33 in mid-2020, Molson Coors Beverage stock (NYSE: TAP) has recovered almost 50% since then. Molson Coors manufactures, markets, and sells beer and other malt beverage products in the United States, Canada, Europe, and internationally. At the current price of $49 per share, we believe TAP stock has reached its near-term potential after a 50% recovery. In comparison, the S&P 500 saw almost a 70% recovery from the lows of 2020. The recent rally was driven by the US government’s announcement of a string of measures to keep businesses afloat and expectations of a rise in consumer demand and reduction in supply bottlenecks as the global lockdowns are gradually lifted. Even after a healthy recovery, TAP stock is still about 40% below its Dec 2017 levels. However, it is unlikely to see any major upside from its current level any time soon because it is beginning to lose market share in not just seltzers, wine, and spirits, but also within the beer industry even before the current pandemic. Our dashboard Why Molson Coors Stock Lost 41% Between 2017-End And Now? provides the key numbers behind our thinking.

The stock price decline during the 2017 to 2019 period is justified by over a 4% decrease in revenues as the demand for beer has been decreasing worldwide due to changing consumer preferences. This effect was amplified by sharp deterioration in profitability as net income margin went down from 14% in 2017 to 2% in 2019. On a per share basis, earnings dropped from $7.27 in 2017 to $1.12 in 2019.

However, the P/E multiple increased sharply from 11x at the end of 2017 to 48x at the end of 2019. The rise in P/E was because the decline in the stock price was not as sharp as the drop in EPS. This was because profits decreased in 2019 mainly due to significant non-recurring impairment charges and not due to a considerable change in fundamentals. The multiple dropped in 2020 following the pandemic, but has recovered over recent months with lockdowns being lifted. It currently stands close to 44x. We expect the P/E multiple to decline in the near term with the company losing market share, while the stock price would be sustained at the current level with an improvement in EPS which would offset the lower multiple.

Outlook

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This took a toll on consumption and consumer spending, which was reflected in TAP’s Q2 2020 results where its revenue declined by 15% y-o-y. The widespread closing of restaurants and bars, plus the cancellation of sporting events, concerts, and nearly every other form of public entertainment across key markets like the U.S. and Canada, led to a plunge in beer sales, thus affecting the stock price adversely. An even more significant decline in sales was averted as the company has been focusing on off-premise sales (other than bars and restaurants).

However, there have been signs of lifting of the global lockdowns over recent months. As the global economy opens up and lockdowns are lifted in phases, consumer demand is slowly picking up. Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With the lifting of lockdowns, reduction of supply bottlenecks is expected to help a company like TAP, which has a global supply network, to increase its volume. This was partially reflected in the company’s Q3 results, where TAP’s revenues saw only a y-o-y decline of 3.5%, compared to 15% drop in Q2 2020.

With investors’ focus having shifted to 2021, the stock has seen healthy growth over recent months in anticipation of strong revenue and margin growth. However, the recent surge in Covid positive cases, new virus strains coming into the picture, and the re-imposition of lockdowns in the UK could prove to be an impediment in this growth path. If the rise in cases warrant a re-imposition of lockdowns in other major economies as well, then the stock could see a sharp drop. Even in the absence of another lockdown, a major rise in the stock is unlikely after having increased 50% over recent months. Also, considering the fact that the company is losing market share in not just seltzers, wine, and spirits, but also within the beer industry, the stock does not appear to have any major upside from here. TAP’s stock is likely to remain around its current level of close to $50 in the near term.

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