At their current price, shares offer a compelling bargain to long term investors bent on defensive sectors and sustainable competitive advantages, plus a 4% dividend yield as soon as the distribution — suspended since the start of the pandemic — resumes.
With a 25% market share in North America, where its two flagship brands — Coors Lite and Miller Lite — come second after the unassailable Bud franchise, Molson Coors sports a solid footing in the second largest market globally.
This feat notwithstanding, recent years brought their fair share of hardship on the group and the other big brewers. Their mass brands are losing ground to a new kind of artisanal, high-end brewers, and the latter is happening against a backdrop of stagnating — if not declining — beer consumption almost everywhere but in Africa.
These challenges should be kept in perspective, however, since the said decline is infinitesimal in volumes — and thus probably anecdotal over the long cycle — whereas the market share of new entrants remains at best marginal.
Handicapped by their lack of scale, these emerging players cannot turn a profit even when they grow fast. In that respect, as soon as one of them stands out, one of the big brewers can move to acquire it in a combination that favors everyone — the former by getting a successful exit, the latter by neutralizing a rival.
In addition to the notoriety of their brands — which results from decades of investments in marketing that no one can replicate — the major brewers control highly strategic distribution networks that enable them to keep a firm grip on the markets they dominate.
All in all, their affairs give no serious cause for concern. Molson Coors may perhaps finds itself in a slightly more precarious position than its peers given that its portfolio is heavily focused on just two brands, but the Heineken example proves that this is not necessarily a handicap.
In fact, Molson Coors' business — and others' — has been running like clockwork. Earning power is still remarkably stable and operating profitability has recovered after years of lagging performance. The nuclear winter in F&B and tourism had almost no impact so far, with cash earnings — a.k.a free cash-flow — reaching $1.3bn in 2020, more or less the same amount than in 2019.
GAAP earnings were negative in 2020 because they included a sizable impairment on assets, as well as an amortization charge — which results in large part from the acquisition of AB Inbev's stake in MillerCoors — higher than capital expenditures.
In effect, under antitrust laws, the world's leading brewer had to unload his shareholding in MillerCoors during the takeover of SAB Miller five years ago. Molson Coors was the buyer. The deal led the group to double its revenue overnight, but it had to take on substantial debt to finance the deal.
From there come the $7bn in long-term debt carried on the balance sheet, which roughly represent three and half years of EBITDA and seven years of free cash-flows. Investors blessed the deal at first, but this leverage came back to bite them when synergies failed to deliver as fast as expected.
Progress is taking time indeed, yet leverage should remain manageable and under control. Debt maturities are adequately structured, and Molson Coors management has made no mystery of their intention to sell the non-strategic European assets.
Therefore we shouldn't see any refinancing risk or liquidity issuue. Capital allocation can remain oriented towards debt reduction in the first place, followed by dividends and possibly share buybacks if the current discount persists.
An investment in Molson Coors is thus a direct bet on a return of the dividend — contingent on whether society returns to normal — as well as the successful roll-out of new synergies. The first would restore luster to the stock price; the second would turn the said investment into a homer.
After all, it isn't often that investors can get a global brewer at just x10 its free cash-flows.