Many beverage stocks -- both inside and outside of the alcoholic drink segment -- are underperforming the market in 2020. But Molson Coors (NYSE:TAP) is among the industry's biggest losers, with shares down over 25% through mid-August compared to a 4% increase in the broader market.
Investors are worried about the hit that the global beer giant took to its sales base in recent months. Wall Street also seems to believe Molson's rebound will take a long time -- if it happens at all. Below, we'll look at whether those concerns are overblown, or if investors are right to tread with caution around this beer stock.
A bad quarter all around
While every drink business endured sales challenges during global pandemic shutdowns in March, April, and May, Molson Coors was hit especially hard. Sales fell 15% in the three months ended on June 30, thanks to a 12% volume slump. Its European business shrank by 21% while the U.S. market fell 8%.
That performance put the company slightly ahead of Anheuser-Busch InBev (NYSE:BUD), which saw a 17% global volume decline in Q2, but well behind other drink specialists like Constellation Brands and Boston Beer. Both of these smaller peers offset plunging demand at bars and restaurants with soaring sales from the retailing channel.
It also helped that Constellation and Boston Beer each have a few hit premium franchises that people were glad to consume at home. Hard teas and hard seltzer drinks easily made the shift from bars to home refrigerators. Molson's biggest franchises, like Coors Light and Miller Light, didn't.
The bigger concern is that most industry giants expect the weak demand pressure to last into 2021. Restaurant and bar traffic will stay weak until the COVID-19 threat passes with widespread vaccine usage. In the meantime, consumers will likely keep avoiding the type of crowded public events like sports games, concerts, and festivals that drive much of Molson Coors' demand. Coca-Cola, for example, sees at least another year of unusually low consumer mobility ahead.
Against that weak sales backdrop, Molson Coors investors are bracing for potentially worse news on the financial front. The consumer company has had to take on more debt through the crisis, which is increasing interest expenses. Meanwhile, peers are boosting advertising spending today in hopes of achieving modest growth in a shrinking industry. Molson Coors will have to do the same, and so its operating margin is likely to shrink at least through 2021.
A value trap?
But the biggest reason to stay on the sidelines with this stock is that Molson Coors was losing market share even before COVID-19 hit the industry starting in early 2020. Many consumer demand changes from the pandemic, including the shift away from on-premises alcohol consumption, have amplified those challenges and extended any rebound timeline further into the future.
Investors looking for potential values might be attracted to the pessimism embedded in this stock today. You can buy the business for less than one times annual sales, after all, compared to over 2.2 times sales for both Anheuser-Bush and Heineken.
But it's hard to get excited about that valuation gap when it could be several years before Molson Coors returns to even its modest 2019 growth profile. That's why investors might do better looking at expanding franchises like Constellation Brands and Boston Beer.