TD Cowen downgrades Molson Coors, lowers price target to $58: Is it time to exit?

Molson Coors Beverage Company (NYSE: TAP) is in the spotlight today following a downgrade by TD Cowen. Despite Molson Coors posting better-than-expected Q2 earnings and reaffirming its 2024 outlook yesterday, TD Cowen adjusted its rating on the company, moving from a Buy to a Hold, and lowering the price target from $68 to $58.

This revised target indicates a modest upside potential of just 7% from the stock’s recent closing price. TD Cowen’s decision to downgrade Molson Coors was influenced by the company’s inability to fully capitalize on the market share gains that emerged from the Bud Light boycott.

The anticipated benefits from increased shelf space—up 13% this year—did not translate into expected revenue gains. The slow progress in premiumization efforts, particularly around the Blue Moon rebranding, also factored into the downgrade.

Despite these challenges, the analysts at TD Cowen believe that Molson Coors’ 2024 guidance is achievable but unlikely to excite investors unless the company demonstrates a path to more robust organic growth.

Molson Coors Q2 earnings

The second quarter of 2024 was a bright spot for Molson Coors, with the company reporting a 7.9% increase in profits, translating to $1.92 per share, surpassing consensus estimates by $0.24.

Revenue slightly declined by 0.6% year-over-year to $3.25 billion but still exceeded forecasts by $70 million. Molson Coors’ ability to maintain its top-line performance while enhancing its bottom line—up 5.2%—amidst a challenging environment underscores its operational resilience.

In terms of its 2024 outlook, Molson Coors remains optimistic, maintaining guidance for low single-digit growth in net sales on a constant currency basis.

The company expects underlying income before taxes to rise mid-single digits, with similar growth anticipated for diluted earnings per share.

Capital expenditures are projected at $750 million, and free cash flow is estimated at $1.2 billion, signaling continued financial health and investment capability.

Challenges ahead

Fundamentally, Molson Coors is navigating a complex landscape characterized by evolving consumer preferences and intense competition. Its diverse brand portfolio, including core brands like Coors Light and Miller Lite and premium offerings like Blue Moon, positions it well to capture various market segments.

However, the company’s reliance on traditional beer sales amidst shifting consumer trends toward premium and alternative beverages presents both opportunities and challenges.

Growth drivers for Molson Coors include strategic initiatives such as the Acceleration Plan, which aims to boost revenue through innovation and premiumization, and targeted investments in key markets like EMEA and APAC.

The company is also exploring opportunities in non-alcoholic and spirits categories, reflecting a broader industry trend of diversification beyond traditional beer offerings.

Valuation and risks

Valuation-wise, Molson Coors presents a compelling case with a price-to-earnings (P/E) ratio significantly below the industry average. Trading at a forward P/E ratio of below 10, the stock is currently undervalued compared to peers like Anheuser-Busch InBev, which commands a much higher multiple.

Molson Coors’ dividend yield of over 3.27% and a robust share buyback program further enhance its appeal as a value investment.

Despite these positives, Molson Coors faces several risks that investors should consider. The global nature of its operations exposes the company to geopolitical tensions, such as the Russia-Ukraine conflict, and macroeconomic factors like fluctuating fuel and electricity costs.

Additionally, beer consumption is sensitive to economic conditions, potentially impacting sales during downturns.

The company’s strong balance sheet, with almost $1.65 million in cash and manageable debt levels, provides a cushion to navigate these challenges.

Molson Coors has been proactive in managing its capital structure, with a $2 billion share buyback program underscoring its commitment to returning value to shareholders while maintaining flexibility for growth investments.

As investors weigh the company’s performance against market expectations, examining the stock’s technical indicators can provide further insights into its potential price movements and guide future investment decisions. Let’s delve into the charts to better understand Molson Coors’ price trajectory and market positioning.

Rangebound between $49 and $68

Molson Coors’ stock has been on a long-term downtrend since 2016. Though it made a noticeable bounce back after falling to $30 levels during the 2020 crash, it remains significantly below its 2016 peak.

TAP chart by TradingView
Since 2023 the stock twice tried to break above the $68 level, but failed, reinforcing the long-term downtrend. Hence, investors who are bullish on the stock and expect it to surge significantly must wait for that level to be crossed for any significant upward move. If it doesn’t the stock can remain range bound for a long time.

Traders who are bearish on the stock must also not short it at current levels because it is trading close to its long-term support near $49 as can be seen in the chart. If the stock fails to drop below that support level, it can continue to trade in the $49-$68 range in the near future.

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