Molson Coors drink (NYSE: TAP) is down more than 7% after the company reported a mixed earnings report on August 2. The adult beverage company’s profit came in at $1.19 per share. However, revenue was a slight miss of $2.92 billion, against the forecast of $2.94 billion.
On a brighter note, management maintained its full-year revenue and earnings forecast. But that may not be enough for investors who see the company trying to rely on its premium brands to lift it through a shaky economy.
In this article, we’ll look at what the company had to say and some things you may want to consider before taking or adding to a position in TAP stock.
Premium sales grow
The good news is that Molson Coors’ earnings are back to pre-pandemic levels. The company reports that this is due to a significant increase in local sales. Molson Coors reported that on-premises sales are still not at pre-pandemic levels. However, it is at 93% of pre-pandemic levels and continues to grow revenue sequentially.
As reported by the company, this is part of the company’s “premiumization” strategy. According to Chairman and Chief Executive Officer (CEO) Gavin Hattersley, the company’s “superior brands” contributed to a record portion of the net sales revenue of our global portfolio in the last 12 months. And the company’s US portfolio net sales revenue above premium is now higher than its US economy portfolio net sales revenue over the past 12 months.
If this trend continues, it could dispel the trend that Molson Coors lacks pricing power as the popularity of craft beers continues to grow. But a compelling argument for this thesis is the weakening of the global economy. There is already evidence that consumers are beginning to ‘switch’ to lower priced brands. However, if the economy continues to weaken, the company says it has a portfolio of brands that allow the company to compete at a variety of price points.
The balance gets stronger
Molson Coors continues to do a solid job of paying down its debt. And as the company notes, most of its $6.4 billion in net debt is fixed-rate. This means you will be less affected by rising interest rates. However, debt is debt. And if the company can’t find a way to significantly increase revenue, that will still be a drag on earnings.
So how likely is it that the company will continue to grow revenue? On the one hand, Molson Coors recognizes that it faces inflationary pressures. On the other hand, the company plans to raise prices in the fourth quarter.
The fundamentals suggest TAP stock is cheap
The company has a current price-to-earnings ratio of 10.97 and a forward P/E ratio of just under 12 times earnings. And the company’s profit margin of 10.13% is higher than the industry average of 6.61%.
Post-earnings analysts are cutting their price targets for TAP stock. And at a current price of $54.19, the stock is trading above the consensus price target.
On the other hand, Molson Coors shares are up 19% in 2022, which is no mean feat. And if the company delivers a positive earnings surprise, the stock can reward investors. But if it doesn’t, TAP stock could remain range-bound as it has for several months.