Molson Coors Beverage (NYSE: TAP) is down over 7% after the company delivered a mixed earnings report on August 2. Profits for the adult beverage company came in right on the number at $1.19 per share. However, revenue was a slight miss at $2.92 billion with the forecast calling for $2.94 billion.
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On a brighter note, management did maintain its forecast for revenue and earnings for the full year. But that may not be enough for investors who see the company as trying to rely on its premium brands to lift it through a shaky economy.
In this article, we’ll look at what the company said and some things you may want to consider before taking, or adding to, a position in TAP stock.
Premium Sales are Growing
The good news is that revenue for Molson Coors is back to pre-pandemic levels. The company reports that this is due to a significant increase in on premise sales. Molson Coors reported that on-premise sales are still not a pre-pandemic levels. However, it is at 93% of pre-pandemic levels and it continues to increase revenue on a sequential basis.
As the company reported this is part of the company’s “premiumization” strategy. According to president and chief executive officer (CEO) Gavin Hattersley, the company’s “above-premium brands” contributed to a record high portion of our global portfolio net sales revenue on a trailing 12-month basis. And net sales revenue of the company’s U.S. above-premium portfolio is now higher than the net sales revenue of its U.S. economy portfolio on a trailing 12-month basis.
If this trend continues, it could dispel the trend that Molson Coors has no pricing power as the popularity of craft beers continues to grow. But a compelling argument to this thesis is the weakening of the global economy. There’s already evidence of consumer beginning to “trade down” 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 Sheet is Getting 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 of net debt is of the fixed rate variety. That means it will be less impacted by rising interest rates. However, debt is debt. And if the company can’t find a way to significantly increase revenue this will still be a headwind on earnings.
So how likely will it be that the company will continue to grow revenue? On the one hand, Molson Coors is acknowledging that it faces inflationary pressures. On the other hand, the company is planning a fourth quarter price increase.
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 12x earnings. And the company’s profit margin of 10.13% is greater than the sector average of 6.61%.
Post earnings analysts are lowering 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 stock is up 19% in 2022 which is no small accomplishment. And if the company does deliver an upside surprise in revenue, the stock may reward investors. But if it doesn’t then TAP stock could remain range bound as it has for several months.