We exited Molson Coors Beverage Company (ticker: TAP) last year at prices higher than today’s quote and have not reinvested. The closer one looks the less we like it. The headline cash flow math is interesting, but the company-specific volume trend isn’t cooperating.
Management is guiding to roughly $1.1B in forward free cash flow (±10%) over the next year. With a market value under $10B, TAP shares screen somewhat attractively. Share buybacks are ongoing. Debt is steady, but manageable.
Industry pain across the alcohol space is evident — from Diageo plc to Constellation Brands — raising the possibility of consolidation. But TAP’s own sales volumes have been consistently and materially negative, and pricing can only offset that for so long. Cutting price to chase units becomes a race to the bottom, while raising price on a shrinking base has limits.
Warren Buffett has often pointed to case volume at Coca-Cola as the key metric – a simple signal of brand strength and long-term intrinsic value growth. We think Molson Coors is no different.
It’s also worth knowing that when a business contracts, free cash flow can get a short-term lift from working capital coming out of the system — lower inventories and receivables — which flatters the headline number even as the underlying fundamentals deteriorate. Buying inexpensive cash flow in a declining volume business can become a value trap. Until TAP’s volume trend stabilizes, the enterprise isn’t expanding — it’s shrinking — and that’s the trend that matters.
Devotion to Understanding
Disclosure: Neither the author, nor Devotion clients have any position in TAP shares.
