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Molson Coors Brewing Co (NYSE: TAP ) stock has lost about one-third of its value over the last 17 months. The company which is famous for brands such as Coors, Miller Lite and Molson Canadian has seen buyers turn away from its core products.
As consumers switch to higher-end brands, or sometimes away from beer altogether, investors have sold TAP stock. However, with its falling valuation, investors should watch as a lucrative buying opportunity starts to form.
To be sure, the stock has faced a secular downtrend. Competition from the likes of Anheuser Busch InBev NV (ADR) (NYSE: BUD ), Boston Beer Company Inc (NYSE: SAM ), Diageo plc (ADR) (NYSE: DEO ) and Constellation Brands, Inc. (NYSE: STZ ) has heated up.
Like Molson Coors, its archrival BUD also remains primarily in the beer business. However, other competitors serve a higher-end beer market and sell wine and spirits. In fact, Constellation has ventured into marijuana with its investment in Canopy Growth Corp (OTCMKTS: TWMJF ). Today's economy favors more diversified players.
TAP makes higher-end and regional beers such as Revolver, Saint Archer and Terrapin. The company also owns popular foreign brands such as Pilsner Urquell, Peroni, Grolsch and Sol.
Still, Coors and Molson remain their flagship brands, and popular low-end brands such as Keystone and Milwaukee's Best also exist under their umbrella. The TAP stock price has fallen as these brands have become less popular.
Long-Term Trends Remain Favorable for TAP
However, this falling stock price will someday set up a golden buying opportunity. As my colleague Bret Kenwell points out , people drink beer in good times and in bad. When the economy and the market turn south, lower-cost beer such as the ones made by TAP should come back into favor.
I predict the same will happen with alcohol-related equities, and particularly TAP stock. Beer has remained a popular beverage for centuries and should remain so for centuries to come. As the largest beer producer in the U.S., TAP remains well-positioned to benefit.
Moreover, history has shown the resiliency of so-called "sin stocks." Interestingly, even falling domestic consumption does not always bode poorly for these equities.
In a previous article about TAP, I pointed to the example of Altria Group Inc (NYSE: MO ). MO has enjoyed decades of stock growth despite the fact that tobacco consumption has fallen steadily since the 1960s. If one factors in dividend reinvestment, Altria pays a dividend equivalent to its split-adjusted stock price in 1996.
TAP's dividend yield stands at 2.2% currently, and dividends have risen over time. I believe TAP stock investors with a long enough time horizon could enjoy the same type of trend.
TAP Is on Track for Falling Valuations and Increasing Profits
Valuations for the company are also becoming reasonable. The TAP stock price stands at around $74 per share. With non-GAAP earnings of $4.47 for 2017, that places the price-to-earnings (PE) ratio at around 16 times earnings. Moreover, analysts predict earnings will grow by over 15% this year and by just under 7% next year.
Bottom Line on TAP Stock
Don't tap the keg on TAP stock yet but watch as a buying opportunity begins to form. Beer consumption, especially the type of beers produced by Molson Coors, has fallen in recent years. As a result, TAP stock has lost much of its value over the last year.
Despite falling consumption, beer remains popular, and outsized stock growth remains possible even if domestic consumption falls. The PE continues to fall, and the stock will become cheap if the trend continues.
I do not recommend buying now as the stock continues to fall. Still, if the downtrend breaks, or if investors can buy in at a PE below the teens, owners of TAP stock could find themselves raising a glass to their profits.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
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