A Marijuana Play You Likely Haven’t Considered
Seeing the triple-digit growth rates with many cannabis stocks, every investor wants a piece of the action. As a result, marijuana stocks have been highly sought after, and early investors have pocketed big profits.
There is, however, a flip side to the story. Because many pot stocks have shot through the roof during the past two years or so, they have gotten expensive.
In this day and age, it’s not uncommon to see a marijuana stock with a triple-digit price-to-earnings (P/E) ratio, and that’s if the company actually made earnings. In many other cases, we see soaring stocks of pot companies that are yet to turn profitable.
And that, my dear reader, is why today I want to talk to you about Molson Coors Brewing Co (NYSE:TAP).
Molson Coors Brewing Co
As the name suggests, Molson Coors Brewing is in the beer brewing business. The company was formed when the Canada-based Molson Brewery merged with the U.S.-based Coors Brewing Company in 2005.
Today, Molson Coors is one of the largest brewers in the world, with a portfolio of brands that are well known to beer drinkers, such as “Coors Light,” “Miller Lite,” “Molson Canadian,” and “Carling,” just to name a few.
Now I know what you’re wondering: “We were just talking about pot stocks; why am I looking at a beer company?”
Well, while Molson Coors is not a cannabis grower, it is well positioned to capitalize on the upcoming cannabis-infused beverage market in Canada.
In August 2018, the company’s Canadian business unit entered into a joint venture with HEXO Corp (NYSEAMERICAN:HEXO), a Quebec-based cannabis producer.
Together, the companies will develop non-alcoholic, cannabis-infused beverages for the Canadian market following the legalization of such beverages. (Source: “Molson Coors Canada and HEXO Announce Agreement to Create Joint Venture Focused on Non-Alcoholic, Cannabis-Infused Beverages for the Canadian Market,” Molson Coors Brewing Co, August 1, 2018.)
Under this partnership, Molson Coors was to have a 57.5% controlling interest.
At this point, I should mention that, while Canada legalized recreational pot for adult use on October 17, 2018, you can’t legally buy cannabis gummy bears or drinks yet. The country is expected to legalize edibles and cannabis-infused beverages (often referred to as the “second wave” of legalization) in the fall of 2019.
And that’s where the opportunity lies for the beer giant.
When asked about the joint venture in Molson Coors Brewing Co’s latest earnings conference call, Molson Coors Canada’s President and CEO Fred Landtmeters reiterated that the company’s objective is to “be ready to capture a meaningful share of the cannabis-infused beverages markets from day one of legalization.” (Source: “Molson Coors Brewing’s (TAP) CEO Mark Hunter on Q4 2018 Results – Earnings Call Transcript,” Seeking Alpha, February 12, 2019.)
If the joint venture accomplishes what it sets out to do, it could become a major catalyst for Molson Coors stock.
Here’s the neat part: because Molson Coors is still considered a brewing company for the most part, its share price didn’t shoot through the roof like many pot stocks. And that means value is still within reach.
As of this writing, TAP stock trades around $60.60 apiece, which gives it a P/E ratio of 11.8 times. Companies in the overall brewing industry, on the other hand, have an average P/E ratio of 17.8 times. (Source: “Molson Coors Brewing Co (TAP),” Reuters, last accessed April 5, 2019.)
Meanwhile, Molson Coors Brewing Co’s price-to-sales and price-to-cash-flow ratios are also significantly lower than the brewing industry average.
In other words, Molson Coors stock is not just cheaper compared to marijuana stocks, but also cheaper compared to other brewers.
TAP Stock Chart
Chart courtesy of StockCharts.com
Right now, the reason that many marijuana stocks carry sky-high valuations is their growth potential. I have no doubt that the pot industry will expand rapidly over the next several years, but, as is the case with any industry, not every company will be a winner.
If an investor puts money in a high-priced pot stock and that company doesn’t deliver the earnings growth that people had anticipated, there could be significant risk in the long run.
That’s why, for risk-averse investors, a non-pure-play marijuana stock like Molson Coors could be worth considering.
TAP stock offers an inexpensive valuation, and still gives investors exposure to the booming cannabis industry through its cannabis-infused beverage project.
Even if things turn out to be less than stellar, the company’s strong core brewing business means there’s still a reason to hold on to its shares. And if Molson Coors Brewing Co’s cannabis endeavor does bear fruit, it could give a solid boost to the company’s stock price.