Over the past six months, Molson Coors’s shares (currently trading at $38.62) have posted a disappointing 12.8% loss, well below the S&P 500’s 11.2% gain. This might have investors contemplating their next move.

Is now the time to buy Molson Coors, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Molson Coors Will Underperform?

Even though the stock has become cheaper, we don’t have much confidence in Molson Coors. Here are three reasons we avoid TAP, plus one stock we’d rather own.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

Molson Coors’s average quarterly sales volumes have shrunk by 8.4% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Shrinking Operating Margin

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Looking at the trend in its profitability, Molson Coors’s operating margin decreased by 37 percentage points over the last year. Molson Coors’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 22.7%.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Molson Coors’s five-year average ROIC was negative 0.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.

Final Judgment

Molson Coors doesn’t pass our quality test. After the recent drawdown, the stock trades at 8.3× forward P/E (or $38.62 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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