Coverage of the shares of this alcoholic beverage producer was recently initiated at MKM Partners with a ‘Buy’ rating, and 10 analysts have increased their EPS estimates for the company in the past 30 days.
Constellation Brands, Inc. (STZ)
From Argus Weekly Staff Report
We are maintaining our BUY rating on Constellation Brands, Inc. (STZ) with a revised target price of $230, raised from $220. Constellation is a global producer and marketer of wine, spirits, and beer with a wide range of brands, including Ruffino, Robert Mondavi, and SVEDKA vodka. The company also owns the rights to brew and market Modelo Mexican beers (including Corona) in the United States.
As the largest wine company in the world and the third-largest beer company in the U.S., Constellation should continue to benefit from economies of scale. We have a positive view of the
recent additions to Constellation’s brand portfolio and increased share of the U.S. beer market, as well as of its above-average margins. The stock also appears attractively valued based on peer comparisons and historical multiples.
Constellation’s results over the past decade reflect several key industry trends, including faster U.S. sales growth for premium beer (imported and ‘craft’) than domestic beer; an increase in global wine consumption, which has favored the sale of more expensive wines; strong sales of premium spirits; and the consolidation of suppliers, wholesalers and retailers. Constellation has a record of growth. Over the past eight years, the company has posted compound annual revenue growth of 7%, operating income growth of 25%, and EPS growth of 20%. This growth has been driven by the launch of new brands as well as by changes in the business portfolio. For example, in 2011, Constellation purchased the 50.1% of Italian winemaker Ruffino that it did not already own; that year, it also divested its Australian and U.K. businesses and launched four new brands. In 2012, it acquired the Mark West premium wine brand. And in 2013, it completed the $4.75 billion acquisition of Grupo Model’s U.S. beer business from Anheuser-Busch InBev.
In the second quarter, sales in the beer segment rose 7% from the prior year, reflecting both volume growth and higher pricing. Reflecting a tough prior-year comparison and divestitures, wine and spirits sales decreased 9%. The 2Q20 adjusted operating margin fell 20 basis points to 33.8%, but topped the consensus estimate of 33.4%.
In its 2Q20 press release, management provided FY20 EPS guidance of $9.00-$9.20, up from a prior $8.65-$8.95. Reflecting losses from its investment in Canopy Growth, STZ cut its GAAP earnings guidance for FY20 to $0.55-$0.75 per share. Reflecting prospects for lower wine and spirits sales following the divestiture to Gallo, and in line with management’s revised guidance, we are maintaining our FY20 EPS estimate of $9.10, down from $9.28 in FY19. For FY21, we are maintaining our estimate of $10.30.
Reflecting mixed fiscal 2Q results (strong beer sales and disappointing sales of wine and spirits), STZ shares fell 6% on September 3. STZ is trading at 21.4-times our FY20 estimate, above the 10-year historical average of 18 and the average of 17 for other growing Consumer Staples companies. However, we believe that a higher multiple is warranted based on the company’s prospects for above-peer-average growth, margin improvement, and rising ROE. Our target price of $230 implies a multiple of 25.3-times our FY20 estimate.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, October 11, 2019