This global beverage company beat consensus analysts’ estimates by $0.27 per share last quarter.
Constellation Brands, Inc. (STZ)
From Argus Weekly Staff Report
We are maintaining our BUY rating on Constellation Brands, Inc. (STZ) with a target price of $260. Constellation is a global producer and marketer of wine, spirits, and beer with a wide range of brands, including Clos du Bois, 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 our discounted cash flow analysis.
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 seven 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 Modelo’s U.S. beer business from Anheuser-Busch InBev.
In the second quarter, sales in the beer segment rose 11% from the prior year, reflecting volume growth and higher prices. Adjusted EPS totaled $2.87, up from $2.47 a year earlier. EPS topped the consensus forecast of $2.61 and our estimate of $2.78, reflecting the successful launch of new products, which included Corona Familiar and Premier. EPS has exceeded consensus estimates in 20 of the past 23 quarters. Despite a tough comparison to the prior-year period, wine and spirits sales increased 9%. The positive earnings surprise reflected better-than-expected beer sales, as well as a high single-digit increase in wine and spirit sales.
Looking ahead, we expect sales and earnings growth at Constellation to be driven by new products, new packaging, and line extensions. For FY19, we project revenue of $8.2 billion, above the consensus estimate of $8.1 billion. Based on our expectations for greater-than-expected cost synergies from the Ballast Point acquisition, management’s guidance, and positive earnings surprises in twenty of the past 23 quarters, we are maintaining our EPS estimates of $9.80 for FY19 and $11.00 for FY20.
STZ shares appear attractive relative to peers and based on our discounted cash flow model. Our DCF model, using an initial growth rate of 10%, a terminal growth rate of 2%, and a WACC of 7.7%, points to a value of $270 per share. Our peer comparison, which considers the company’s above-average earnings growth, prospects for higher returns on invested capital, and improved margins, points to a value of $250 per share. Based on our blended analysis, our target price is $260.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, October 12, 2018