Is Constellation Brands A Buy?

Posted: Oct 18, 2018



At a glance, Constellation Brands (NYSE:STZ) appears to have all the characteristics of an attractive stock investment. The alcoholic beverage giant recently announced healthy second-quarter earnings results that showed robust market share growth in its beer segment and weaker -- but still positive -- trends in wine and spirits.

It paired those gains with news of a massive capital investment that could make it a leader in the emerging cannabis-infused beverage space.

Below, we'll take a closer look at those growth opportunities and whether they make this stock a good buy for investors today.

What it does

Constellation Brands produces and sells alcoholic beverages. But, unlike rivals such as Budweiser owner Anheuser-Busch InBev, its portfolio is heavily tilted toward the premium side of the industry. That focus has made all the difference for the company lately, as its family of imported beer brands including Corona, Modelo, and Pacifico are growing faster than the broader market and are generating far higher profit margins at the same time.

Constellation Brands acquired those beer franchises back in 2012 and the company continues to direct significant resources toward buying more premium breweries, wineries, and liquor distilleries around the world.

How it's doing
Constellation Brands' booming beer business has powered a 20% or better earnings boost in each of the last five fiscal years, which helps explain why the stock has risen so sharply. More recently, investors have seen that torrid growth pace slow as the company ramped up marketing spending to support the launch of major new products like Corona Premier. Management is also dealing with softer selling conditions in the wine segment.

Still, beer sales are up 9.5% over the last six months, compared to InBev's 1% global uptick. Constellation Brands has also expanded its profitability slightly despite all the extra marketing spending. Its market share gains, in other words, are showing no signs of slowing. "We won the key summer selling season," CFO David Klein told investors in early October, "with excellent execution across all [selling] channels."

Outlook and valuation
Management has a bullish outlook for the premium segment of the alcoholic beverage niche, which executives believe will continue expanding at a faster rate than the wider industry. As for the current fiscal year, they're targeting another double-digit sales increase in the beer unit and more modest growth in wine and spirits as profitability ticks up.

Meanwhile, the company is busy laying the groundwork for many more years of above-average growth. It is putting the final touches on a huge project of upgrading and expanding its Mexican brewery network, for one. Constellation Brands just made its second massive major-investment bet, too, by adding $4 billion to its equity stake in cannabis specialist Canopy Growth Corp.

That attractive combination of market-thumping operating results today and aggressive capital commitments toward future gains should make this stock a solid long-term bet. Yes, it appears expensive compared to rivals. Constellation Brands shares are currently trading for about 23 times expected earnings, compared to InBev's P/E ratio of 20.

Still, that premium makes sense given its faster growth and improving profit margin. If the global cannabis niche becomes a significant consumer beverage market over time, investors stand to earn robust returns from this highly efficient alcoholic beverage giant. But shareholders don't need to count on this risky outlook unfolding to see solid growth from Constellation Brands, so long as it keeps expanding market share and profitability in its core beer business.

By Demitrios Kalogeropoulos 
October 16, 2018
Source: www.fool.com



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