Decrease Target Price - Stz: Uncontrollable Events Clouding Near-term Narrative As Fundamentals Rema

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1. Message today is "Confidence" despite little "Clarity." The ramifications of COVID-19 overshadowed a strong 4Q20 print. While the company laid out the strength of its brands, innovations, and strategy, two uncontrollable realities will dominate near-term share movement: indefinite U.S. on premise closures and potential production suspensions as Mexico's government attempts to slow the spread of the virus.

2. We do not model an April production shut down at this time. Company states breweries remain operational, even as Heineken & ABI shut operations. Possible factors: 1. Import demand for the portfolio remains strong, 2. Decisions to close vary by state and the Gov't of Coahuila (home to Nava) has rejected prohibition; 3. Some industries granted agricultural exemptions (i.e. tequila in Jalisco). The situation remains fluid.

3. Supply chain can manage a (short) disruption. Constellation is working to mitigate a shutdown with ~70 days inventory on-hand, 2x its average. There is a further 1-2wks at retail and 80% of product is in the US. We expect them to continue to grow inventories.

4. Flexible Liquidity Situation Top of Mind. F20 ND/EBITDA 3.9x with $700mn maturing in Nov. We do not see downgrade/covenant risk (detailed here). We model F21 FCF +7% (vs. +33% F17-20 CAGR) to $1.4bn ex-div on lowered CAPEX (Mexicali paused); plus cushion from $2bn untapped revolver. Co. prioritizing paying down debt over buybacks.

5. No FY21 Guide. The right move in this environment in-line with ABI, TAP, CARLb.DK.

6. 4Q Beer and Wine Trends Solid, Fundamentals Intact. Reported EPS $2.06 vs. Street $1.65 with 50% of the beat due to better operations (~$0.20 from lower tax rate). Beer depletions +11% and wine Power Brands +4% (total wine -1%) supported a strong finish to F20. Modelo depletions +18% lifted beer. Anticipated beer margin contraction of 120bp to 39.3% on higher SG&A and upped marketing. Wine beat top and bottom line expectations on positive mix shift, a testament to the premiumization strategy.

7. QTD Beer & Wine Off-Premise Trends Strong.: Per Nielsen wk end 3/22, Constellation dollar sales +39% vs. 4-wk (March) +22%. Driven by Corona family +50% (seltzer launch in late-February added a ~LSD boost). Modelo Especial 1-wk +29% with smaller variants Modelo Chelada +85% and Negra Modelo +39%. Additionally, the 30% of sales in wine/spirits segment significantly boosted with still wine 1-wk +47% and whiskey 1-wk +55%. This is a marked reversal vs. still wine 52-wk -3%.

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14. Reiterate Outperform: TP to $197 (prior $233) on 18x our F24 EPS of $13.79 (prior $14.21). We slightly lower our multiple on elevated uncertainty. Risks: production stoppages, recessionary slow down. Company Constellation Brands

By Kaumil Gajrawala
April 6, 2020 
Source and Complete article: Credit-Suisse