Stars Are Aligning for Constellation Brands Stock

What do you do when you are the virtual superstore of alcoholic beverages? You sell them with unique marketing strategies and come up with great earnings. Constellation Brands (NYSE: STZ) is doing exactly that. It’s good to be No. 1. Constellation Brands is, in fact, in that position as far as being a supplier of beer, wine and spirits in the United States.

Oh, and by the way, Constellation Brands holds several other top spots: the No. 1 imported beer company in the U.S., the No. 1 global premium wine company, the No. 1 retail case price beer supplier and No. 1 in retail dollar sales growth among alcohol suppliers.

Alas, it is “only” the third-largest domestic beer corporation, and holds a third of the top 15 spots for imported beers, accounting for some 50% of import volume.

Constellation Brands stockConstellation Brands: Big Labels, Big Earnings

You’ve also heard of many of its labels. On the wine side, you know Robert Mondavi, Blackstone, Ravenswood and Woodbridge. Beer? Of course, you’ve had sips of Corona, Modelo and Pacifico. Don’t tell me you haven’t knocked back some Casa Noble tequila or Svedka vodka.

All those famous names translated to big numbers this past quarter.

In its earnings report, Constellation Brands said earnings for the quarter rose almost 16% over the year-ago quarter to $1.19 per share. This came on 14% sales growth to $1.54 billion. Sticking in those pesky currency exchange issues, sales were up 10%. The big winner, again, was the beer business. Demand is booming for Constellation Brands’ beer portfolio, which saw massive 18% sales growth.

Wine sales, which had been a big sluggish, increased 4%.

As we drop down to the gross and operating profit lines, the news just improves. Constellation Brands said Gross profit leapt 21% to $716 million, and those all-important margins increased a sizable 2.6% to 46.4%.

This all flowed to operating income, which popped its cork: up 24% to $433 million. On an operating income level, all Constellation Brands beverages saw outstanding growth: 29% for beer and 14% for wine and liquor.  This came despite heightened marketing expenses, so that bodes well for the company.

Constellation Brands’ Debt Load

Constellation Brands sits on $83 million in cash. It’s never been a cash-rich company, and it has had to take on a lot of debt to finance many of its acquisitions. That debt load is now $6.82 billion.

That’s a big number, and it’s only acceptable to me as an investor because operational cash flow is very strong: $1.41 billion for the year, and $520 million in free cash flow.

Constellation Brands pays a 1% dividend, and spent $34 million repurchasing stock. I have to say I don’t like those moves. The dividend isn’t high enough to attract dividend investors. The interest on all that debt is 5%, and I’d rather they use that free money to pay down the debt.

The company is considering spinning off its Canadian wine business as an IPO. I don’t think I would like that company’s financials, but I would love to see the money from an IPO pay down debt.

But that’s about the only complaint I have with management. It wisely is continuing its expansion into the Mexican beer market, and purchased a new craft beer brand, Ballast Point.

It’s trying to bolster its wine business by going after a nifty label that I know pretty well, The Prisoner Wine Co. I’m seeing this in several places and that explains its 30% annualized sales growth. Good purchase.

Is Constellation a buy? With fiscal year 2017 earnings per share pegged between $6 and $6.30 per share – up $0.82 to $1.12 from FY16, or 14 to 20% EPS growth – you are buying into a definitive growth stock.

Constellation Brands stock trades at 26 times EPS, though. I find Constellation too pricey right now, but a decline of 20% of more in a correction makes it attractive.

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Published by Wyatt Investment Research at