Beer Ferments Constellation Brands’ First-Quarter Gains

Constellation Brands (NYSE: STZ) is what you might call the conglomerate of beverages, specifically alcoholic ones. The company reported earnings Friday for the quarter, but before I hit those, I want to educate investors on the amazing array of beverages the company sells so you can put those earnings into context.
The company is the top multi-category supplier of beer, wine, and spirits in the U.S., the No. 1 premium wine company in the world, the leader in average retail case price of top beer suppliers, the largest imported beer company in the U.S., the leader in retail dollar sales growth of top beverage alcohol suppliers and the third-largest beer company in the U.S.
There’s more. Constellation owns five of the top 15 imported beers, accounting for more than 175 million cases sales, which is more than half of the volume for the import calendar for 2013.
Whew. And that’s not even mentioning the brands themselves.
Constellation is behind everything from Svedka Vodka to Casa Noble Tequila, Corona beer, and Robert Mondavi wines. The company literally owns dozens of different labels across all kinds of alcoholic beverages.
Corona and Modelo beer were scooped up when Budweiser and InBev merged and were forced to sell them for the merger to go through.
Constellation’s Canadian wines have seen everything from 10% growth (Ravenswood) in FY14 to 34% for Clos du Bois. Woodbridge wine sold over 9 million cases last year.

First-Quarter Results

Constellation’s sales jumped 6% year over year to $1.8 billion, with gross profit up 9.9% to $738 million. Operating income also rose 8.9% to $428 million, which translates to operating margins of 22%. Net income was $240 million, up about 16% over $208 million from last year. Take note that this was an organic 15% increase, not goosed by stock buybacks.
The secondary story for every company these days is how the strong dollar affected sales. Constellation didn’t escape, but it did better then most, with net sales rising 8% in constant currency, and 7% accounting for the strong dollar. Constellation’s beer segment saw an 11% increase with no currency effect because its sales are all in the U.S. Shipment volume rose a not-surprising 10%. Beer represents 67% of sales, so the corresponding increase in segment operating income of 17% comes as a great piece of news.
However, currency effects did affect wine and spirits to the tune of 3%, leaving the overall 4% increase at only 1%. Shipment volume increased 4%, which makes sense since they tend to be more expensive. Wine sales were flat while spirits increased 7.8%, so this quarter people seemed more interested in hard liquor.
The company thus managed $205 million in operating cash flow with $77 million in free cash flow.

The Beer Adds Up

Digging deeper, you’ve probably figured out that beer is really the big driver for the company. The Modelo purchase is turning out to be the big winner. That, along with Corona and other Mexican imports drove a 13% volume increase. When you consider the Hispanic population is constantly increasing in the U.S., that development makes more sense.
There is a weakness in the company’s approach with wines. The company targets the table wine category primarily. Yes, it has some solid 90-95 point wines in its portfolio, but the table wine focus is hurting it. Exports were down 1.3%, and they represent 81% of the company’s wine sales. Constellation needs to broaden out that category.
The other good reason for selling higher-end liquor is that the category tends to enjoy robust import rates. In this case, the U.S. saw an 18% increase.
Alas, my problem is that Constellation remains a very expensive stock, trading at 23x FY16 estimates on 12% to 15% EPS growth. The price needs to come down at least 25% for me to get interested.

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