STZ - Constellation Brands: Bullish Sentiment Ahead Of Q1 Earnings

2023-06-28 23:45:27 ET

Summary

• Constellation Brands will report its earnings on June 30th.
• Sentiment towards the stock is largely positive due to recent beer performances by key brands, Mondelo and Corona, and a strong FY2024 earnings forecast.
• I am cautious of its underperforming wine and spirits business cutting into top and bottom-line results.

Constellation Brands, Inc. ( STZ ), an alcoholic beverage company, is in the spotlight as it prepares to release its Q1 2024 Earnings Report on Friday, June 30th . In May 2023, their Mexican beer brand, Modelo Especial, surpassed Budweiser Light ( BUD ) as the top-selling beer in the USA, briefly ending a twenty-one year reign. While the brand might have benefitted from the Budweiser controversy , Modelo has steadily gained market share over the last ten years and has yet to reach the wider market . Momentum from growing beer sales in Q1's latter two months, the launch of a new light beer, and bullish analysts are some of the reasons that may have improved the EPS consensus to $2.83 per share over the last month.

Two prominent analysts, Jefferies and Wedbush, have raised their target prices for Constellation Brands' stock. Jefferies now predicts a target price of $300 per share, while Wedbush has increased its target to $270. The stock is currently trading below the average target price of $268.83 . Constellation Brands has stood out among beer companies by increasing its top line through increased beer consumption, not only increased pricing. This is due to their focus on marketing imported, premium and light beers. While the weaker performance of their wine and spirits business may impact overall performance, the company is expected to perform well in FY2024, forecasting FY2024 adjusted profit per share between $11.70 and $12.00. As a result, investors may consider taking a bullish stance on this stock.

Company overview

Constellation Brands makes, imports, markets, and sells high-end and imported beers, distilled spirits, and wine offerings with operations in the USA, Mexico, New Zealand, and Italy. In 2013 it paid $4.75 billion to acquire the exclusive rights to import and market six of the top twenty imported beers in the USA owned by Anheuser-Busch ((BUD)) subsidiary Grupo Modelo, among them Corona and Modelo.

Its brands are well positioned in the high-end and imported beer market, selling nine of the top fifteen imported beers. Constellation Brands has done a great job of building brands through marketing. Modelo was not even in the top ten best-selling brands ten years ago. The Mexican imported beer category is growing in the high single digits. This is compared to a very flat beer growth market.

Modelo took over Budweiser's spot as the number one brand in the USA in May 2023, claiming 8.4% of all retail sales compared to Bud Light's 7.3%. Budweiser is still in the number one spot for the year, but its market share has declined for years.

One of Constellation's weaker businesses has been its wine and spirit offering, which has decreased net sales in previous quarters . However, they are addressing this by selling off less popular mainstream brands and prioritising the growth of high-end brands through direct-to-consumer and international sales channels.

Upcoming Q1 2024's Earnings Report

Over the last four quarters, Constellation has beaten consensus EPS estimates three times. In Q1 2022 the company missed EPS expectations by $0.02.

Some compelling reasons for a strong Q1 2023 have been the beer business' improved performance in the last two months of Q1, particularly after the addition of the light beer brand Modelo Oro this month. Furthermore, management has forecasted adjusted profit per share between $11.70 and $12.00, above analyst consensus of $11.68 per share.

The company had a positive levered free cash flow of $815.18 million, which decreased YoY, primarily due to increasing costs of high-interest rate loans, and increased CapEx; however, cash flow remains positive enough to reinvest in the business and reward shareholders. Constellation has $1 billion authorised for share repurchases. It pays out a quarterly dividend, which has increased over the last seven years. It has an FWD dividend yield of 1.44%, and the payout ratio is very safe at 30.08%. The most recent ex-dividend date was on May 2, 2023.

The company has a large debt intake with a high net leverage ratio of 3.6X. However, as we can see below, no debt maturities are due in FY2024. Investors should be cautious of the increasing costs due to the impact of rising interest rates. Approximately 15% of the company's debt has adjustable rates.

Ownership

Institutional investors primarily own Constellation at 86.64% of the company's stock; this could give us a sense of trust in the company's ability to perform well. If we look at the trading activity of some of these institutions, we find both buying and selling of the stock. Copeland Capital Management LLC reduced their position last quarter by 0.7%, while Chartwell Investment Partners LLC increased its position by 5.3%.

Valuation

We have recently seen various analysts , such as Wells Fargo, raise its price target from $260 to $275. Furthermore, Citi increased its price target from $265 to $280 due to sales scanner data and confidence by the Constellation management team in their financial performance. Wall Street analysts are bullish, with seventeen out of twenty-six analysts giving the stock a buy rating. Wedbush analysts expect adjusted earnings per share of $2.90, Wall Street is at $2.92, and we can see a $2.83 from Seeking Alpha. Although the consensus is very bullish, if we look at its valuation relative to the consumer staples industry, it has a slightly higher FWD price-to-earnings ratio of 21.73 versus the sector median of 20.21. Its EV to EBITDA ratio of 17.70 is also higher, indicating that the stock may be expensive compared to its sector.

Final thoughts

Constellation Brands has created much buzz over the last months due to its successful growth of premium and imported beer brands. Various indicators show that Constellation Brands could perform well this financial year, including confidence from the management team. Due to positive beer brand growth and a successful strategy focused on premium brands across its business, investors may want to consider a bullish stance on this stock.

Constellation has confirmed Q1 2024 earnings date of Friday, June 30, and earnings will be released before the market opens. A conference call is scheduled beginning at 10:20 a.m. EDT. You can access the conference call by dialling +1-877-407-9121 and entering the conference identification number 13739041.

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