Mexican Beers Spell Fiesta for Constellation

Constellation Brands (NYSE: STZ  ) , a company previously more known for its grape-based products, is finding its recent success in the world of beer -- specifically, Mexican brews. The company reported earnings this week that surpassed analyst estimates and sent the stock higher. Constellation, which owns the Robert Mondavi name and others in the world of wine, had previously been unable to find its own profitable piece of the beer market. But since taking hold of Corona and Modelo from Anheuser Busch In-Bev (NYSE: BUD  )   last June, the profits have been flowing like wine, er... beer.

Earnings pop
Despite operating from a nation where per capita beer consumption is on the downward trend (and has been for 20 years), Constellation's portfolio of Mexican beers is sending the company to new heights -- well beyond what its wine and spirits businesses have been able to accomplish in recent periods.

Constellation saw its fiscal second-quarter adjusted earnings per share rise an intoxicating 35.2% to $0.96 per share.

Wine and spirits actually declined through the three months, down a little more than 1% compared to 2012's second quarter. Coupled with a rise in grape prices, the company saw gross margins decline a bit, despite the substantial bottom-line improvement.

As one might guess, it was the beer that saved Constellation, and it did so in a big fashion.

Beer me
Constellation took over Grupo Modelo's U.S. beer business, Crown Imports, from Anheuser Busch In-Bev for $4.75 billion. Management has heralded the deal as "transformational" to Constellation's business. With doubled revenues and strong brand-specific numbers, the executives have reason for their elation.

Modelo Especial sales were up 18% year over year, leading the pack of quick-selling Mexican beers. Negra Modelo grew 6.3%, Corona Extra and Corona Light were both up by 3.9%, and Pacifico was down 0.4%. With the exception of Pacifico (I actually prefer this to Corona, for the record), it was an impressive quarter. What's more impressive is that, according to a beer trade group, total consumption in August alone dropped 2.1%.

The question now is: Has the market priced in all that is to be gained from the Grupo Modelo acquisition, or can the company continue to rise at rapid rates and beat the Street?

Tough call
At nearly 17 times forward earnings, Constellation is priced for good things ahead. It isn't too far beyond its peers, including Diageo at 15.6 times forward earnings and SABMiller at 16.85, but relying on beer sales to carry the company when other segments are falling flat is a bit disconcerting.

Management mentioned a plan to introduce new Mexican beers with higher alcohol content, as well as an effort to sell more kegs. Traditionally, beer companies source 10% of their sales from kegs. According to a Bloomberg Businessweek article, Constellation is at 2%.

Investors compelled by the resilient Mexican beer market may want to take a closer look at Constellation, but keep in mind, the market seems to have this one efficiently priced.

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