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Why Constellation Brands’ Run Isn’t Over Yet

Constellation Brands (NYSE: STZ  ) is up an impressive 80% this year due to its focus on strengthening its brand and introducing new products. It has been growing through acquisitions as well, leading to superior performance over peers such as Beam (UNKNOWN: BEAM.DL  ) and Molson Coors Brewing (NYSE: TAP  ) , and it's also beating the Dow Jones U.S. Brewers Index. 

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The purchase of its balance stake in Crown Imports, which has distribution rights in the United States for the highly imported Modelo beers (including Corona), has proven to be a smart move. In June, Constellation paid $4.75 billion for 50% of Crown's stake that it did not already own. 

Solid results
Constellation reported its second-quarter fiscal 2014 results recently, impressing analysts and investors. Net sales in the quarter almost doubled versus the year-ago quarter to $1.46 billion. The year-over-year increase in revenue was driven primarily by the consolidation of Crown's business.

The company's revenue from the beer segment increased 3.4% versus the year-ago quarter. The only downside in the reported quarter was a drop in organic growth in the wine and spirits business due to increased promotional expenses and lower spirits volume.

Weather variables have affected the cost and timing of the grape supply that goes into wine production. This resulted in a decline in wine and spirits gross profits because of the higher cost of grapes and the timing of shipments; in total it led to an increase in costs by 70 basis points. This resulted in a contraction of the gross profit margin to 40.3% of sales. Despite this, the company reported net earnings of $0.96 per share, which was 35.2% more than the year-ago quarter and comfortably ahead of the $0.89 estimate.

Constellation Brands also issued upbeat guidance for fiscal 2014. The company now expects fiscal 2014 adjusted EPS to be in the $2.80-$3.10 per share territory, compared with the $2.60-$2.90 per share that was previously projected.

The opportunity
As per Winemag, Millennials are driving wine demand, while the Boomers have remained loyal customers. The prospects look bright, as the global wine industry is expected to be worth $327.8 billion by the end of 2016; American wine drinkers account for a major share of this. In 2012, for the first time, America was home to 100 million wine drinkers. This number will continue to grow, according to a Wine Market Council (WMC) study.

To capitalize on this expected growth, Constellation plans to expand its Nava brewery. The company said that it would invest $500 million to $600 million over the next three years to double the brewery's capacity .

Constellation is the biggest wine producer in the world, with brands like Robert Mondavi, Clos du Bois and Manischewitz. It also owns spirits brands including Svedka vodka. This large and well-known portfolio of brands should help the company's growth as beer consumption increases.

Can Molson Coors and Beam do better?
Despite headwinds, Molson has managed to gain market share in key markets on the back of new launches and packaging innovations. Its second quarter adjusted earnings of $1.51 per share beat consensus estimates by 8.6% and were better than the year-ago earnings of $1.38 per share. The European and international markets were the primary drivers behind this improved performance.

Unfortunately, Molson Coors continues to expect weak consumer demand in the coming quarters due to macro-economic headwinds. The company has been on a decline for the past three years, though the acquisition of Starbev should reverse this trend.

On the other hand, for those who are on the lookout for possible merger and acquisition targets, Beam could be a stock to watch. Rumors are abound that Beam could be a takeover target as a part of the consolidation of the market. Beam is the owner of famous brands such as Jim Beam bourbon, Maker's Mark, and Sauza tequila. Rumors suggest that the likes of Pernod and Diageo might consider acquiring Beam .

It is reported that bourbon consumption has been increasing globally, and since Beam has a popular bourbon brand in its portfolio, it is a hot property in the market. As Fool writer Phillip Woolgar recently wrote, Beam's inventory is an advantage as premium bourbon needs a long aging process. Because of this, it would be quite a few years before Beam has any competitor in the market, and that's why investors should take a closer look at it.

The takeaway
As we saw, there are a few investment options in the liquor industry, but Constellation could turn out to be a high-growth pick. At a P/E of just 6.85, the company's stock is dirt cheap. Earnings are expected to grow an impressive 37% this fiscal year, followed by another 25% growth next year. For investors looking for a cheap stock that can deliver good returns, Constellation looks like a good company to own.

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