Are the Stars Aligning for Constellation Brands?

Ever since Constellation Brands (NYSE: STZ  ) acquired Grupo Modelo's U.S. beer business from Anheuser-Busch InBev (NYSE: BUD  ) for nearly $5 billion, the company has been seeing unprecedented success. Perhaps it's a sign Anheuser-Busch InBev sold out too cheap, or worse, a sign of inept management. In any event, Anheuser-Busch InBev's loss is Constellation Brands' gain as it competes against other hot beer brands such as those from Boston Beer (NYSE: SAM  ) .

Constellation Brands results
On Jan. 8, Constellation Brands reported its third-quarter fiscal results. Net sales soared 88% to $1.443 billion. Operating income jumped 129% to $364 million. Diluted earnings per share rocketed 84% to $1.07. While much of the growth was due to the acquisition, Constellation Brands experienced great organic operating results due to successful execution as well.

CEO Rob Sands credited in part the momentum in sales of Corona and Modelo Especial coming from the summer months and continuing into the fall and holiday season. He pointed out that "new marketing campaigns" and "distributor execution" helped contribute to the success. The Nava brewery in Mexico also helped and "expansion activities continue to proceed." This implies that Constellation Brands fully expects higher demand and sales going forward.

In last quarter's report, Constellation Brands gave some details that foreshadowed this quarter's results. The company stated, "Overall, we are well positioned to generate organic growth throughout the remainder of the year ... Modelo Especial Chelada will roll out in key markets earlier this week and will be supported by national Hispanic TV advertising."

Not just beer
While all beer brands themselves experienced double-digit percentage volume growth, "continuing to significantly outperform the growth of the U.S. beer market," beer isn't the only thing leading Constellation Brands to stardom. The company saw wine sales accelerate throughout the quarter, which outperformed the U.S. wine market across all channels. For the full fiscal year ending in February, Constellation Brands expects to report earnings per share of between $3.10 and $3.20.

Conference call
During the call, Sands gave a bit more detail. Modelo Especial sales flew 18% and Corona Extra hopped up 6%. The company's draft business grew by 30% and is expected to grow even further as Corona Light draft is rolled out nationally following successful test markets. CFO Robert Ryder expects Corona Light to become the company's biggest draft brand. He points out that draft sales help increase case sales as well, since having the taps in front of the consumer helps with marketing.

Can it continue to rapidly grow beer?
You may be wondering if it's even possible for brands that have been around for a while like Corona and Modelo Especial to continue to grow rapidly. Look to Boston Beer for an example that says "Yes." Boston Beer has been brewing Samuel Adams beer for more than 30 years, but the brand is growing as if it were launched just yesterday. Last quarter, Boston Beer reported sales that leaped 30% to $216.1 million, and adjusted earnings per share popped 30.1%. In fact, demand was so great last quarter that the company actually ran into a shortage of beer and is struggling to expand capacity fast enough.

Foolish final thoughts
Constellation Brands is brewing up runaway success with its new brands in a way that the behemoth Anheuser-Busch InBev couldn't. This suggests a very well-run company that may be capable of more surprises. Constellation Brands deserves a closer look by Fools searching for a company with great numbers with the potential to surprise to the upside due to strong management.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2014, at 5:06 PM, safetymargin0 wrote:

    STZ Bought position for 5.3 billion . Costs in the last 10Q for 3Q 2014 were calculated with regard to a 3 year nonrenewable supply agreement . Not 1 analyst has seen that supply and service agreement with BUD ! No analyst has asked what will be the reported operating margin once the 3 year nonrenewable contract ends! As reported STZ reported 662 million of additional beer sales with only 94 million in Selling General and Operating expense ! That's cost line is subsidized or reduced to to the 3 year nonrenewable contract! The investors are now paying a large multiple for earnings which are non recoring beyond 3 years

  • Report this Comment On January 16, 2014, at 11:18 AM, TMalone wrote:

    What is Constellation without Crown?

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