Constellation Brands Wins on Beer, but Is It Still a Buy?

For $15 billion alcoholic beverage juggernaut Constellation Brands (NYSE: STZ  ) , the story remains much the same since the company completed its acquisition of Grupo Modelo's U.S. beer business one year ago -- quickly growing sales and increased market share. While much of the U.S. commercial beer industry is struggling with declining demand and volumes, Constellation's Mexican beer portfolio continues to grow in the double digits. Even in the cutthroat wine and spirits market, Constellation is growing volume market share. This company may simply be the best in the business.

Owning it
For the fourth consecutive year, Constellation Brands achieved market share gains at least by volume. For fiscal 2014, incremental sales were up more than $2 billion, largely due to the beer acquisitions. On a consistent basis, beer sales were up 10%, while wine and spirits posted a more docile 2%. The company's Focus wine brands, such as Rex Goliath and Mark West, led the way for the segment.

Free cash flow, one of the company's most appealing elements, was up over the $600 million mark for the just-ended budget year. Investors should note that, in the short term, free cash will be inhibited by an expensive renovation at the newly acquired Mexican brewery. Fiscal 2015 free cash flow is projected to be in the range of $425 million-$500 million. The total investment for the project has grown and could now top $1 billion. Still, this is a necessary investment in the company's prize assets. Investors should see attractive long-term returns from the short-term expense.

The road ahead looks great as Constellation continues to defy industrywide trends. The beer business, on a constant basis, is expected to grow operating income in the 10%-12% range (excluding brewery benefits), while net sales overall are targeted in the mid to high single digits for fiscal year 2015. 

Beer run?
A great business is not automatically a great investment, as many a Fool knows. Constellation certainly meets the mark for the first, but is it a great buy at current levels? On a trailing basis, the stock looks dirt cheap at under eight times earnings, but a two-year forward estimated earnings ratio of more than 17 times isn't a bargain for a mature industry.

Constellation can grow its earnings via market share grabs and improved operations in the wine and spirits segment (management hopes to see noticeable improvements this year), but maintaining the growth to justify a 17 times forward earnings ratio and more than 20 times trailing EV/EBITDA is difficult.

Constellation's stock is up nearly 280% over the past two years. There's no denying the strength of its operations, management, and portfolio of brands. Growth investors may be willing to pay the premium, but just make sure the business seems to have the juice to keep things chugging in the years to come.

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