Analyst upgrades Constellation Brands to "Buy"

An analyst on Monday upgraded shares of Constellation Brands Inc. to "Buy" purely on the wine and spirit maker's valuation.

Stifel Nicolaus & Co. analyst Mark Swartzberg wrote in a note to clients Monday that he was upgrading the stock from "Hold" based solely on the valuation and the company's free cash flow, which "supports an intrinsic value well above current levels." He has a 12-month target share price of $16.

Shares of Constellation rose 28 cents, or 2.3 percent, to $12.49 in morning trading Monday.

Swartzberg wrote to clients that "little has been going well" in the company's portfolio of businesses, which includes more than 200 brands like Robert Mondavi wines and Arbor Mist in its drink portfolio.

But he is upgrading the stock on the belief that "embedded expectations" for the wine and spirits and imported beer business are too low. That includes expectations the company will earn little from the Crown imported beer joint venture after 2016, when its partner in the 50-50 enterprise, Modelo, can replace Constellation.

"We believe any upside to this bleak assumption represents potential upside to our intrinsic value estimate," he wrote.

Constellation owns half of Crown Imports, which imports Corona and other Modelo brands exclusively in the U.S. Modelo owns the other half and can replace Constellation with itself for a "nominal sum," Swartzberg wrote, after 2016.

Swartzberg said he would be surprised to see regulators allowing Modelo's buyout of Crown, since market leader Anheuser-Busch has a 50 percent stake in Modelo and controls nearly half the U.S. beer market.

He said one risk, though, would be the effect of proposals to increase federal taxes on alcohol. If the proposal were enacted, Swartzberg said an "extreme impact" would be a 14 percent downside to wine and spirits-related earnings per share, or about a 6 percent hit to the company's value since wine is about 45 percent of its portfolio.