Many good companies have built themselves through a series of acquisitions. Then again, many not-so-good companies have tried to do the same, only to fall apart when either their stock lost its buying power or they ran out of targets. It'll be interesting to see which camp Constellation Brands (NYSE: STZ) ultimately occupies.
For now, Constellation is primarily a collection of reasonably popular wine brands that seems to rely heavily upon acquisitions for growth. For the fourth quarter, reported revenue growth of 1% was offset with an organic revenue decline of 1% (both figures include currency impacts).
Reported operating income was up 9%, while the company's self-styled "comparable basis" operating income figure was up 2%. The reported 22% increase in net income was due to a tax benefit; assigning a consistent tax rate for the two periods results in growth of just 5%.
The more I follow Constellation Brands, the less confidence I have that it's a strong company or stock. First off, let me dismiss one idea -- that wine is a "fad," making Constellation Brands a fad stock. If wine consumption really were a fad, you'd see college kids involved, and you'd see a lot of dubious stocks rushing to the market -- something we've seen with microbreweries, cigars, and poker.
That said, two things about Constellation bug me, and the first is its apparent reliance upon acquisitions. I know that management says they don't need to do deals, but the history of the company and their present-day sales growth make me wonder. Second, if this were really such a great company/stock/business, why have its returns on capital been so average (actually, a bit below average) for so long?
I'm not here to try to encourage anybody to sell their Constellation stock -- if you like it and don't agree with me, by all means keep it. But by the same token, I've got to call this stock the way I see it, and I just don't see the strong bull case that so many others apparently do. I'd prefer to look at some of Asia or Latin America's distillers and distributors, or maybe Diageo (NYSE: DEO) and the slightly overpriced Central European Distribution (Nasdaq: CEDC).
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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