The broader alcoholic beverage industry is enduring weak growth lately, but investors have still pushed Constellation Brands (STZ -0.04%) stock higher this year on hopes that its premium beer, wine, and spirits portfolio will generate market-beating earnings growth. The company delivered on that promise in fiscal second-quarter results this week that included a big jump in profitability as the company raised its profit outlook.
Image source: Getty Images.
More on that bubbly earnings forecast in a moment. First, here's how the big-picture operating results compare against the prior year:
|
Metric |
Q2 2017 |
Q2 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$2.08 billion |
$2.02 billion |
3% |
|
Net income |
$500 million |
$359 million |
39% |
|
Earnings per share |
$2.48 |
$1.75 |
40% |
Data source: Constellation Brands' financial filings.
What happened this quarter?
Constellation Brands benefited from a strong summer selling season in the beer segment, improved trends in the wine and spirits division, and rising profitability across its portfolio.
Key highlights of the quarter included:
- Beer sales sped up to a 12% pace from 8% in the prior quarter as the company soaked up market share over the summer months. While the Corona franchise usually does the heavy lifting in this segment, it was the Modelo brand that made the difference this time by logging 20% higher consumption.
- Operating margin jumped by over 4 full percentage points in the beer business, up to 41% of sales, thanks to lower production costs and increased prices.
- Sales trends in the wine and spirits segment improved to a 1% decline to keep that division on track to meet management's fiscal-year goals. Profitability ticked up by less than a percentage point to 26.2%.
What management had to say
Executives said that the company's focus on premium alcoholic beverages paid off handsomely during the quarter. Constellation Brands was responsible for 60% of the growth at the high end of the beer industry, in fact, and managed improving trends in wine sales. "We remain the leader in the high-end of the U.S. beer market," CEO Rob Sands said in a press release, "and we are reaping the benefits of our wine and spirits premiumization efforts."
"We gained market share, improved margins, continued to generate strong free cash flow and executed exceptionally well," CFO David Klein added.
Looking forward
That success gave management the confidence to boost its profit outlook for the second time this year. Sands and his team now see earnings ranging from $8.25 per share to $8.40, compared to the prior target of between $7.90 per share and $8.10.
Image source: Getty Images.
The midpoint of that guidance puts profits at $8.33 per share, which is above the $8.18 that Wall Street had been expecting. Constellation Brands still believes the beer business will expand by about 10% in fiscal 2018 while the wine and spirits segment grows at a more modest but still market-thumping 5% pace.
Looking further out, the company's Mexican brewery upgrades are proceeding as planned and hold great potential, given the early contribution that they're already making to profitability. Constellation Brands plans to invest about $1 billion on these plants, which will keep a lid on cash flow this year. However, that capital spending pace is slated to slow dramatically beginning in fiscal 2019, at which point annual free cash flow should reach a record $1 billion, or double the result from fiscal 2016.
