Constellation Brands (NYSE:STZ) has morphed into far more than the wine and spirits specialist it was before it bought the U.S. rights to sell Modelo and Corona imported beers in 2013. And the business shift accelerated with the recent acquisition of a huge stake in cannabis specialist Canopy Growth (NYSE:CGC).
The company's third-quarter earnings report just demonstrated some of the big benefits of these strategic moves, but also the risks involved in targeting faster overall growth across several industry niches.
Beer is still booming
The good news is its core beer business is firing on all cylinders. Depletion, a measure of retail sales, expanded by 8% this quarter as the company continued its multiyear run at gaining market share. The Corona and Modelo franchises were standout performers again, helping shipment volume spike 14%.
Constellation Brands spent a bit more on marketing and advertising to support new launches including Corona Premier, the first national addition to that franchise in decades. These expenses were mostly offset by rising average prices, though. Overall, beer sales rose at a slightly faster pace than management had predicted, and cost growth was a bit more restrained than expected. "The results delivered by our beer business mark the highlight of our third quarter performance," CEO Rob Sands said in a press release. "The Modelo and Corona brand families continue to be on fire," he noted while citing healthy demand and distribution gains.
Wine and interest costs
On the downside, Constellation Brands ran into significant challenges in its wine and spirits segment. Depletion fell 3% overall compared to a flat result last quarter. Increased marketing spending and healthy demand in premium brands like Meiomi and Prisoner failed to offset weakness in its value-based offerings, priced at $11 per bottle or lower.
The company also took some charges related to its $4 billion Canopy Growth investment that closed in early November. Unrealized gains topped $1 billion since Constellation Brands' initial equity purchase a year ago. But recent swings in the share price triggered a $164 million noncash charge for the quarter. Investors can expect more volatility along these lines now that Constellation Brands owns over 35% of the weed giant with options to expand that stake to over 50%.
Sands and his team lowered a few of their operating targets to account for the latest trends. Beer sales are expected to be a bit higher than expected, or around 11%. The wine and spirits business is now on pace to decline for the year rather than rise by between 2% and 4%.
Higher interest expenses related to funding the Canopy Growth purchase will mean that core earnings should land between $9.20 and $9.30 per share instead of jumping to between $9.60 and $9.75 per share as executives had predicted back in October.
The company still plans to generate as much as $2.5 billion of operating cash flow and free cash flow of over $1.2 billion in 2019 despite making huge investments in expanding and upgrading its Mexican brewery network. That financial strength, plus the health of its core beer segment, means the business could be an attractive candidate for investors who've been waiting for a better entry point and want to take advantage of a post-earnings price drop.