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Constellation Brands Earnings: Faster Growth and Expanding Cash Flow

By Demitri Kalogeropoulos - Jan 10, 2021 at 8:25AM

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Strong retailing demand from brands like Corona and Modelo offset plunging results at bars and restaurants in the third quarter.

Investors were optimistic heading into Constellation Brands' ( STZ -0.95% ) recent earnings report. The alcoholic-beverage giant's business had taken a hit from the COVID-19 pandemic, but its popular imported beer brands helped it grow through 2020 even as the major beer giants reported shrinking volumes.

Constellation Brands added plenty of fuel to that bullish investing thesis on Thursday. Let's take a closer look.

Market-share wins

Investors had been expecting continued market-share gains in the booming beer segment following last quarter's success, with brands like Modelo and Corona outpacing franchises from Anheuser-Busch InBev and Molson Coors. But Constellation Brands achieved a higher level of competitive success here.

A man putting beer in a shopping basket.

Image source: Getty Images.

Beer depletion, a measure of consumer sales, landed at 12% compared to 5% last quarter. That boost came entirely from at-home channels and offset a 35% slump in demand in the bar and restaurant segment.

The Modelo franchise was a standout performer, but Corona and Pacifico each logged stellar growth that put the brands in the same league as some of Boston Beer's biggest hits like Truly hard seltzer. "Our performance accelerated during the quarter," CEO Bill Newlands said in a press release, "despite ongoing headwinds from the pandemic."

Wine and spirits challenges

The wine and spirits segment, home to brands like Kim Crawford, Meiomi, and Svedka, had another soft performance as depletions fell 1% and operating margin shrank. But there was good news to mark in this area, too. The portfolio shift toward a smaller, more premium-focused offering was completed in Q3. Constellation Brands still expects to grow sales for this segment in fiscal 2021 while profit margin steadily climbs toward 30% of sales by fiscal 2023.

Except for that relatively weak division, most other trends are looking up for the business. Newlands and his team now see beer sales landing near the top of their prior forecast of between 7% and 9% growth. The beer division will get more profitable, too, thanks to rising prices and successful innovative launches like Corona hard seltzer.

Follow the cash

But the most attractive part of this business might be its knack for generating cash. Free cash flow jumped 23% to $1.9 billion this quarter, giving management plenty of ammunition to direct toward long-term growth initiatives like the Canopy Growth investment, upgrading capacity in its brewery network, paying down debt, or sending cash to shareholders through dividends and stock buybacks.

Constellation Brands' team has illustrated over the last decade that they can allocate capital in a way that rewards stock owners, whether through the major acquisition that brought its imported beer brands into the fold or through the billions spent in recent years on the brewery network.

Faster growth is therefore especially good news for investors because it accelerates profit gains while strengthening management's ability to make further bets on its premium beer, wine, spirits, and recreational marijuana portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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