It might be a bumpy ride in 2021, but Constellation Brands (STZ 0.74%) should post another year of rising market share and increasing earnings. The alcoholic beverage giant behind some of the fastest-growing imported beer brands in the U.S. announced double-digit revenue gains to kick of its fiscal year.
In a conference call with Wall Street analysts, CEO Bill Newlands and his team explained why they're confidently pouring billions of dollars into upgrading their brewery network. They also explained why investors can expect rising cash returns from this growing business over time.
Let's look at the biggest takeaways from that call.
Image source: Getty Images.
1. Big plans for Corona hard seltzer
The beer business kept up its multiyear record of strong growth, with popular brands like Pacifico and Modelo Especial helping push overall depletions -- a measure of consumer sales -- up 11% in Q1. These higher-end imports are delivering most of the industry's growth today, and executives see many more years of potential gains ahead.
The company has bigger plans for the hard seltzer space that it just entered with the Corona franchise. Corona Hard Seltzer is the fourth-best-selling drink in that competitive niche, which is dominated by brands like White Claw and Boston Beer's (SAM -1.06%) Truly.
Constellation Brands is aiming to break into the top three with help from new flavors and additional innovative launches. "We believe the ... category will be dominated by a few large brands in the long run," Newlands told investors, "and we are positioning Corona Hard Seltzer to be one of those brands."
2. The wine business will recover
The wine and spirits division continued to be a drag on sales and profits in Q1 despite management's forecast for a solid rebound this year. The slump was driven by temporary challenges like supply chain hiccups and a transition to a new distributor, though. If you zoom into the core brands like Kim Crawford and Meiomi, meanwhile, investors should see lots of reasons to be excited.
These core growth franchises are winning share despite rising prices. That success implies Constellation Brands can hit its ambitious goal of over 30% operating margin for the division and significant annual growth that nevertheless trails the 10% or more that's likely from the beer unit. "Our transformation of this business to a higher-growth, higher-margin operation continues to gain traction," Newlands said.
3. Cash returns are a priority
Constellation Brands is expecting several major cost pressures over the next few quarters, including rising input prices and a writedown charge for a property in Mexico. These trends might help explain why investors have left the stock out of the market rally since mid-2020. This year is shaping up to be a building and investing year, with almost $1 billion slated to go into increasing brewer capacity.
But there's every reason to expect a return to rising margins from there. And in the meantime, executives confirmed their commitment to returning excess cash to shareholders by spending over $500 million on buybacks just this past quarter. The company is aiming to return about $5 billion in the three years ending in fiscal 2023 and already put a big down payment on that ambitious goal.
For investors who've been on the sidelines of this story waiting for an obvious wine and spirits rebound or wider legalization of recreational marijuana, you might consider buying the stock before there's clarity about these growth catalysts. The stock has underperformed the market in the past year, but that slump likely won't continue for long.
