Constellation Brands (STZ 0.09%) investors had high hopes heading into its latest earnings update. The alcoholic-beverage giant has been winning market share despite huge demand swings around niches like hard seltzer. That success, plus the prospect for rising cash returns over the next several years, has attracted investors to the stock, which has outperformed the market so far in 2022.
Let's take a closer look at the first-quarter 2022 update and why it implies solid growth ahead for the business.
NYSE: STZ
Key Data Points
Sales trends
Sales trends held up well, especially considering all the volatility around consumer demand right now. Constellation achieved a 9% boost in depletions, a measure of sales to consumers, as it gained market share in both the premium and the broader beer segments. That boost marked a slight acceleration compared to the prior quarter's results.
Stand-out brands included Modelo Especial, which grew 15% in Q1, and Pacifico, up 21%. "We're pleased with our strong start to the fiscal year," CEO Bill Newlands said in a press release.
The wine and spirits segment was a drag on results, as it has been for more than a year. But trends improved there, too. Depletions grew, thanks to solid demand for pricier brands like High West Whiskey and The Prisoner Wine Company. Across the portfolio, overall sales were up 17%.
Profits and cash
Constellation Brands wasn't immune to the cost surge that has been hurting most businesses' profitability. Input, transportation, and labor expenses increase more than offset the impact of higher prices and reduced marketing spending. Operating margin declined by 2.6 percentage points in the beer division and 3.3 percentage points in wine and spirits.
STZ Cash from Operations (TTM) data by YCharts. TTM = trailing 12 months.
Overall, operating income rose just 10% to trail the company's 17% sales boost. But CFO Garth Hankinson focused on Constellation's cash generation, which is providing plenty of resources that management can direct toward high-return investments in the business. Operating cash flow was up 6% to $758 million, helping fund dividend payments and accelerating stock buyback spending.
Is Constellation a buy?
The best news in this report is that Constellation Brands is just as optimistic about the 2023 fiscal year as it was back in early April. The beer business is still on track to grow sales by between 7% and 9% and boost profits at a slightly slower rate. Management also affirmed their forecast for a return to profitability for the wine and spirits segment. Cash flow targets were all affirmed as well.
That update is great news for investors who were worried that Constellation Brands would reduce its sales targets due to softening consumer demand for pricier imported beers. It's a testament to the strength of its vertically integrated business that the company isn't reducing its earnings outlook, too, given that inflation has accelerated in the weeks following its last report in early April.
Overall, shareholders should be happy with this report as it shows the company is still growing and generating cash it can productively deploy into things like its Mexican brewery capacity upgrade. That project should deliver positive returns for investors over many more years, and that's just one more reason to like this growth stock right now.
