Constellation Brands' (STZ 0.06%) business is close to firing on all cylinders again. The alcoholic beverage giant, which owns popular imported beer brands like Corona and Modelo, recently announced strong fourth-quarter sales and earnings results that gave the company excellent momentum heading into the new fiscal year. Financial wins also give Constellation Brands flexibility to invest in growth initiatives even while sending cash back to shareholders.
Let's take a closer look at those results, and why they point to solid returns ahead for patient investors.
Beer wins
Constellation Brands is seeing strong results in both its beer and wine segments, but these divisions are winning in different ways. In the core beer segment, market share growth has been key, with depletions, a measure of consumer sales, rising 6% in Q4.
The company won market share in the broader beer niche and performed especially well among higher-priced import beers. "The momentum of our iconic and next wave beer brands continued our...share gains," CEO Bill Newlands said in a press release.
That success was tempered by declining profitability as price increases trailed rising costs. Constellation Brands' margins in beer fell to 34% of sales from 39% a year ago.
A bottle of red
The wine segment didn't grow as quickly but did make progress in management's turnaround strategy. Overall depletions fell 5% in Q4 and declined by 3% for the full year. But the company's shift toward the premium end of the industry helped operating profit margin jump to 28% of sales from 22% of sales a year earlier.
STZ Operating Margin (TTM) data by YCharts
These successes contributed to an excellent financial showing by the broader business. Constellation Brands generated $1.7 billion of free cash flow for the year, up 3% from fiscal 2022, and core earnings rose 4%. Management demonstrated their priority of direct cash returns by spending $2.3 billion on dividends and stock buybacks over the past 12 months.
Looking ahead
Those cash returns might moderate slightly in the new fiscal year ahead as the company allocates more resources toward its brewery upgrades in Mexico. But there's still plenty for investors to like about Constellation Brands' fiscal 2024 outlook.
Specifically, profit margin declines in the beer business will lessen, according to management's forecast, even as sales growth approaches 10%. The wine and spirits segment will take another step toward sustainably strong earnings as sales decline by less than 1% and operating income rises by between 2% and 4%.
These forecasts could change as consumer spending patterns shift over the year, but Constellation Brands isn't likely to disappoint patient shareholders. Its hold on large parts of the beer market is growing, and the wine and spirits division is finally ready to start contributing to earnings following its multiyear restructuring process.
The stock isn't extremely cheap. Shares are trading for nearly 5 times annual sales, or about twice the valuation Wall Street is placing on Anheuser-Busch InBev today. Constellation's P/S ratio had been as high as almost 6 times sales in earlier phases of the pandemic, though. It's a good sign for future returns that this valuation has declined in recent months even as the growth stock improved on its sales and profitability trends.
