The profits from Constellation Brands' (NYSE: STZ) wine business offered a rich bouquet in the third quarter, although there remained a hint of refermentation as the Australian wine industry continued to deal with a glut of cheap exports.
The distributor is the largest wine maker by volume, more so now that it has acquired Fortune Brands' (NYSE: FO) wine business. Demographic trends are showing that wine and premium spirits are stealing market share from brewers like Anheuser Busch (NYSE: BUD) and Molson Coors (NYSE: TAP), as the younger folks dubbed "millenials" are willing to stumble home with a larger bill for the beverages they imbibe.
Spirit sales grew at an intoxicating 31%, with the help of Constellation's premium vodka Svedka, which grew 25% in the previous quarter and was again the fire behind the quarter's sales growth. Constellation also closed the remainder of the 50% joint venture that will add Effen vodka to its list of spirits. Of course, it's wine that gives Constellation its blush, and branded sales in that segment grew 12% to $911 million.
When comparing this year to last, it's apparent that Constellation has straightened out its wine racks. With the top line tumbling 27%, you might question that statement, but keep in mind the decline was actually the result of the company changing the way it accounts for its imported beer and Matthew Clark joint venture. The equity accounting method has Constellation showing only the profits earned from the part of the joint ventures it owns, while removing sales.
While Constellation has been tending to the many vines it has out there, its costs are rising as a result of acquisitions. It now finds it necessary to control those costs and says it will take charges in the next quarter to account for them, and accordingly lowered guidance slightly to a range of $1.33 to $1.38 per share, excluding one-time items.
At 12.5 times 2009 earnings, Constellation is on par with Fortune Brands, yet at enough of a discount to both Diageo (NYSE: DEO) and Brown-Forman (NYSE: BF-B) to be meaningful. As tastes and trends turn in Constellation's direction, it should mean a change in fortunes that's worth uncorking a bottle over.
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