Back in February 2002, I recommended Constellation Brands (NYSE:STZ) in Motley Fool Select, which is now Motley Fool Hidden Gems. Since then, the distributor of beer, wine, and spirits has grown into the largest wine producer in the world. The stock price has grown also, up about 40% for the period versus a flat S&P 500.
Yesterday's third-quarter earnings statement and conference call is rather a mess to dig through, with results reported not only on a GAAP basis, but also on a comparable basis (excluding restructuring and unusual items), a pro forma basis (including results from the $1.4 billion BRL Hardy acquisition as if it were owned a year ago), and an organic basis (excluding Hardy results).
Our mission is to sift through all this and try to nail down a reasonably accurate growth rate. Net sales increased 34%, to $987 million, thanks to the addition of the Hardy results, but just 11% on a pro forma basis -- which includes a 4% bump due to favorable currency exchange rates. GAAP earnings were up 6% to $0.73 per share, while pro forma earnings jumped 16% to $0.80 per share.
Shining through all those numbers is the fact that free cash flow has moved ahead at a nice 14% clip this year, which just happens to be right at management's near- to mid-term target of 15%. Compare that to a price-to-free cash flow multiple of roughly 18 and the price seems somewhat reasonable.
On the other hand, the enterprise value-to-free cash flow ratio -- which takes into account a company's long-term debt and cash -- currently sits around 29. That's not nearly as reasonable. (Check out Jeff Fischer's Joy of Free Cash Flow for more on these concepts.)
Management will release estimates for fiscal 2005 some time next month. It will be interesting to see what kind of growth we can glean from that information.
Rex Moore owns shares of Constellation Brands.
