The documentary How Beer Saved the World lays out the important role the beverage has played in the development of civilization, from math and poetry to modern medicine. And no less a luminary than Benjamin Franklin was purported to have said, "Beer is proof that God loves us and wants us to be happy."
Whatever the truth behind both the history lesson and the apocryphal Franklin story, beer is making a comeback and Constellation Brands' (STZ 1.34%) latest quarterly numbers point to it fermenting bigger expansion possibilities than either wine or spirits, up till now the headline-grabbers for growth.
Like a cask of skunked beer, sales of the barley, malt, and hops mix have flagged for the past few years,and it was only in 2012 that sales ticked up again by 1%. Even Samuel Adams brewer Boston Beer saw sales of its flagship beer snap back sharply higher last quarter following several years of declining volumes, though management itself isn't sure if it's a one-off result or the start of a new trend.
Still, Constellation, having acquired Crown Imports and its Modelo and Corona brands from Anheuser-Busch InBev (BUD 2.24%) last June, continues to see its profits cup runneth over. Beer segment sales were up 3% year over year, but operating profits soared 60% from the prior period. This led the adult beverage giant to revise its earnings forecast, now anticipating adjusted earnings between $2.80 and $3.10 per share in 2014, well ahead of its prior guidance of $2.60 to $2.90 per share, which itself was raised from $2.55 to $2.85 per share. Analysts, who have yet to catch up to this growth story, were expecting earnings of $2.83 per share.
The effort is all the more noteworthy because other brewers are having a hard time replicating the success. Anheuser-Busch, for example, recently said poor weather hurt U.S. selling-day-adjusted sales to retailers, which fell 2.3%, and Molson Coors may want to sever its Canadian partnership with SABMiller if it can't get MillerCoors beer volumes to improve.
So, beer's improved outlook has had more to do with the craft-brew movement than the mass-produced beers. That could explain Constellation's success since the Mexican imports are not on the same level as a Bud or a Coors Light. And like the growth of craft beers and the recent explosion in hard cider, Constellation sees the opportunity to jigger sales by crafting new tastes it can profitably exploit, including a recently announced clam-and-tomato concoction.
Beer, it seems, is not only good for the world, but Constellation, too. Yet that points to the underlying weakness this past quarter of the company's wine and spirits business, a surprising development considering the strength vintners and distillers have enjoyed. Beam reported a spike in American whiskey sales last quarter, while Jack Daniel's maker, Brown-Forman, is anticipating enough growth that it's embarking on a major expansion program.
Constellation says it anticipates its own non-beer sales to pick up in the back half of its fiscal year and that the segment's underperformance this time around was merely a matter of timing. Even so, it previously said it expects the segment to only match industry growth next year rather than leading the category because higher grape costs are meeting consumer resistance in having higher prices passed along.
Still, there should be some star power evident for Constellation as beer, wine, and spirits come together. With shares trading at 17 times expected earnings growth, a discount to both Brown and Beam -- though at a slight premium to my favored Diageo -- this may be a stock you'd want to raise your mug to and put in your portfolio.
