Constellation Brands (NYSE:STZ) recently reported its second quarter results, its first quarter since the acquisition of Grupo Modelo`s US beer business from Anheuser-Busch InBev (NYSE:BUD) for nearly $5 billion. Right out of the gate the beer biz is seeing success, with Corona showing 4%-5% growth and Modelo Especial showing 17% growth. Corona Extra posted its best summer ever. It appears Constellation Brands is able to create extra value for the beer brands that Anheuser was unable to. Perhaps Anheuser has gotten soft in regard to its marketing savvy.
The growth in beer sales is at least partially due to Crown's various successful marketing campaigns. These campaigns include the "Live it, Share it, and Win it" summer retail promotion and the accompanying TV advertising campaign. This new growth in the company's already-solid beer business allows it to create new opportunities. The earnings release reminded investors that "the perpetual brand license also includes certain brands and brand extensions not currently marketed in the U.S. by Crown and the freedom to develop new brand extensions and innovations." Opportunity for further growth awaits.
Innovation is key in the beer business
It's much easier to develop extensions of successful brands than starting over from scratch. Constellation clearly has big ideas for growth in this area. Constellation could possibly give Diageo (NYSE:DEO) a few pointers, so it wouldn't have to utter phrases during its conference calls such as "the weaker performance of our beer business." Diageo also stated in its July 31 conference call that "innovation in beer in the last 12 months has not been as successful as we'd like. We need to crack the code in beer."
Constellation's beer business is expected to expand to further distribution channels, and the company expects to see more growth. "Overall, we are well positioned to generate organic growth throughout the remainder of the year... Modelo Especial Chelada will roll out in key markets earlier this week and will be supported by national Hispanic TV advertising." Perhaps most encouragingly, "The draft beer opportunity for the Crown portfolio continues to have significant momentum with draft depletions increasing nearly 40% during the second quarter."
Beer is seasonal
Beer is most often consumed in the summer. Could Constellation's beer success just be a seasonal honeymoon period that will taper off in the cold months ahead? CFO Robert Ryder gave mixed signals. First he stated, "The beer business obviously is a summer business. But Christmas period is one of the higher periods for Corona because people tend to get better-quality products for their holiday parties, which tends to suit us. So we've had tremendous momentum in the summer. I wouldn't expect that to continue [the] balance of [the] year."
Obviously Constellation's beer business is far from invincible. Ryder warned later in the call that
...we'll be advertising with the NFL and with the NBA when they start out, right? But I wouldn't expect the current momentum to continue. It'll probably slow down a little bit, and it's -- I'll say it's in more off-season than the summer. Of course, our peak season starts with Cinco, right? We start a little bit earlier than everybody else and goes right through Labor Day, and then we cool down a little bit and then picks up again at Christmas.
Sounds like its beer business may wake up with a hangover after the New Year. What a buzz kill.
Look for beer innovations and follow the numbers
It's a dirty job, but somebody has to do it. I recommend investors look for new beer brands such as Modelo Especial Chelada being launched by Constellation and give them a try (if you're over 21). More importantly, even if not as tasty, investors should simply follow the numbers and the clues in conference calls and presentations as to how the new beer division is going. Success occurring this quickly could mean big growth ahead.
Constellation Brands looks priced for around fair value with a forward price-to-earnings ratio around 17, while Diageo has a forward P/E of around 16, and Anheuser-Busch has a forward P/E of around 18. The key to watch for is more evidence of earnings growing faster than expectations that could allow Constellation to justify a higher, possibly even much higher, valuation. Constellation looks like it has cracked the code in beer, but make sure to factor in seasonal adjustments when evaluating.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Diageo plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.