Please ensure Javascript is enabled for purposes of website accessibility

Can Anything Stop Constellation Brands?

By Michael Lewis - Jan 10, 2014 at 3:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This beer and spirits company is outperforming its industry on every mark. Even after major stock gains, this one has room to run.

Booze giant Constellation Brands (STZ 1.62%) is having trouble doing anything wrong. The company, which owns a variety of brands from Corona to Robert Mondavi wines, has seen its stock rise more than 110% in 12 months. The best part is, the growth doesn't look to be ending anytime soon, as nearly all segments are showing strength -- even its big beer business. What is it that allows Constellation's brands to exhibit such resilience while many competitors are finding it difficult to maintain volume and growth? Let's take a look at the new earnings report for a hint.

Recap
In 2013, Constellation Brands was the top performer in the S&P 500 Consumer Staples index, and 2014 is off to a great start. The company grew its fiscal-third-quarter sales by an impressive 88%, mainly due to its recent acquisition of Grupo Modelo -- four Mexican beer brands that are among the best-sellers in the industry.

On a comparable basis (excluding restructuring charges) earnings went to $1.10 per share -- a gain of 83% from the prior year's quarter.

Net sales for the beer segment grew 23% due to demand for the aforementioned Mexican beers and normalized inventory levels at distributors. All the core beer brands saw volume increases. Investors should note that any increase at all is impressive, let alone double-digit increases. Though craft-beer mania has swept the nation, legacy beer brands have seen demand drop for several years.

It wasn't just beer that performed well -- the company's wine-and-spirits portfolio saw sales tick up a collective 3%. Wine outperformed the broader U.S. wine market, while bulk spirit sales sagged a bit.

Most encouraging to the Street was forward guidance. Constellation Brands expects $525 million to $575 million in free cash flow (giving it a P/FCF of more than 25 times at the high end) and a comparable full-year EPS between $3.10 and $3.20. In the prior year, on the same basis, the company earned $2.19 per share.

Despite this company's large size and status as the third-biggest beer company in the country, it is growing incredibly well.

Downside?
Thus far, Corona, though far, far from a craft beer, has followed the craft trend while the regular beer market has deteriorated over time. Demand, as reported, is up on all counts. This is due to great marketing (who doesn't like the idea of a Corona with lime?), smart business decisions (Corona is now available on draft), and perhaps an easily convinced American beer drinker.

If that image fades and American beer drinkers view the brands as more similar to the Buds and Millers, that beautiful double-digit growth could slow down quickly. At 20 times forward earnings, the company isn't expensive, but the market is certainly expecting a decent rate of growth in the coming years -- largely in response to the Grupo Modelo purchase.

This risk is speculative, though, and the company has only shown evidence of the opposite -- increasing demand. For growth seekers, this is very well-run company with a great eye for hitting the American demand sweet spot. Even after its precipitous rise, I'd consider an investment in Constellation Brands.

 

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$243.73 (1.62%) $3.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.