Constellation Brands' (STZ +0.71%) stock popped to an all-time high recently after the company reported strong fourth-quarter results. Revenue and net profit were both up by double-digit percentages, and to top it all off, the dividend was raised.
But before you raise your glass to toast the alcoholic beverage purveyor's shares, you may want to listen to this segment from the Motley Fool Money radio show, in which Chris Hill, Andy Cross, Simon Erickson and Jason Moser explain why, despite its stock rally, Constellation might not be the fine vintage the market seems to think it is just now.
A transcript follows the video.
This podcast was recorded on April 8, 2016.
Chris Hill: Constellation Brands hitting a new all-time high this week after the beverage giant wrapped up the year with strong fourth-quarter results. Revenue and profits both up double digits, Simon. And speaking of dividends, they raised theirs.
Simon Erickson: You know, this story made me raise a couple eyebrows. Two eyebrows.
Andy Cross: How about a glass?
Hill: Do you have more than two?
Erickson: (laughs)
Cross: Just one?
Erickson: So, they acquired Prisoner Wine, which was an addition to Ballast Point, which it acquired last year, also. And all of these acquisitions they are making are immediately accretive to earnings, which looks great on the income statement. But it shouldn't be that easy for a brewery to just go out and immediately make acquisitions that are immediately accretive to your income statement like this. And, you look at this, and there are brands to these beers, but they're also loading up the balance sheet with a whole lot of goodwill. When a company goes out and pays a price to acquire a company that's larger than fair market value, you take goodwill on your balance sheet. That's an intangible asset. And goodwill is now 42% of the assets that are on Constellation Brands' balance sheet. So, I think there's a little bit of a risk to this strategy. It looks great from the income statement, and Wall Street applauded the news, but I'm a little wary.
Cross: Just for comparison's sake, Chris, anything above 40% is when a lot of fundamental investors start to think, "Mm, that may be a little too high."
Jason Moser: Yeah, we talk about goodwill a lot. I think we've probably run Microsoft through the ringer on this once or twice. But the problem with goodwill, it sits on the balance sheet forever, hopefully, and it's not a problem. But if it becomes a problem, and you have to take a writedown on that goodwill, if it's suddenly deemed that those assets aren't worth what they maybe once were, then that flows through the income statement and affects the company's earnings, and that's where the bad news starts coming in. So, it looks good now. It could be a problem later on. And that's the problem investors have to take into consideration.
Hill: But in general, this is the move of any beverage company, isn't it? It's, "We're going to acquire, we've got better distribution." We've seen this with the soda companies, why not with an alcohol company?
Erickson: It's in the brands. It's your perception of the brand and how successful that's going to be. There's a lot of play for Southern California, Ballast Point especially. Constellation is betting big on the move they're making that this brand will be successful. If it is, then yes, this could be a great acquisition. But I think we need to be a little bit cautious of that, at least, as investors.
