Forget about oil prices, the housing boom, interest rates, and all the other economic bric-a-brac that fills the airwaves and financial press. People, by and large, like to drink. They'll drink to their success when times are good, and they'll drink to better days when times aren't so good. But history has shown pretty consistently that they'll keep on bending their elbows. That's means Constellation Brands
Second-quarter results from this maker of alcoholic beverages were pretty much on par with expectations. Sales climbed 15% to $1.2 billion, and gross margin improved despite some adverse costs for grapes. Performance at the operating line depends upon which number you choose to use -- strict as-reported operating margin fell a bit, but adding back various acquisition-related charges reverses that to a nice little gain. Likewise, reported net income grew only 2%, but so-called "comparable basis net income" rose 20%.
The top-line growth numbers concern me a bit. Without including the acquisitions of the Mondavi and Ruffino brands, total revenue growth would have been around only 3%. There was 5% base growth in branded wines, but the European business was flat and the Australian business was down 1% -- and that includes a sizable currency benefit. Elsewhere, beer sales were up 9% and well ahead of the industry, but growth in the sales of spirits slowed to just 2%.
As for other financial statements, inventories rose 23% on a year-over-year basis, while receivables growth was slightly below the revenue growth figure. The company ended the quarter with about $3 billion in debt, a sum that slightly exceeds shareholder equity. On a happier note, free cash flow through the first six months trended much higher than year-ago levels, though structural free cash flow growth is more on the order of 20%.
Constellation's history of acquisitions has long caused speculation on whether the company can grow without ongoing purchases. This quarter's 3% growth isn't going to dispel those concerns. I would say, though, that this is a business that should have meaningful operating leverage even when those acquisitions stop. Presuming that the company can maintain just single-digit revenue growth, debt reductions funded by cash flow and incremental operating improvements should allow earnings to continue to grow at a double-digit clip.
I do believe that this is a high-quality business in an attractive industry. But I'm not quite as sure that it's the greatest stock idea in the space. After all, there are plenty of choices -- a company like Central European Distribution
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).