In the wake of giving up on Vincor, Constellation Brands (NYSE:STZ) uncorked the results for its fiscal second quarter on Thursday morning. Revenue rose about 17%, though the figure would have been just 6% without the benefit of acquisitions. Operating margins expanded, and net income grew from last year.
The amount of that growth deserves a little discussion, though. As reported, net income was up about 12%, but according to the company's self-made "comparable basis" calculation, income was up 25%. Now, I give the company full marks for how clearly it discloses its comparable basis numbers -- you can look at the bottom of the earnings release and decide for yourself which numbers should really be excluded or included. Personally, I think the notion of comparable basis earnings is silly -- they want to include the revenue that comes from acquisitions, but exclude the costs that go with them. Sorta like "heads I win, tails you lose," don't you think?
This quibble aside, let's examine the business units' performance. Wine sales were up about 19% as reported; they would have been up about 6% without the acquisitions of Mondavi and Ruffino. Interestingly, pro forma growth (including the year-ago results of the acquired companies) was roughly 4%, or 6% if you exclude brands that Constellation has since disposed of.
Beer sales were strong, up about 12% despite ongoing flatness in the market and sluggish growth from the likes of Motley Fool Inside Value recommendation Anheuser-Busch (NYSE:BUD). Spirit sales, though, were up only 1%; they've gotten weaker (in terms of annual growth rates) each quarter since I first began following the company. Accordingly, I'll be paying a bit more attention to upcoming releases from the likes of Fortune Brands (NYSE:FO) and Motley Fool Income Investor pick Diageo (NYSE:DEO) in the hopes of getting a better handle on what's going on in this market.
All in all, Constellation is a very good company with a few blemishes -- sort of like a cover girl that needs a little airbrushing. The returns on capital aren't yet as high as they should be, but this business could produce some very solid cash flow in the future. Though it doesn't look like a value to me at this price, it's certainly one to keep watching.
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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).
