Constellation Brands (STZ) is an international producer and marketer of beer, wine, and spirits and has operations in the United States, New Zealand, Mexico, and Italy. The company’s brands include Corona Extra, Modelo Especial, Robert Mondavi, Kim Crawford, Meiomi, and SVEDKA Vodka.
The company has four reporting segments including Beer, Wine and Spirits, Canopy and Corporate Operations, and Other. Its beer segment consists of high-end imported beer, ABA brands, and craft beer. The Wine and Spirits segments consist of a portfolio of wine brands that are high-margin, high-growth, and are complemented by high-end spirits brands.
Constellation Brands also has an equity method investment in Canopy, a Canadian marijuana company.
STZ reported its Q1 FY22 results on June 30. The company reported net sales of $2.03 billion, up 3% year-over-year, slightly beating analysts’ expectations of $2.02 billion. Adjusted earnings per share (EPS) came in at $2.51, increasing 3% year-over-year and beating Street estimates of $2.32.
Outlook for FY22
The company raised its FY22 reported basis outlook for earnings per share to between $2.7 and $3, and the EPS outlook on a comparable basis ranging from $10 to $10.30. STZ affirmed an operating cash flow target of between $2.4 billion and $2.6 billion for FY22 and expects free cash flow of $1.4 billion to $1.5 billion.
The company intends to repurchase additional shares worth $500 million in Q2, and the raised FY22 guidance includes $1 billion worth of share buybacks. The company is still committed to repurchasing around $2.5 billion worth of shares through FY23.
Following the Q1 results, MKM Partners analyst William Kirk reiterated a Hold with a price target of $216 on the stock. Kirk stated in his research note to investors, “Lower expected share count more than offsetting greater expected interest expense is driving the raise in comparable EPS guidance.”
“While this isn’t the earnings beat Constellation has so reliably delivered, Beer shipments strength should be the major investor takeaway headed in the peak seasonality,” Kirk added.
Beer Business Segment
When it comes to its beer business, the company posted double-digit volume depletion growth of around 11% in Q1, driven by strong demand from consumers. The beer business produced revenues of $1,572 million in Q1 and made up approximately 78% of the company’s total revenues. (See Constellation Brands stock chart on TipRanks)
STZ’s Modelo Especial was the #1 brand in the high-end category and posted a depletion growth of 12%. The company’s other beer brand Pacifico reported a depletion growth rate of over 35%, and “was a top share gainer within the import segment.”
According to analyst Kirk, Modelo Especial is popular among consumers due to lower calories, strong demographics for the brand, and “brand authenticity”. The analyst is of the firm belief that Pacifico will follow in Modelo’s footsteps in terms of rising popularity.
Kirk added, “However, we still have near-term concerns, particularly around Seltzer innovation and potential Wine disruption from shifting distribution of one-third of volume.”
The analyst is not so optimistic about STZ’s Corona Hard Seltzer and opines that it will be difficult for this beer to gain market share in a crowded market. Kirk added that a delayed launch for Corona Hard Seltzer Limonada from May to June could “make it harder to form Limonada Summer drinking habits.”
Kirk also pointed out in his research report that capex is set to rise following the company’s failed Mexicali expansion. In FY17, STZ had started the construction of its Mexicali Brewery in Mexico. In March last year, a “public consultation” was held regarding construction of the brewery. Construction was halted after a negative result following the consultation.
The analyst expects advertising expenses to rise too and anticipates an “upside to FY’22 guidance reliant on surprise topline performance, which we envision as difficult.”
Consensus among analysts on Wall Street is a Strong Buy based on 13 Buys and 2 Holds. The average Constellation Brands price target of $271 implies approximately 16.8% upside potential to current levels.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
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