When hearing the name “Constellation Brands” (STZ), you may not really know what this company consists of.
However, it owns brands which you are probably very familiar with. These include alcohol brands like Corona, Modelo, SVEDKA Vodka, and more, as well as a 38.6% stake in the well-known weed retailer Canopy Growth Corp (CGC).
Operating mostly in the stable and predictable alcohol market, this makes it a defensive stock that could be good for investors seeking stability. We are Neutral on Constellation Brands. (See Analysts’ Top Stocks on TipRanks)
Growth Expectations
Constellation Brands focuses on premium alcohol brands. This is good because high-end alcohol growth has been outpacing that of low-end alcohol.
In terms of dollar sales for the 52-weeks ending May 16, 2021, higher-end wine grew 15%, higher-end spirits grew 23%, and high-end beer grew 19%.
In contrast, lower-end spirits saw growth of 7%, lower-end wine grew in the low single digits, and low-end beer experienced negative low single-digit growth.
For Fiscal Year 2021, Beer made up 71% of STZ’s sales, and Wine & Spirits made up 29% of sales. STZ recently raised its guidance for its Beer business. It now expects to achieve 9-11% sales growth, and 4-6% operating income growth for fiscal 2022. For the Wine & Spirits business, organic net sales are expected to grow in the 2-4% range on an adjusted basis.
Constellation Brands also has Corona Hard Seltzer, which will be a nice growth opportunity for them, because the hard seltzer market is expected to grow at a CAGR of 14.4% from 2021-26.
This is largely due to a rising preference for gluten-free, low-calorie, more “natural” drinks, as well as an increase in popularity for the flavors hard seltzers offer, such as black cherry and grapefruit.
Overall, analysts expect less than 1% EPS growth from now until February 2022. However, EPS growth of 18.5% and about 13% are expected for the next two years after that, respectively. This would give STZ a forward P/E ratio of about 16.4x when looking to February 2024, which is fairly priced in our opinion.
Constellation Brands Has a Competitive Advantage
We can measure Constellation’s competitive advantage by comparing its earnings power value to the value of reproducing the business.
This method of analyzing a business was made famous by Columbia University Professor Bruce Greenwald. Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value.
If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.
For STZ, the calculation is as follows:
EPV = EPV adjusted earnings / WACC
33.73 billion = 2.294 billion /0.068
Since STZ has total assets of about $25.3 billion compared to an EPV of $33.7 billion, the company is considered to have a competitive advantage.
This statement is further reinforced when looking at Constellation’s return on invested capital over the long run, which has steadily hovered in the 9-12% range since February 2014.
This stability proves that competitors have had a hard time chipping away at its returns. Also, since STZ’s return on capital is higher than its weighted average cost of capital of 6.8%, the company is considered to be a value creator.
Dividends and Buybacks
For investors that like dividends and buybacks, STZ is a company that does both. Keep in mind though, that its dividend yield is relatively low at about 1.4%.
About three years ago, the company made a goal to return $5 billion of value to shareholders through dividends and buybacks. So far, Constellation has achieved about 60% of this goal.
Returning capital to shareholders can sometimes be a bad thing if a company is doing it irresponsibly. However, STZ seems to be returning capital within its means, because its priority is still to reinvest in its operations and keep its leverage around the 3.5x range, according to management.
Wall Street’s Take
Turning to Wall Street, Constellation Brands has a Moderate Buy consensus rating, based on eight Buys, and four Holds assigned in the past three months. The average Constellation Brands price target of $256.25 implies 16.5% upside potential.
Final Thoughts
Constellation brands is a good company, with a competitive advantage that should enjoy modest long-term growth.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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