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We have maintained our long-term ‘Neutral’ recommendation on Constellation Brands Inc. (STZ - Analyst Report) with a target price of $55.00 per share. Our long-term recommendation is well supported by the Zacks Rank #3 (Hold).

Why Reiterate?

Constellation Brands’ strong portfolio of globally recognized brands and its focus on innovation have helped in strengthening its leadership position. The company is striving to find opportunities to expand its global footprint and increase its market share by acquiring new brands. Such strategies position the company strongly among competitors such as SABMiller plc and Molson Coors Brewing Company (TAP - Analyst Report).

The company’s initiatives to strengthen its foothold in the U.S. wine industry and increase its portfolio of brands are driving growth. This is well evident from the company’s recent acquisition of Grupo Modelo SAB de C.V.’s U.S. beer business from Anheuser-Busch InBev. Considering the positive impact of the recent acquisition of Grupo Modelo, management raised its earnings guidance for fiscal 2014 to $2.60–$2.90 per share from $2.55–$2.85 projected earlier.

Furthermore, owing to its strategic endeavors, Constellation Brands is witnessing steady depletion trends and an increasing market share in the U.S. wine and spirits category. Moreover, the company is increasing its distribution points in retail and effectively executing strategic merchandising initiatives to bolster sales.

However, we remain apprehensive about the stock’s future performance due to rising grape prices. We noticed that the grape harvest in 2013 remained weak for the third consecutive year, resulting in higher grape prices. We believe that the company might be unable to fully pass on the rising grape costs to consumers, which may consequently drag down its margins. In addition, Constellation Brands’ highly leveraged balance sheet may limit its financial flexibility.

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