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On Jan 27, we downgraded the world’s largest wine company, Constellation Brands Inc. (STZ - Analyst Report), to Neutral with a target price of $80.00.

Why Neutral?

Though Constellation Brands posted overall strong third-quarter fiscal 2014 results, we are skeptical about the company’s future performance due the disappointing performance at its wine and spirit segment. The segment’s sales improved 3% year over year but increased promotion and marketing costs dragged its operating income. Moreover, Constellation Brands expects its wine and spirit operating income for fiscal 2014 to be in the range of flat to slightly negative.

Further, 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 dent its margins. Additionally, Constellation Brands’ highly leveraged balance sheet may limit its financial flexibility.

Nonetheless, we are impressed with Constellation Brands’ consistent focus on brand building and its initiatives to include new products in its wine and spirits businesses, which are the key revenue drivers for the stock.

Moreover, this Zacks Rank #1 (Strong Buy) has aggressively increased its beer business in the last one year by acquiring Crown Imports business and Grupo Modelo SAB de C.V.’s U.S. beer business from Anheuser-Busch InBev. Last quarter, the segment contributed nearly 46% to the total revenue.

Furthermore, we believe that Constellation Brands with its formidable portfolio of well-known brands, new product offerings and strategic initiatives to strengthen its foothold in the U.S., holds a promising future. Moreover, the company is enhancing its points of distribution at retail and is executing its strategic merchandising initiatives well, which will help augment sales.

Other Stocks Worth Considering

Other stocks in the consumer staples sector worth considering include Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report), The Hain celestial Group, Inc. (HAIN - Analyst Report) and ConAgra Foods Inc. (CAG - Analyst Report). All these carry a Zacks Rank #2 (Buy).

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