A month has gone by since the last earnings report for Constellation Brands (STZ Quick QuoteSTZ - Free Report) . Shares have lost about 0.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Constellation Brands due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Constellation Brands Beats Q3 Earnings & Sales Estimates

Constellation Brands has reported third-quarter fiscal 2021 results, wherein the top and the bottom lines surpassed the Zacks Consensus Estimate. With this, the company has reported an earnings beat for the 12th consecutive quarter. Despite the impacts of the coronavirus outbreak, results were primarily aided by strong shipments across both segments as well as robust depletion growth at the company’s beer business. Moreover, it outlined its view for fiscal 2021.

Constellation Brands posted fiscal third-quarter comparable earnings of $3.09 per share, which increased 44% year over year and beat the Zacks Consensus Estimate of $2.41. Earnings on a reported basis, including Canopy Growth equity loss of 8 cents, were $6.55. Excluding the impacts of Canopy Growth, the company posted comparable earnings of $3.16 per share, up 32% from the year-ago period.

Net sales advanced 22% to $2,438.1 million and surpassed the Zacks Consensus Estimate of $2,271 million.

At the company’s beer business, sales improved 28% to $1,677.9 million, driven by a 27.1% increase in shipment volume and 12.3% depletion volume growth. Organic shipment volume rose 28%. Organic sales for the beer segment were up 30%. Depletion volume benefited from improved inventory levels and robust off-premise channel sales, which more than offset the 35% decline in the on-premise channel due to the coronavirus outbreak.

Solid portfolio depletions and market-share gains mainly stemmed from continued strength in the Modelo and Corona Brand Families. Notably, depletions for the Modelo Especial increased nearly 20%, while the Corona Brand Family witnessed 12% growth.

Sales at the wine and spirits segment increased 10% to $760.2 million in the fiscal third quarter. Further, organic net sales for the segment grew 13%. Moreover, shipment volume rose 3.1%, while depletions fell 0.8%. Organic shipment volume was up 6.5%. The segment benefited from double-digit growth at high-end Power Brands, including Kim Crawford, Meiomi and The Prisoner Brand Family, which outpaced the total higher-end wine category.

Margins

Adjusted gross profit increased 22.4% year over year to $1,280.5 million. Meanwhile, adjusted gross profit margin expanded 20 basis points (bps) to 52.5%.

Constellation Brands' comparable operating income rose 29.7% to $835.4 million, while comparable operating margin improved nearly 210 bps to 34.3%.

Further, the operating margin at the beer segment expanded 330 bps to 42.6%, owing to gains from lower marketing spend and SG&A expenses, as a percentage of sales, as well as Ballast Point divestiture. This was partly offset by higher cost of goods sold. The wine and spirits segment’s operating margin contracted 220 bps to 24% as unfavorable fixed cost absorption, resulting from wildfires and higher marketing costs, were partly offset by gains from favorable mix and price.

Financial Position

Constellation Brands ended the fiscal third quarter with cash and cash equivalent of $152.9 million. As of Nov 30, 2020, it had $10,416.1 million in long-term debt (excluding current maturities) along with total shareholders’ equity (excluding non-controlling interest) of $13,312.1 million.

In the first nine months of fiscal 2021, Constellation Brands generated operating cash flow of $2,363.6 million and adjusted free cash flow of $1,895.9 million.

On Jan 6, 2021, the company announced a quarterly dividend of 75 cents per share for Class A and 68 cents for Class B stock. The dividend is payable Feb 23 to its shareholders of record as of Feb 9.

The company’s board authorized a new share repurchase program worth $2 billion. It has $1.9 billion remaining under the current buyback program.

Other Developments

On Jan 5, 2021, Constellation Brands completed the previously agreed-upon deal to divest a portion of its wine and spirits portfolio to E. & J. Gallo Winery. The transaction included Constellation Brands’ brands priced at $11 retail and below, including certain related facilities located in California, New York, and Washington State.

As part of the deal, the company received an aggregate of $810 million from Gallo, including about $560 million of cash payment on closing and the prospect to receive up to $250 million in earnout payments, depending on the fulfillment of brand performance targets within a two-year period after closing. Moreover, the transaction price includes adjustments of nearly $220 million related to changes in inventory for which Constellation Brands already received the benefit.

Simultaneously, the company sealed its separate but related deal with Gallo to sell the New Zealand-based Nobilo Wine brand, and related assets and liabilities for $130 million. Additionally, it completed the divestiture of certain brands, related inventory, interests in contracts and liabilities of its grape juice concentrate business to Vie-Del Company.

Meanwhile, Constellation Brands received approval for the sale of the Paul Masson Grande Amber Brandy brand, related inventory and interests in certain contracts to Sazerac for $255 million. The transaction is likely to be completed in January 2021.

Outlook

Constellation Brands outlined its guidance for fiscal 2021. Including the effects of the Ballast Point divestiture, the company estimates net sales growth at the higher-end of 7-9% for the beer segment. Excluding the divestiture impacts, net sales are likely to be at the lower end of the aforementioned range. Operating income for the beer business is expected to increase 8-10%.

Net sales and operating income for the wine and spirits business are estimated to decline 9-11% and 16-18%, respectively. Depletions for the retained Power Brand portfolio, after the divestitures of wine and spirits brands, are expected to increase 2-4%.

Further, the company expects interest expenses of $390 million for fiscal 2021. Further, it anticipates tax rate of 21% and weighted average diluted shares outstanding of 195 million. The company expects no share repurchases for fiscal 2021.

Driven by the aforementioned factors, Constellation Brands estimates reported earnings per share of $10.30-$10.55, whereas it reported a loss of 7 cents in fiscal 2020. On a comparable basis, excluding the Canopy business, earnings per share are expected to be $9.80-$10.05.

Moreover, the company expects to generate operating cash flow of $$2.5-$2.7 billion for fiscal 2021, while free cash flow is estimated to be $1.7-$1.8 billion. Constellation Brands plans to incur capital expenditure of $800-$900 million in fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -29.33% due to these changes.

VGM Scores

Currently, Constellation Brands has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Constellation Brands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.