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Why is Constellation Brands (STZ) Up 2.8% Since Last Earnings Report?

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It has been about a month since the last earnings report for Constellation Brands Inc (STZ - Free Report) . Shares have added about 2.8% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is STZ due for a pullback? 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 Tops Q4 Earnings, Guides for FY19

Constellation Brands delivered robust fourth-quarter fiscal 2018 results, wherein both the top and bottom line topped estimates and improved year over year. Notably, this marked the 14th consecutive quarter of earnings beat for the company. Further, it provided an upbeat outlook for fiscal 2019.

Q4 Highlights

The company’s adjusted earnings for fourth-quarter fiscal 2018 rose 28% year over year to $1.90 per share, surpassing the Zacks Consensus Estimate of $1.74. Reported earnings were $4.64 per share, up 105% year over year.

Net sales improved 8% to $1,765.9 million and topped the Zacks Consensus Estimate of $1,757 million. Moreover, organic sales grew 10%.

Sales at the company’s beer business improved 11.9%, driven by 10.2% rise in shipment volumes and depletions growth of 11%. The solid portfolio depletions mainly stemmed from the strength in Modelo and Corona brand families with the rise in depletions of 18% and 16%, respectively. During the quarter, the company gained from the launch of Corona Familiar new packages in regionally expanded markets, which positioned it among the top 10 high-end beer share gainers alongside Modelo Especial, Modelo Chelada Tamarindo Picante and Pacifico.

Wine and spirits’ sales advanced 4.3% due to a 4.3% fall in shipment volumes, offset by 2.1% higher depletions. Organic sales for the segment rose 7.6%, driven by mix benefits, particularly due to strong Meiomi volumes. Further, the company’s focus wine brands reported 7% depletion growth, backed by marketing investments. This resulted in depletion growth of 24%, 18%, 16% and 10% at Meiomi, The Prisoner, Black Box and Ruffino brands, respectively.

Margin Performance

Adjusted gross profit improved 11% year over year to $869.1 million. Adjusted gross profit margin expanded 90 basis points (bps) to 49.2%.

Constellation Brands' comparable operating income grew nearly 10% to $544.5 million with the comparable operating margin expanding 40 bps to 30.8%. This growth was backed by the operating income improvement in both the beer and wine segments. Operating income for the beer segment gained from solid operating performance and favorable pricing while favorable mix aided the wine and spirits’ business performance.

Financial Position

Constellation Brands ended fiscal 2018 with cash and cash equivalents of $90.3 million. As of Feb 28, 2018, it had $9,417.6 million in long-term debt (excluding current maturities) and total shareholders’ equity was $8,062.7 million.

In fiscal 2018, Constellation Brands generated $1,931.4 million in cash from operations and $873.8 million from free cash flow.

The company’s solid cash flows and financials provide it with the flexibility to pay dividends. Incidentally, on Mar 28, 2018, it announced a quarterly dividend of 74 cents per share for Class An and 67 cents for Class B shares, reflecting an increase of 42%. This dividend is payable on Mar 24. The company also increased the dividend payout ratio target to 30%.

Further, it repurchased 3.7 million shares for $800 million in the fourth quarter and 4.8 million shares for $1.04 billion in fiscal 2018.

Fiscal 2019 Outlook

Management remains encouraged with superb results, which was marked by significant market share gains, margin expansion, strong free cash flow and solid execution. Consequently, it provided an upbeat outlook for fiscal 2019.

The company envisions adjusted earnings guidance of $9.40-$9.70 per share for fiscal 2019. On a reported basis, EPS for fiscal 2018 is anticipated to be $9.38-$9.68.

It expects net sales and operating income for the beer segment to grow 9-11%. Moreover, sales and operating income for the wine and spirits segment is expected to improve 2-4%.

Certain other factors were taken into consideration in providing the earnings guidance. These include an interest expense expectation of $355-$365 million, an approximate tax rate of 19% and weighted average diluted shares outstanding of approximately 197 million.

The company anticipates capital expenditure for fiscal 2019 to be $1.15-$1.24 billion with roughly $900 million estimated for the expansion of Mexico beer operations.

The company’s free cash flow expectation for fiscal 2019 lies around $1.2-$1.3 billion. Operating cash flow is projected to be $2.35-$2.55 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.

VGM Scores

At this time, STZ has a nice Growth Score of B, though it is lagging a lot on the momentum front with an F. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

The company's stock is suitable solely for growth based on our styles scores.

Outlook

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


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