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Constellation Brands Inc. (STZ - Analyst Report), the largest wine company in the world, is scheduled to release its fourth-quarter 2012 results before the opening bell on Thursday, April 5, 2012.

The current Zacks Consensus Estimate for earnings for the quarter is 38 cents a share. For the fourth quarter, revenue is expected at $633 million, according to the Zacks Consensus Estimate.

Third-Quarter Recap

Constellation Brands posted earnings of 50 cents per share for third-quarter 2012, missing the Zacks Consensus Estimate of 52 cents and declining over 24% from the prior-period level of 66 cents.

Sales in the quarter dropped 27% to $701 million from the year-ago quarter. The decline was due to the divestitures of the Australian and U.K. wine businesses. Sales also missed the Zacks Consensus forecast of $718.0 million.

The company’s organic constant currency net sales decreased 8% due to a decline in volume that stemmed from the overlap of distributor inventory build in the third quarter of fiscal 2011 as part of the U.S. distributor consolidation initiative.

Fiscal 2012 Outlook

The company expects its fiscal 2012 adjusted EPS in the band of $2.00 to $2.10 compared with $1.91 in fiscal 2011. The guidance factors in an interest expense expectation in the range of approximately $180–$185 million, an approximate tax rate of 27% and weighted average diluted shares outstanding of approximately 209 million.

On a reported basis, the company expects EPS in the range of $1.96-$2.06 compared with $2.62 in fiscal 2011.

Constellation Brands’ third-quarter release points to a $100 million growth in its free cash flow target for fiscal 2012, bringing the guidance to a range of $700 million to $750 million.

Zacks Consensus

The analysts covered by Zacks expect Constellation Brands to post fourth-quarter 2012 earnings of 38 cents a share, higher than 35 cents registered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between 34 cents and 42 cents a share.

For fiscal 2012, the Zacks Consensus Estimate stood at $2.05 per share, higher than the previous fiscal earnings of $1.91. The current Zacks Consensus Estimate for the fiscal ranges between $2.00 and $2.09 per share.

Agreement of Estimate

Over the last 7 and 30 days, no movement in estimates has been noticed either for the fourth quarter or for fiscal 2012.

Magnitude of Estimate Revisions

With no earnings revisions by the analysts over the last 30 days, the Zacks Consensus Estimates for the fourth quarter of 2012 and fiscal 2012 remained unchanged at 38 cents and $2.05 per share, respectively.

Surprise History

With respect to earnings surprises, Constellation Brands has topped the Zacks Consensus Estimate over the last four quarters in the range of flat to 34.6%. The average remained at positive 18.9%, suggesting that Constellation Brands has surpassed the Zacks Consensus Estimate by that measure in the trailing four quarters.

Our Take

We believe that the company’s strategic initiative of expanding its foothold in the U.S wine industry along with focus on brand building and promotion will accelerate its growth opportunities while strengthening its market position. Moreover, in an effort to generate strong margins, Constellation Brands is also focusing on higher priced segments across all key categories.

Moreover, the company’srecent stake sale in the Australian and U.K. businesses will help it to focus on organic growth of its brand portfolio, margin improvement, return on invested capital and free cash flow. During the last two years, the Australian and U.K. businesses were facing challenging market conditions, which were no longer consistent with Constellation Brands’ business strategy.

However, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by governments of respective countries. We believe any excise tax increase in future may have an adverse effect on Constellation Brands’ financial performance.

Above all, the company faces intense competition from other well-established players in the industry, including Beam Inc. , Brown-Forman Corporation (BF.B - Analyst Report) and Diageo plc (DEO - Analyst Report). Moreover, Constellation Brands also encounters competition from local and regional players in the respective countries. Consequently, this may dent the company’s future operating performance.

Currently, Constellation Brands holds a Zacks #2 Rank, implying a short-term 'Buy' rating on the stock. However, in the long term, we have a 'Neutral' recommendation on the stock.

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