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Constellation Brands Inc. (STZ - Analyst Report), the largest wine company in the world, is scheduled to release its first-quarter 2013 financial results before the opening bell on Friday, June 29, 2012.

The current Zacks Consensus Estimate for earnings for the quarter is 39 cents a share. For the first quarter, revenue is expected to be $644 million, according to the Zacks Consensus Estimate.

Fourth-Quarter 2012 Recap

Constellation delivered adjusted earnings of 69 cents per share in the fourth quarter of fiscal 2012, outpacing the Zacks Consensus Estimate of 38 cents and surging nearly two-fold from the prior-year period earnings of 35 cents. The year-over-year increase in the bottom line was primarily driven by benefits from negative tax rates and improved margins.

However, sales in the quarter dropped 12.2% to $628.1 million from the year-ago quarter. The fall was due to the divestitures of the Australian and U.K. wine businesses, partially offset by improved sales at North American business. Sales also missed the Zacks Consensus Estimate of $633 million. The company’s North American organic constant currency net sales increased 5% driven by improved volume and favorable product mix.

Apart from this, Constellation achieved a record free cash flow of $715.7 million during fiscal 2012, enabling the company to reduce debt, fund stock repurchases and make acquisitions.

Fiscal 2013 Outlook

The company expects its fiscal 2013 adjusted earnings in the band of $1.93 to $2.03 per share compared with $2.34 in fiscal 2012.

On a reported basis, the company expects earnings in the range of $1.89-$1.99 per share compared with $2.13 in fiscal 2012. Moreover, the company anticipates generating a free cash flow in the range of $425 million to $475 million.

Zacks Consensus

The analysts covered by Zacks expect Constellation to post first-quarter 2013 earnings of 39 cents a share, flat compared to the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between 38 cents and 41 cents a share.

For fiscal 2013, the Zacks Consensus Estimate stood at $2.00 per share, lower than the previous fiscal earnings of $2.34 per share. The current Zacks Consensus Estimate for the fiscal ranges between $1.95 and $2.04 per share.

Agreement of Estimate

Over the last 7 and 30 days, no movement in estimates has been noticed either for the first quarter or fiscal 2013.

Magnitude of Estimate Revisions

With no earnings revisions by the analysts over the last 7 or 30 days, the Zacks Consensus Estimates for the first quarter and fiscal 2013 remained unchanged at 39 cents and $2.00 per share, respectively.

Surprise History

With respect to earnings surprises, Constellation has topped the Zacks Consensus Estimate over the last four quarters in an average range of positive 34.6%, indicating that Constellation Brands has surpassed the Zacks Consensus Estimate by that measure in the trailing four quarters.

Our Recommendation

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 stake sale in the Australian and U.K. businesses will help Constellation 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.

In addition, we believe the company’s newly issued $600 million worth of senior notes along with $1,650 million of new senior credit facility will strengthen its financial position, and provide liquidity to pay its current maturities with ease while focusing on future growth prospects.

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 the 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 #3 Rank, implying a short-term Hold rating on the stock. In the long term, we have a Neutral recommendation on the stock.

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