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Constellation Brands Stays Neutral

STZ BEAM

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We maintained our Neutral rating on Constellation Brands Inc. (STZ - Analyst Report) with a target price of $38.00, as increased promotional and interest expenses continue to deter the profitability of the company.

However, it is encouraging to observe that the company’s continuous focus on brand building and initiatives to bring in new products in its wine and spirits business are furnishing favorable results. Owing to its strategic efforts, the company is witnessing robust depletion trends and increasing market share in the U.S. wine and spirits category.

Moreover, the company is enhancing its points of distribution at retail and is well executing its strategic merchandising initiatives that will facilitate it to augment sales.

Further, we believe that the acquisition of the remaining 50% stake in Crown will enhance the company’s market share in the booming U.S. beer market and will be significantly accretive to its earnings as Crown continues to deliver strong sales and profitability. Management stated that Crown’s performance has exceeded the U.S. beer industry, and the business generated $788 million in sales, up 8% during the reported quarter.

However, Constellation Brands’, which faces stiff competition from Beam Inc. (BEAM - Snapshot Report), posted second quarter adjusted earnings of 71 cents per share, which fell 8% from the prior-year quarter as higher promotional expenses and increasing interest expenses continue to deter the profitability of the company.  After witnessing flat sales in the first quarter, top line showed a marginal increase of 1% year over year to $698.5 million, and also came below the Zacks Consensus Estimate of $710 million. In the first quarter too, the company had missed the Zacks Consensus Estimate.

Moreover, Constellation Brands ended second-quarter 2013 with a long-term debt of $3928.7 million, reflecting a debt-to-capitalization ratio of 60%, which is substantially higher, and could adversely affect the company's credit worthiness and make it more susceptible to the macro-economic factors and competitive pressures.

Currently, Constellation Brands holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

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