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On Apr 17, we downgraded the world’s largest wine company, Constellation Brands Inc. (STZ - Analyst Report), to Neutral following a weak bottom-line performance for the fourth quarter of fiscal 2013. Moreover, the stock currently has a Zacks Rank #3 (Hold).

Why Neutral?

A fall in the Zacks Consensus Estimate was witnessed after the company reported dismal bottom-line results for the fourth quarter on Apr 10. The quarterly earnings of 47 cents per share dipped 31.9% from the year-ago quarter, primarily due to higher product costs and shriveled margins. Gross and operating margins contracted 130 basis points (bps) and 40 bps to 37.9% and 19.2%, respectively. Following this, the estimate for fiscal 2014 declined 1.1% to $2.82 per share.

Further, we remain apprehensive about the stock’s future performance due to rising grape prices. We noticed that the grape harvest in 2013 remained weak for the third consecutive year, resulting in higher grape prices. We believe that the company might be unable to fully pass on the rising grape costs to consumers, which may consequently drag down its margins. In addition, Constellation Brands’ highly leveraged balance sheet may limit its financial flexibility.

On the flip side, despite decline in earnings, our long-term outlook on Constellation Brands remains positive based on its strong performance over the last several quarters. Going forward, we expect it to continue posting earnings as well as revenue growth in the coming quarters.

Further, we believe that Constellation Brands with its formidable portfolio of well-known brands, new product offerings and strategic initiatives to strengthen its foothold in the U.S., holds a promising future. Moreover, the company is enhancing its points of distribution at retail and is well-executing its strategic merchandising initiatives, which will help augment sales.

Other Stocks Worth Considering

Apart from Constellation Brands, other stocks worth considering are Macy’s, Inc. (M - Analyst Report), Conns Inc. (CONN - Snapshot Report) and Sears Holdings Corp. (SHLD - Analyst Report). All these companies hold a Zacks Rank #1 (Strong Buy).

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