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Here's Why Constellation Brands (STZ) is Poised for Growth in 2021

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Constellation Brands Inc. (STZ - Free Report) is one stock that has been resilient in 2020 despite the headwinds posed by the coronavirus pandemic. The stock has shown momentum despite the pandemic-led turmoil mainly due to the company’s strong fundamentals, strength of its brands and endeavors to adapt to the changes in the market, particularly e-commerce investments and growth of hard seltzer.

These endeavors have not only aided stock performance but also helped maintain a robust earnings performance. The company boasts a solid earnings surprise trend, with the 11th consecutive earnings beat recorded in second-quarter fiscal 2021. Robust depletion growth at the company’s beer business, growth of off-premise sales and improved margins aided results. Moreover, the company’s premiumization strategy at the wine & spirits business is playing out well, as evident from accelerated growth of Power Brands in second-quarter fiscal 2021.

We note that shares of the Zacks Rank #3 (Hold) company have gained 11.9% year to date against the industry’s decline of 7.2%. Further, the company compares favorably with the Consumer Staples sector’s decline of 0.5%.

 

 

Why Constellation Brands is Well-Positioned for 2021

Constellation Brands is capitalizing on the shift in consumption to at-home occasions, with increased investments in the off-premise and e-premise (e-commerce) channels. Notably, e-commerce for beverage alcohol has expanded significantly, increasing three to four times in volume than the prior year. Moreover, two-thirds of consumers plan to continue their e-commerce purchases even in the post-COVID situation. The digital business is gaining share through platforms like Instacart, Drizly and other retailer online sites as consumers look for the convenience offered by these channels.

Driven by the accelerated e-commerce trend, Constellation Brands acquired Empathy Wines, which fits its premiumization strategy and also provides an avenue to strengthen its position in the direct-to-consumer, and three-tier e-commerce channel. Empathy Wines produces high quality and sustainably made wines that are sold directly to consumers through the e-commerce platform. This along with minority investment in the Booker Vineyard's business is likely to make e-commerce, including DTC, a key growth driver for the company’s business.

Additionally, Constellation Brands is well-positioned to cash on the boom in the hard seltzer category during the pandemic. The company’s Corona Hard Seltzer, launched in first-quarter fiscal 2021, racked up a 6% market share in the U.S. seltzer market. Constellation Brands is witnessing high Hispanic penetration rates for the brand versus other hard seltzers. Notably, the refreshment characteristics of seltzers combined with the Corona beer brand’s popularity is aiding the performance of Corona Hard seltzer. It is available in four flavors namely tropical lime, mango, cherry and blackberry lime.

Notably, hard seltzers have particularly gained popularity since the start of the pandemic due to its low alcohol content. Product innovation and increased brand launches have also played a crucial role in the growing penetration of hard seltzer.

According to Grand View Research Inc., the global hard seltzer market size was $4.36 billion in 2019 and is expected to reach $4.51 billion in 2020. Moreover, the hard seltzer market is projected to reach $14.5 billion by 2027, witnessing a CAGR of 16.2%.

Moreover, Constellation Brands has been significantly gaining from strength in the beer business over the years. In second-quarter fiscal 2021, the company’s beer depletions benefited from robust off-premise channel sales, which more than offset the 50% decline in the on-premise channel due to the coronavirus outbreak. Solid portfolio depletions and market-share gains mainly stemmed from continued strength in the Modelo and Corona Brand Families.

Although the company did not provide guidance for fiscal 2021, management expects product inventories to return to normal levels by the end of the fiscal third quarter. Moreover, the company’s long-term outlook for the beer business remains robust.

Also, Constellation Brands remains keen on reviving the performance of the wine & spirits business. The company’s wine & spirits premiumization strategy is playing out well, as evident from accelerated growth of Power Brands and strong margin performance in second-quarter fiscal 2021. Notably, the company’s higher-end wine power brands outpaced the U.S. high-end wine category in IRI channels. This growth was led by gains in Kim Crawford, Meiomi and The Prisoner Brand Family, all of which reported double-digit growth in IRI channels.

Additionally, the company is making investments to fuel growth of its power brands through innovation, capitalizing on priority, consumer trends, with successful product introductions. Some of the recent product launches include the Prisoner Cabernet Sauvignon and Chardonnay varietals, SVEDKA and High West ready-to-drink cocktails, Ruffino wine spritzer and Meiomi Cabernet Sauvignon.

Conclusion

Despite the qualms of the coronavirus pandemic on the company’s on-premise business, we believe the aforementioned strengths and investments position it well for continued growth in 2021. This is further supported by a VGM Score of B and an expected long-term earnings growth rate of 6.5%.

Don’t Miss These Better-Ranked Stocks

The Boston Beer Company, Inc. (SAM - Free Report) delivered an earnings surprise of 23.1%, on average, in the trailing four quarters. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

National Beverage Corp. (FIZZ - Free Report) , also a Zacks Rank #1 stock, delivered an earnings surprise of 28%, on average, in the trailing four quarters.

Molson Coors Beverage Company (TAP - Free Report) currently has a Zacks Rank #2 (Buy). The company has an expected long-term earnings growth rate of 3.7%.

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