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Why a Hold Strategy is Apt for Constellation Brands (STZ) Now

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Constellation Brands Inc. (STZ - Free Report) has been resilient in a tough environment, driven by continued strength in the beer business, and robust shipment and depletion volume growth, which have been boons for its strong quarterly performance. The company’s premiumization strategy is also playing out well. Its focus on capitalizing on the hard seltzer boom has also been a driver.

Despite the tough comparisons due to the last year’s pandemic-led pantry-loading activity, the company’s beer business posted double-digit growth in shipments and depletion volume in first-quarter fiscal 2022. Sales at the beer business improved 14%, driven by an 11.3% increase in the shipment volume and 10.7% depletion volume growth.

Although shares of Constellation Brands fell 8.4% in the past three months, it fared better than the industry’s decline of 10.8%.

 

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In the past 30 days, the Zacks Rank #3 (Hold) company’s estimates for fiscal 2022 and 2023 earnings per share have been unchanged. For fiscal 2022, its earnings estimates are pegged at $10.04 per share, suggesting 0.7% growth from $9.97 reported in the year-ago quarter.

Factors Supporting Growth

Constellation Brands has been significantly gaining from strength in the beer business over the years. Solid portfolio depletions and market share gains in the beer business have been stemming from continued strength in Modelo and the Corona Brand Family. Depletion volume in first-quarter fiscal 2022 benefited from robust consumer demand in the off-premise channel as well as the return of the on-premise channel to growth. Depletion growth was also aided by more than 35% growth in Pacifico, which was the top share gainer in the import segment.

Depletions increased 12% for the Modelo Especial and more than 7% for the Corona Brand Family. The Modelo brand strengthened its position as the leader in the high-end category, becoming the No. 2 beer brand. It was also the largest share gainer in dollar sales in the U.S. beer category in IRI channels. The Corona brand depletions benefited from growth in Corona Premier, Corona Hard Seltzer and Corona Extra, leading it to be the No. 2 share gainer in IRI channels.

For fiscal 2022, the company expects net sales growth of 7-9% for the beer segment. The operating income for the beer business is expected to increase 3-5%.

Constellation Brands is also gaining from its efforts to revive the performance of the wine & spirits business. Accelerated growth for Power Brands in first-quarter fiscal 2022 reflects the benefits of the wine & spirits premiumization strategy. The company’s high-end Power Brands, including Kim Crawford, Meiomi and The Prisoner Brand Family, outpaced their respective price segments and gained a share in IRI channels. This along with gains from consumer-driven innovation initiatives aided the segment’s organic sales, which improved 16% in the fiscal first quarter.

The company is making investments to fuel growth of its power brands by capitalizing on priority and consumer trends, with successful product introductions. The company is lined up for impactful product launches in second-quarter fiscal 2022, including Saldo Red Blend, The Prisoner Unshackled sauvignon blanc, and Robert Mondavi Private Selection 100% in cabernet sauvignon and chardonnay varitals as well as the launch of Kim Crawford Illuminate.

Constellation Brands is one of the beer companies looking for opportunities in the hard seltzer category. It is on track with continued innovation and product launches to strengthen its competitive position in the hard seltzer category, broaden its distribution reach and enhance market share in the high-end of the U.S. beer market. The Corona Hard Seltzer, launched in early 2020, has achieved the number four position in the category and is currently the second-fastest-moving hard seltzer.

Management is also on track with its plans to invest in the next phase of capacity expansion in Mexico. This will help meet the potential demand for the high-end Mexican beer portfolio, including the emerging Alternative Beverage Alcohol sub-space, which includes hard seltzers. Per the plan, the company projected $700-$800 million expenses in order to support 15 million hectoliters of capacity expansion between fiscal 2023 and 2025.

Hurdles in the Path

Despite the premiumization efforts, Constellation Brands has been witnessing softness in its wine & spirits business for a while now. Out-of-stock conditions at some of the SKUs due to the impacts of global supply-chain logistics, route to market changes, and the company's transition to SAP hurt the segment’s sales in the fiscal first quarter. For fiscal 2022, net sales and operating income for the wine and spirits business are estimated to decline 22-24% and 23-25%, respectively. However, the company predicts organic sales growth of 2-4% for the wine & spirits segment.

The company’s earnings for first-quarter fiscal 2022 included the impacts of adjustments related to the loss from the Canopy Growth deal and other activities. Constellation Brands’ share of Canopy Growth’s equity earnings and related activities for first-quarter fiscal 2022 totaled a loss of $155.8 million on a reported basis and a loss of $44.3 million on a comparable basis.

For fiscal 2022, the company expects reported earnings per share, including the Canopy business, of $2.70-$3, down from $6.90-$7.20 stated earlier.

Better-Ranked Stocks to Watch

Helen of Troy Limited (HELE - Free Report) has a long-term earnings growth rate of 8%. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Heineken NV (HEINY - Free Report) , with a Zacks Rank #2 at present, has a long-term earnings growth rate of 25.3%.

Coca-Cola Europacific Partners ((CCEP - Free Report) ), also a Zacks Rank #2 stock, has a long-term earnings growth rate of 21.1%.