Shares of Constellation Brands Inc. (STZ - Analyst Report) gained 6.3% in the pre-market trading session, as the company raised its fiscal 2017 outlook after posting yet another quarter of spectacular results. In second-quarter fiscal 2017, both earnings and sales saw double-digit year-over-year growth, alongside exceeding expectations. While the quarter marked the company’s eighth consecutive earnings beat in a row, Constellation Brands has surpassed sales estimates for six straight quarters now.
Results were backed by the company’s effective integration and growth of its recently acquired brands, higher margins across its portfolio along with strong consumer demand that was supported by superb marketing and sales strategies for its core, higher margin and premium brands. Further, strength in the company’s beer business, improving trends at its wine and spirits business and solid overall depletion trends helped the beat. The splendid quarter also prompted management to raise its fiscal 2017 outlook.
The company’s adjusted earnings for the second quarter of fiscal 2017 jumped 13.5% year over year to $1.77 per share, outpacing the Zacks Consensus Estimate of $1.66.
Net sales of this Zacks Rank #2 (Buy) company advanced 17% to $2,021.2 million, driven by strong organic sales growth and gains from the Meiomi, Ballast Point and Prisoner wine acquisitions. On a currency adjusted basis, consolidated organic sales grew 13%. Moreover, the top line exceeded the Zacks Consensus Estimate of $1,959.1 million.
Sales also benefited from strong volumes, favorable pricing and Ballast Point’s contribution, at the beer business – which drove 20% sales growth at the segment. Organic net sales for the segment grew 15%. The segment mainly benefited from strong consumer demand and solid market share gains by Corona Extra and Modelo Especial. Depletions at Ballast Point were outstanding, with double-digit growth witnessed in the second quarter. Notably, the beer business contributed 60% of the IRI category dollar growth for the U.S. beer space.
Wine and spirits’ sales improved 12% year over year, benefiting from the Meiomi and Prisoner wine acquisition and organic net sales growth. On a constant currency basis, organic sales were up 8%, mainly driven by increased volumes and a favorable mix. Further, Meiomi and Prisoner wine brands reported double-digit depletion growth in the quarter, while achieving solid distribution gains.
Cost and Margin Performance
Adjusted gross profit for the quarter surged 23% year over year to $971 million, while adjusted gross profit margin expanded 240 basis points (bps) to 48%.
Constellation Brands' comparable operating income escalated nearly 24% to $620.2 million, with the comparable operating margin expanding 180 bps to 30.7%. This was backed by solid operating income growth at both the beer (27%) and wine and spirits (17%) businesses. The beer segment gained from higher organic volume, effective pricing and gains from the Ballast Point acquisition, while growth at the wine and spirits segment was attributed to the Meiomi and Prisoner acquisitions, increased organic volumes and a favorable mix.
Constellation Brands ended the quarter with cash and cash equivalents of $177.3 million. As of Aug 31, 2016, the company had $7,021.6 million in long-term debt (excluding current maturities) and its total shareholders’ equity was $7,174.1 million.
In the first half of fiscal 2017, Constellation Brands generated $1,044.9 million in cash from operations and free cash flow of $676 million.
On Oct 4, 2016, the company declared a quarterly dividend of 40 cents per share for Class A and 36 cents for Class B shares. The dividend is payable on Nov 22, to shareholders on record as of Nov 8.
Concurrently, Constellation Brands announced a deal to acquire High West Distillery, for nearly $160 million, which is anticipated to close by October end. This Utah-based distillery boasts a robust portfolio of unique, award-winning premium American straight whiskeys and other spirits brands. Further, High West has achieved double-digit volume growth for three straight years now. Its addition to Constellation Brands’ kitty is likely to be profitable for the company by helping it enter and expand in the superior craft whiskey space.
Fiscal 2017 Outlook
Encouraged by a robust first half, management raised its adjusted earnings guidance to a range of $6.30–$6.45 per share, from $6.05–$6.35 projected earlier. On a reported basis, earnings per share for fiscal 2017 are now anticipated in the range of $6.25-$6.40, compared with $5.98–$6.28 guided earlier.
Further, the company now expects net sales for the beer segment to grow in the 16%–17% range, thereby raising the lower end of its previously announced 14%−17% band. Operating income at this segment is now anticipated to increase at the high teens level, compared with 14%−17% growth expected earlier. This outlook also accounts for the gains coming from the recent Ballast Point acquisition.
However, the company reiterated its wine and spirits’ sales and operating income view. Sales at this segment are still projected in the mid single-digit range, while operating income is expected to grow in the mid-to-high single-digit range, including gains from the Meiomi and Prisoner acquisitions.
Certain other factors were taken into consideration before providing the earnings guidance. These include an interest expense expectation of $325–$335 million, an approximate tax rate of 29%, and weighted average diluted shares outstanding of approximately 206 million.
The company now anticipates capital expenditure for fiscal 2017 in the range of $1.125−$1.225 billion, compared to $1.25–$1.35 billion expected earlier.
The company’s free cash flow expectation for fiscal 2017 now ranges from $375−$475 million, higher than the earlier estimate of $250−$350 million. Operating cash flow is still projected in the range of $1.5–$1.7 billion.
Other well-ranked stocks worth considering in the same industry include Castle Brands Inc. (ROX - Snapshot Report) , Molson Coors Brewing Company (TAP - Analyst Report) , with a Zacks Rank #1 (Strong Buy) each, and Craft Brew Alliance, Inc. (BREW - Snapshot Report) , with a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Castle Brands has seen positive estimate revisions for the current fiscal year over the past 60 days. The company is expected to report second-quarter fiscal 2017 results sometime next month.
Molson Coors has to its credit a long-term EPS growth rate of 6% and positive estimate revisions over the past 60 days.
Craft Brew Alliance, with a long-term EPS growth rate of 25%, has witnessed positive estimate revisions for 2016, over the past 30 days. Also, the company has an Earnings ESP of +6.25%.
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