Constellation Brands Inc. (STZ - Free Report) has been in investors’ good books, courtesy of its consistent earnings record, strength in the beer business and robust business growth plans. Additionally, the stock has been in talks for its $5-billion investment in the marijuana biggie — Canopy Growth (CGC - Free Report) . This confirms the Corona maker’s focus on building a global cannabis platform with Canopy, which should prove to be a lucrative opportunity.
However, this Zacks Rank #3 (Hold) company’s stock has been volatile lately due to lower demand for beer as well as headwinds related to increased costs and marketing investments, which are hurting margins. While the stock has moved down 17.5% year to date, it represents an outperformance compared with the industry’s decline of 25.3%.
Here are some factors that should bring back luster in Constellation Brands’ stock.
Strong Beer Business Amid Hurdles
Strength in Constellation Brands’ beer business has been a key growth driver for the past many years. Despite the softness in the U.S. beer market, the company’s beer business sales improved 10.5% in second-quarter fiscal 2019, driven by 8.7% rise in shipment volumes and depletions growth of 10.1%.
Solid portfolio depletions and market share gains mainly stemmed from strength in Modelo and Corona brand families. Further, the company witnessed significant momentum from the product launches, including Corona Premier and Familiar. Management continues to expect high-single-digit volume growth as well as 9-11% net sales and operating income growth for the beer segment in fiscal 2019.
Constellation Brands is expanding operations directed toward achieving business growth in both beer, and wine and spirits categories. In the beer segment, the company’s expansion plans are anchored by the acquisition of the Funky Buddha Brewery, a leading craft brewery in Florida; the introduction of Fathom IPA by Ballast Point Brewery; the Obregon Brewery acquisition, which will bolster its high-end Mexican beer portfolio; expansion of its Nava brewery in Mexico; and the construction of the East Coast brewery in Belleville, VA.
In the wine and spirits segment, the company has a strong pipeline of new brands like Black Box spirits, Robert Mondavi Selection Rum Barrel-Aged Merlot and Spoken Barrel, a Washington state red blend. The company also expanded the rose offerings to include Kim Crawford, Meiomi, Black Box, Band of Roses and Cheryl Smith brand.
Robust Q2 Performance, Strong View
Second-quarter fiscal 2019 results marked a return of the company’s earnings to its 14-quarter long record of positive surprises, after a miss in the previous quarter. It also has strong top-line trends, reflecting sales beat in 10 out of the last 12 quarters. Results were driven by higher sales at both beer, and wine and spirits segments. Strong depletions and shipment volumes in the beer business also aided results.
Management remains encouraged, marked by significant market share gains, margin expansion, strong free cash flow and solid execution. Consequently, it raised adjusted and GAAP earnings outlook for fiscal 2019.
The company envisions adjusted earnings per share of $9.60-$9.75, up from $9.40-$9.70 stated earlier. Further, Constellation Brands’ robust lineup of marketing and promotional activities supports the ongoing growth momentum of its portfolio, positioning it for growth through fiscal 2019.
Rising Costs Might Hinder Growth
Despite a strong quarter, Constellation Brands reported soft operating margins in second-quarter fiscal 2019, driven by higher transportation costs coupled with increased marketing expenses at both beer and wine segments. Comparable operating margin contracted 20 basis points (bps) in the reported quarter.
The wine and spirits segment recorded operating margin contraction of 20 bps due to higher cost of goods sold and increased marketing investments, somewhat mitigated by favorable pricing and lower SG&A expenses.
Soft operating margins remain a threat to the company’s overall profitability. Stiff competition, higher debt position and taxes are additional concerns.
While higher costs present a near-term headwind, Constellation Brands is well positioned for growth backed by these business plans and robust surprise trend. Further, the company’s long-term impressive earnings growth rate of 11% supports our view.
Two Better-Ranked Consumer Staples Stocks You Can’t Miss
Helen of Troy Limited (HELE - Free Report) has average long-term EPS growth rate of 6.1% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Estee Lauder Companies Inc. (EL - Free Report) , a Zacks Rank #2 (Buy) stock, is expected to witness average long-term EPS growth rate of 11.9%.
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