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Can Beer Business Aid Constellation Brands' (STZ) Q2 Earnings?

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Constellation Brands Inc. (STZ - Free Report) is slated to report top and bottom-line results for second-quarter fiscal 2020 on Oct 3. Investors are optimistic about the beer business’s contributions, which has been a key growth driver for the company over the past several quarters. Furthermore, its constant brand-building efforts, acquisitions and innovation are likely to drive top and bottom-line growth in the quarters ahead.

However, investors are skeptical of the persistent softness in the company’s wine & spirits business. Additionally, impacts of adjustments related to loss from the Canopy Growth (CGC - Free Report) deal (mostly higher interest expenses) and other activities as well as the wine and spirits divestitures are likely to affect Constellation Brands’ bottom line in the quarters ahead.

Despite the pros and cons, this Zacks Rank #3 (Hold) stock has been displaying strong momentum, with shares gaining 1.5% in the past month compared with the industry’s 0.1% growth. Additionally, the stock has grown about 28.9% year to date, keeping it in investors’ good books.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 


With that said, let’s unwind on the potential of the company’s key segments and their likely contributions to earnings this time around.

Positive Trends in the Beer Business

Constellation Brands has been significantly gaining from strength in the beer business over the years. Solid portfolio depletions and market share gains mainly due to strength in the Modelo and Corona brand families are driving growth in this segment. Notably, the company is witnessing increasing market share in the U.S. beer category, driven by its brand-building efforts and product introductions.

Strength in the beer business gives the company an edge over its competitors, including the likes of Anheuser-Busch InBev SA/NV (BUD - Free Report) and The Boston Beer Company Inc. (SAM - Free Report) , which are witnessing soft volumes for their key beer brands in North America.

Recently, the company launched Corona Refresca in the Corona brand family. The brand has gained the entire commodity volume or ACV distribution of above 30 since its launch. In the summer selling season, the brand is poised for growth in the flavored malt beverage category.

Further, expansions across its business have been contributing to growth. In the beer segment, the company’s expansion plans are anchored by the Funky Buddha Brewery buyout; addition of Fathom IPA by Ballast Point Brewery; and expansions at the Nava, Obregon and Mexicali breweries. In fiscal 2019, the combined capacity for Nava and Obregon breweries reached 34 million hectoliters, with the completion of final 30-million-hectoliter capacity expansion at Nava Brewery. The fifth furnace at Nava is underway and is likely to produce glass by the end of calendar year 2019.

Additionally, the company expects the five-million hectoliter expansion at Obregon brewery to be completed by the end of fiscal 2021, ahead of the schedule (a year before the original timeline). The expanded capacities at Nava and Obregon breweries are expected to provide more than 400 million cases of beer, which are abundant supply for many years. Moreover, the Mexicali capacity expansion is estimated to be completed between fiscal 2020 and 2023. On completion, the project will represent nearly 10% of the company’s beer capacity in Mexico.

Beer Segment’s Q1 Performance

In first-quarter fiscal 2020, sales at the beer business improved 7.4%, marking the 37th straight quarter of growth. This was mainly driven by a 5.4% increase in shipment volume and 6.6% depletions growth. In fact, the company’s beer business was the most significant contributor to the U.S. beer market in first-quarter fiscal 2020, courtesy of gains at Modelo Especial, Corona Premier and Corona Refresca.

Overall Expectations

Management remains optimistic about fiscal 2020 results, owing to significant market share gains, operating margin expansion, strong free cash flow and solid execution. For fiscal 2020, the company envisions comparable earnings per share of $8.65-$8.95, up from previously mentioned $8.50-$8.80. In fiscal 2019, it reported comparable EPS of $9.28 and $9.34 (excluding Canopy). (Read More: Things You Must Know Before Constellation's Q2 Earnings)

The Zacks Consensus Estimate for the company’s earnings in fiscal 2020 is pegged at $8.36, indicating a decline of nearly 9.9% from the prior-year period’s reported figure. For the fiscal second quarter, the consensus mark for EPS is pegged at $2.62, suggesting an 8.7% decline from the year-ago quarter’s reported number.

The guidance includes the impact of the divestitures of nearly 30 low-end brands from the wine & spirits portfolio but excludes impacts of Canopy Growth equity earnings and gain or loss on the wine and spirits transaction. On a reported basis, EPS for the fiscal year is anticipated to be $4.95-$5.25, whereas it reported $17.57 in fiscal 2019.

Constellation Brands continues to anticipate net sales and operating income for the beer segment to rise 7-9% in fiscal 2020. Further, the company expects to complete the wine and spirits asset divestitures by the end of second-quarter fiscal 2020. Consequently, net sales for the wine and spirits business are estimated to decline 20-25%, with operating income likely to fall 25-30%.

For the beer segment, the Zacks Consensus Estimate for revenues in the fiscal second quarter is pegged at $1,624 million, which suggests growth of nearly 6.4% from the year-ago reported figure. Meanwhile, the consensus mark for the wine and spirits segment’s revenues in the fiscal second quarter is pegged at $710 million, reflecting an 8% decline from the year-ago quarter’s reported number.

Additionally, the company expects interest expenses to be $425-$435 million, including incremental interest expenses of $105 million related to the financing of the 2018 Canopy investment. Further, the company expects tax rate of 17% and weighted average diluted shares outstanding of approximately 195 million.

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