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Can Constellation (STZ) Keep The Party Going: Earning BMO Thursday

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Constellation Brands (STZ - Free Report) has been performing far above the public alcoholic beverage market for the past 5-years. This year alone, STZ has demonstrated over 28% share price appreciation, outpacing the already strong alcohol segment, which has returned investors an aggregate 18.6%. We will see if STZ can keep the drive alive in its earnings release expected before market open Thursday, October 3rd.

STZ is typically a big mover on earnings reports with the last 6 quarterly releases having an average price impact of 5.9% (4 up, 2 down). Zacks Consensus Estimates for Q2 consist of an EPS of $2.62 on sales of $2.34 billion. This would represent an 8.7% EPS decline, a 1.7% sales increase and Constellation’s strongest sales since its inception.

STZ rarely misses on EPS estimates but when they do it typically has an adverse effect on the company’s immediate share price.

The Business

Constellations is a leading beer, wine, and spirits producer in North America. Its most recognizable products are its Mexican beer collection, which includes Corona, Modelo, and Pacifico. The company’s most identifiable spirits include Svedka and Casa Noble.

Constellation has been focusing on high-end alcohol products that produce higher margins and more substantial growth. The firm sold off more than 30 lower-end wines and spirits for $1.7 billion back in April to concentrate on its premium products.

Constellation Brands is betting on the future of the marijuana business with is substantial investment in Canopy Growth (CGC - Free Report) , the largest publicly-traded cannabis company in the world. STZ has invested more than $7 billion into CGC for 38% ownership. This venture diversified the firm’s future bets and positioned them as an early mover in a segment that has prolific expectations.

Constellation has a diverse portfolio of recreational products that will continue to be a party starter and mood lifter as alcohol consumption trends remain on STZ’s side.

Constellation is a consumer staple that will remain robust in times of economic downturns. Alcohol consumption may even increase in periods of economic uncertainty as consumers look for a way to relieve their anxiety.

Industry

Alcohol consumption has increased among millennials as more and more of them have kids. Millennials on average consume 29 drinks per month, which is an over 20% increase from 2013, where the figure was around 24 drinks. I expect that this trend will continue as a growing number of millennials feel the stressors of adult reality.

The cannabis industry is only beginning to scratch the surface of its potential. An increasing number of states are legalizing marijuana, with 12 states having already fully legalized the drug. The haze over the US is taking hold, and I expect that it will be federally legalized in the next 5-10 years, if not sooner.

The cannabis market value for 2018 in the US was $11.3 billion and is anticipated to have an impressive CAGR of 14.5%, according to Grand View Research. Constellations ownership of the leading cannabis producer positions it well to take on this enormous US demand.

Take Away

Constellation Brands is outpacing the rest of the industry with its strategic positioning and operational excellence. This will only continue as management continues to grow this firm out organically and through tactical acquisitions.

Earnings before the bell this Thursday will illustrate whether Constellation can keep the party alive. Estimates are typically conservative and could produce a sizable upside. Look for management’s guidance and sentiment for more clues into STZ outlook. I see this stock as an excellent long term play with its market immune characteristics and cushy 1.5% dividend yield.

 

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