It has been about a month since the last earnings report for Constellation Brands (STZ - Free Report) . Shares have added about 3.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Constellation Brands due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Constellation Brands Beats on Q3 Earnings, Ups View
Constellation Brands delivered stellar third-quarter fiscal 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. With this, the company reported earnings and sales beat in the last eight consecutive quarters. Results were primarily aided by strength in the beer business and strong margins. Further, the company raised its earnings and cash flow guidance for fiscal 2020.
Constellation Brands reported fiscal third-quarter earnings of $2.14 per share, which outpaced the Zacks Consensus Estimate of $1.85. The reported figure included Canopy Growth equity loss of 25 cents. Excluding the Canopy effect, the company posted earnings of $2.39, which grew 1% from the year-ago quarter.
Net sales improved about 1% to $1,999 million and surpassed the Zacks Consensus Estimate of $1,955 million. At the company’s beer business, sales improved 8.3% to $1,310.6 million, driven by 6.8% rise in shipment volume and 7.3% overall depletion growth. Import beer depletion growth was 7.9%. Solid portfolio depletions and market share gains mainly stemmed from continued strength in the Modelo and Corona brand families.
Notably, depletions for Modelo Especial grew 15%, which was ranked the fourth beer brand in the entire U.S. beer category. Meanwhile, the Corona Brand family grew 7% in IRI channels on sustained strength of Corona Premier and Corona Refresca as well as renewed growth of Corona Extra.
However, sales at the wine and spirits segment declined 9.7% to $688.8 million in the fiscal third quarter. The downside resulted from a 13.5% fall in shipment volume and an 11.7% decline in depletions. Organic net sales for the segment fell 8.7%.
Adjusted gross profit grew 5% year over year to $1,045.9 million. Also, the adjusted gross profit margin expanded 200 basis points (bps) to 52.3%.
Constellation Brands' comparable operating income rose 5% to $644 million, while comparable operating margin improved nearly 120 bps to 32.2%.
Further, the operating margin at the beer segment increased 200 bps to 39.3%, owing to gains from favorable pricing and cost of goods sold (COGS), which were partly offset by higher marketing expenses. However, the wine and spirits segment’s operating margin contracted 80 bps to 26.2%, owing to higher COGS and SG&A expenses, as a percentage of sales, which was partly offset by mix benefits.
Constellation Brands ended the fiscal third quarter with cash and cash equivalents of $93.7 million. As of Nov 30, 2019, it had $11,339.7 million in long-term debt (excluding current maturities) along with total shareholders’ equity of $12,036.3 million.
In the first nine months of fiscal 2020, Constellation Brands generated operating cash flow of $2,076.3 million and adjusted free cash flow of $1,538 million, reflecting year-over-year improvements of 5% and 14%, respectively.
On Jan 7, 2020, the company announced a quarterly dividend of 75 cents per share for Class A and 68 cents for Class B stock. The dividend is payable Feb 25 to its shareholders of record as of Feb 11.
Driven by the strong free cash flow generated in the fiscal year so far, the company is on track to return $4.5 billion in cash to shareholders through share repurchases and dividends by fiscal 2022. Further, its debt reduction of $1.3 billion in the first nine months of fiscal 2020 keeps it on track to achieve its leverage target of less than four times.
As part of its wine and spirits transformation strategy, the company recently agreed to revise the terms of its original deal, pertaining to the divestiture of its certain wine and spirits business to E. & J. Gallo Winery. The Federal Trade Commission’s (“FTC”) competitive concerns related to the Sparkling Wine, Brandy, Dessert Wine and Concentrate categories prompted the revision of the deal. The transaction, subjected to the FTC’s approval, is now likely to conclude by fiscal 2020 end.
In a separate but related deal, the Corona brewer entered an agreement with E. & J. Gallo to divest its New Zealand-based Nobilo Wine brand and related assets worth $130 million. The transaction, which is likely to conclude in the first half of fiscal 2021, is subjective to the FTC’s and New Zealand’s regulatory authority’s approvals.
Further, Constellation Brands signed an agreement with Kings & Convicts Brewing Co. to sell the Ballast Point brand and related assets for an undisclosed amount. The sale will include Ballast Point-related production facilities and brewpubs (five in California and one in Chicago). However, Constellation Brands plans to retain the Craft & Specialty facility in Daleville, VA.
Fiscal 2020 Outlook
Management updated guidance for fiscal 2020. The company provided earnings per share projections on a GAAP basis and comparable (excluding Canopy) basis. Further, the guidance assumes the revised wine and spirits transaction to sell a portion of the business to E. & J. Gallo Winery to close at the end of fiscal 2020. Moreover, the separate but related agreement to divest the Nobilo Wine brand to Gallo is expected to close in the first half of fiscal 2021. The additional gain or loss from these transactions is not accounted for in the revised guidance. Proceeds from the transactions are expected to be used for debt repayment.
For fiscal 2020, the company now envisions comparable earnings per share (EPS) of $9.45-$9.55, up from $9.00-$9.20 mentioned earlier. In fiscal 2019, the company reported comparable EPS of $9.28 and $9.34 (excluding Canopy). On a reported basis, EPS for the fiscal year is anticipated to be 95 cents to $1.05 compared with 55-75 cents stated earlier. Notably, it reported $17.57 in fiscal 2019.
Constellation Brands now estimates 7-8% net sales growth for the beer segment for fiscal 2020, with operating income growth of 8-9%. Earlier, the company anticipated net sales and operating income growth of 7-9% for the beer segment.
Net sales and operating income for the wine and spirits business are now estimated to decline 8-10% mainly on the updated assumptions for the closing of the Gallo transactions. Earlier, the company anticipated a 15-20% decline in net sales for the wine and spirits business, with a 25% dip in operating income.
Certain other factors were also taken into consideration in providing earnings guidance. These include an interest expense expectation of $430 million. Further, the company expects tax rate of 97-99% and weighted average diluted shares outstanding of 195 million.
For fiscal 2020, Constellation Brands anticipates capital expenditure of $700-$800 million, with $560 million estimated to be incurred for the expansion of Mexico beer operations. The company now expects to generate operating cash flow of $2.2-$2.4 billion for fiscal 2020. Its free cash flow expectation for fiscal 2020 is now $1.5-$1.6 billion compared with $1.3-$1.4 billion mentioned earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Constellation Brands has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Constellation Brands has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.