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3 Reasons Why Constellation Brands (STZ) is a Solid Pick
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Constellation Brands Inc. (STZ - Free Report) is one of the stocks that have been doing well in the pandemic-ridden market, owing to strong fundamentals, the strength of its brands and endeavors to adapt to the changes in the market, particularly e-commerce investments, and growth of hard seltzer. The endeavors have not only aided its stock performance but also helped maintain a robust earnings performance.
The company’s top and bottom lines beat the Zacks Consensus Estimate and improved year over year in the third quarter of fiscal 2021. With this, it reported an earnings beat for the 12th consecutive quarter. Despite the impacts of the coronavirus outbreak, results were primarily aided by strong shipments across both segments as well as robust depletion growth at the company’s beer business.
Moreover, it benefited from strong margins in the fiscal third quarter, which helped deliver earnings-per-share growth on a year-over-year basis. Also, the company outlined its view for fiscal 2021.
Constellation Brands estimates earnings per share of $10.30-$10.55 on a reported basis, whereas it witnessed a loss of 7 cents in fiscal 2020. On a comparable basis, earnings per share are expected to be $9.80-$10.05, excluding the Canopy business.
We note that shares of Constellation Brands have rallied 13.8% in the past three months compared with the industry’s growth of 4.2%.
Factors Outlining the Growth Story
Beer Business – A Key Driver: Constellation Brands has been significantly gaining from strength in the beer business over the years. Sales at the beer business improved 28% in the fiscal third quarter, driven by a rise in shipment volume and depletion volume growth. Depletion volume has been benefiting from improved inventory levels and robust off-premise channel sales, which have been more than offsetting the decline in the on-premise channel due to the coronavirus outbreak.
Solid portfolio depletions and market-share gains mainly stemmed from continued strength in the Modelo and Corona Brand Families. Notably, depletions for the Modelo Especial increased nearly 20% and the Corona Brand Family witnessed 12% growth in the fiscal third quarter.
Including the effects of the Ballast Point divestiture, the company estimates fiscal 2021 net sales growth at the higher end of 7-9% for the beer segment. Excluding the divestiture impacts, net sales are likely to be at the lower end of the aforementioned range. Operating income for the beer business is expected to increase 8-10%.
Exploiting the Hard Seltzer Market – A Big Opportunity: Constellation Brands is one of the beer companies looking for opportunities in the hard seltzer category. The Corona Hard Seltzer, launched in early 2020, achieved the fourth position in the category and is currently the second-fastest-moving hard seltzer. Moreover, the Corona Hard Seltzer continues to maintain strong incrementality levels at nearly 90%. Launched in four flavors, namely tropical lime, mango, cherry and blackberry lime, the consumer response for the product has been exceeding expectations.
In early fiscal 2022, the company plans to launch Corona Hard Seltzer Variety Pack #2, providing the same Corona refreshment, while expanding to new flavors. The new flavors will include pineapple, strawberry, raspberry and passion fruit. The Variety Pack #2 launch will be followed by the introduction of the hard seltzer initiative.
The initiatives and product launches will likely strengthen Constellation Brands’ competitive position in the hard seltzer category, broaden its distribution reach and enhance market share in the high-end of the U.S. beer market.
Premiumization Strategy: Constellation Brands’ wine & spirits premiumization strategy is playing out well, as evident from accelerated growth for the Power Brands. In the fiscal third quarter, the wine and spirits business delivered double-digit growth at high-end Power Brands in IRI channels, including Kim Crawford, Meiomi and The Prisoner Brand Family, which outpaced the U.S. high-end wine and spirits category.
Additionally, the company is making investments to fuel growth of its power brands through innovation, capitalizing on priority, consumer trends, with successful product introductions like the Prisoner Cabernet Sauvignon and Chardonnay varietals, SVEDKA and High West ready-to-drink cocktails, Ruffino wine spritzer, and Meiomi Cabernet Sauvignon.
As part of its efforts to enhance the premium portfolio, Constellation Brands completed the divestiture of a portion of its wine and spirits portfolio to E. & J. Gallo Winery for an aggregate of $810 million. It also sealed its separate but related deal with Gallo to sell the New Zealand-based Nobilo Wine brand, and related assets and liabilities for $130 million. It also completed the divestiture of certain brands, related inventory, interests in contracts and liabilities of its grape juice concentrate business to Vie-Del Company.
Further, it concluded the sale of the Paul Masson Grande Amber Brandy brand, related inventory and interests in certain contracts to Sazerac for $265 million. Notably, the divestitures position Constellation Brands to benefit from the persistence of premiumization trends in the market through the crafting of a winning portfolio of distinguishing high-end brands.
For fiscal 2021, the company predicts depletions for the retained Power Brand portfolio (after the divestitures of wine and spirits brands) to increase 2-4%.
Conclusion
However, the impacts of wildfires and higher marketing costs have been headwinds for the wine & spirits business. Moreover, the impacts of adjustments related to loss from the Canopy Growth deal and other activities are expected to mar the company’s results. Although uncertainties prevail regarding the effects of the pandemic, we expect the Zacks Rank #3 (Hold) stock’s momentum to continue, driven by the aforementioned strategies and trends.
Coca-Cola Femsa S.A.B. de C.V. (KOF - Free Report) currently has an expected long-term earnings growth rate of 9.6% and a Zacks Rank #2.
Albertsons Companies, Inc. (ACI - Free Report) , with a Zacks Rank #2 at present, has an expected long-term earnings growth rate of 12%.
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3 Reasons Why Constellation Brands (STZ) is a Solid Pick
Constellation Brands Inc. (STZ - Free Report) is one of the stocks that have been doing well in the pandemic-ridden market, owing to strong fundamentals, the strength of its brands and endeavors to adapt to the changes in the market, particularly e-commerce investments, and growth of hard seltzer. The endeavors have not only aided its stock performance but also helped maintain a robust earnings performance.
The company’s top and bottom lines beat the Zacks Consensus Estimate and improved year over year in the third quarter of fiscal 2021. With this, it reported an earnings beat for the 12th consecutive quarter. Despite the impacts of the coronavirus outbreak, results were primarily aided by strong shipments across both segments as well as robust depletion growth at the company’s beer business.
Moreover, it benefited from strong margins in the fiscal third quarter, which helped deliver earnings-per-share growth on a year-over-year basis. Also, the company outlined its view for fiscal 2021.
Constellation Brands estimates earnings per share of $10.30-$10.55 on a reported basis, whereas it witnessed a loss of 7 cents in fiscal 2020. On a comparable basis, earnings per share are expected to be $9.80-$10.05, excluding the Canopy business.
We note that shares of Constellation Brands have rallied 13.8% in the past three months compared with the industry’s growth of 4.2%.
Factors Outlining the Growth Story
Beer Business – A Key Driver: Constellation Brands has been significantly gaining from strength in the beer business over the years. Sales at the beer business improved 28% in the fiscal third quarter, driven by a rise in shipment volume and depletion volume growth. Depletion volume has been benefiting from improved inventory levels and robust off-premise channel sales, which have been more than offsetting the decline in the on-premise channel due to the coronavirus outbreak.
Solid portfolio depletions and market-share gains mainly stemmed from continued strength in the Modelo and Corona Brand Families. Notably, depletions for the Modelo Especial increased nearly 20% and the Corona Brand Family witnessed 12% growth in the fiscal third quarter.
Including the effects of the Ballast Point divestiture, the company estimates fiscal 2021 net sales growth at the higher end of 7-9% for the beer segment. Excluding the divestiture impacts, net sales are likely to be at the lower end of the aforementioned range. Operating income for the beer business is expected to increase 8-10%.
Exploiting the Hard Seltzer Market – A Big Opportunity: Constellation Brands is one of the beer companies looking for opportunities in the hard seltzer category. The Corona Hard Seltzer, launched in early 2020, achieved the fourth position in the category and is currently the second-fastest-moving hard seltzer. Moreover, the Corona Hard Seltzer continues to maintain strong incrementality levels at nearly 90%. Launched in four flavors, namely tropical lime, mango, cherry and blackberry lime, the consumer response for the product has been exceeding expectations.
In early fiscal 2022, the company plans to launch Corona Hard Seltzer Variety Pack #2, providing the same Corona refreshment, while expanding to new flavors. The new flavors will include pineapple, strawberry, raspberry and passion fruit. The Variety Pack #2 launch will be followed by the introduction of the hard seltzer initiative.
The initiatives and product launches will likely strengthen Constellation Brands’ competitive position in the hard seltzer category, broaden its distribution reach and enhance market share in the high-end of the U.S. beer market.
Premiumization Strategy: Constellation Brands’ wine & spirits premiumization strategy is playing out well, as evident from accelerated growth for the Power Brands. In the fiscal third quarter, the wine and spirits business delivered double-digit growth at high-end Power Brands in IRI channels, including Kim Crawford, Meiomi and The Prisoner Brand Family, which outpaced the U.S. high-end wine and spirits category.
Additionally, the company is making investments to fuel growth of its power brands through innovation, capitalizing on priority, consumer trends, with successful product introductions like the Prisoner Cabernet Sauvignon and Chardonnay varietals, SVEDKA and High West ready-to-drink cocktails, Ruffino wine spritzer, and Meiomi Cabernet Sauvignon.
As part of its efforts to enhance the premium portfolio, Constellation Brands completed the divestiture of a portion of its wine and spirits portfolio to E. & J. Gallo Winery for an aggregate of $810 million. It also sealed its separate but related deal with Gallo to sell the New Zealand-based Nobilo Wine brand, and related assets and liabilities for $130 million. It also completed the divestiture of certain brands, related inventory, interests in contracts and liabilities of its grape juice concentrate business to Vie-Del Company.
Further, it concluded the sale of the Paul Masson Grande Amber Brandy brand, related inventory and interests in certain contracts to Sazerac for $265 million. Notably, the divestitures position Constellation Brands to benefit from the persistence of premiumization trends in the market through the crafting of a winning portfolio of distinguishing high-end brands.
For fiscal 2021, the company predicts depletions for the retained Power Brand portfolio (after the divestitures of wine and spirits brands) to increase 2-4%.
Conclusion
However, the impacts of wildfires and higher marketing costs have been headwinds for the wine & spirits business. Moreover, the impacts of adjustments related to loss from the Canopy Growth deal and other activities are expected to mar the company’s results. Although uncertainties prevail regarding the effects of the pandemic, we expect the Zacks Rank #3 (Hold) stock’s momentum to continue, driven by the aforementioned strategies and trends.
3 Better-Ranked Stocks to Watch
Diageo plc (DEO - Free Report) has a long-term earnings growth rate of 8.3% and a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Coca-Cola Femsa S.A.B. de C.V. (KOF - Free Report) currently has an expected long-term earnings growth rate of 9.6% and a Zacks Rank #2.
Albertsons Companies, Inc. (ACI - Free Report) , with a Zacks Rank #2 at present, has an expected long-term earnings growth rate of 12%.
Legal Marijuana: An Investor’s Dream
Imagine getting in early on a young industry primed to skyrocket from $17.7 billion in 2019 to an expected $73.6 billion by 2027.
Although marijuana stocks did better as the pandemic took hold than the market as a whole, they’ve been pushed down. This is exactly the right time to get in on selected strong companies at a fraction of their value before COVID struck. Zacks’ Special Report, Marijuana Moneymakers, reveals 10 exciting tickers for urgent consideration.
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