Constellation Brands (STZ, Financial), the maker of liquor, wine and beer, recently released its results for the second quarter. The company posted a good improvement in revenue but missed consensus estimates on earnings. But the company is pleased with the performance of its beer segment. Despite the headwinds that the company is seeing, management is confident of a better quarter ahead. It is counting various strategies such as acquisitions, and is also expecting a boost in beer sales. Let us have a look at how Constellation Brands is performing in a challenging market.
The quarterly report
In the recently reported quarter, Constellation Brands reported a 10% improvement in sales. This was due to one additional week of beer sales. On the earnings front, Constellation posted EPS of $1.11, which couldn’t meet the consensus estimates of $1.15 per share.
However, Constellation Brands is improving. The maker of liquor and spirits is trying hard to improve its performance. Also, the company will benefit from the acquisitions which it has made in the past. The acquisition of the Casa Noble Tequila brand was a wise move by the company, which enhanced its portfolio.
However, the company was disappointed by the Corona Extra product recall caused by defective glasses. The company, however, is working on getting over the loss caused by this. For example, Constellation is working with its glass supplier to cover the cost of the recall.
Expansion moves
Constellation has an aggressive expansion plan, under which it has announced the expansion of capacity at its brewery in Mexico to increase its share of the market to promote import of beers in the U.S. In addition, Constellation is relying on its acquisition strategy, under which it announced the acquisition of a glass production plant from Anheuser-Busch InBev in Nava Mexico. Besides this, it is also entering a 50-50 joint venture with the Owens-Illinois to operate that glass plant.
Another important aspect in this regard is that Constellation has entered into a long term supply agreement for seven years with Vitro. With this agreement, Constellation will be in a position to supply 25% to 30% glass needed for its beer business. But, the company thinks that this initiative is in its infancy, and it will take some time to get fully functional. In the meantime, Constellation will continue working closely with ABI to purchase glass supply which is needed at its Nava Brewery.
The company is seeing positive signs from Corona Extra. It is one of the top selling beers in the U.S. and is still gaining traction. The growth of the beer brand will be enhanced by the joint sponsorship of World Cup games, which it did with Modelo Especial. This is helping Constellation to see good growth in sales. Modelo Especial is already a top Mexican import brand, mainly driven by Spanish language TV ads.
Fundamentals
Now, moving on to the fundamentals, with a trailing P/E of 24.43, Constellation Brands looks reasonable. The forward P/E of 19.93 indicates solid growth in the earnings. For the next five years, the company’s earnings are expected to be growing at a CAGR of 14.80%, which is marginally more than the industry average of 14.50%. In addition, the acquisitions made by the company are expected to help Constellation improve its market position. Also, the growing beer business is expected to drive sales in the coming quarters. So, as of now, Constellation Brands is a good pick and investors should include the stock in their portfolio.
