Constellation’s Beer Portfolio Continues to Buck Trends
We remain impressed by the firm’s beer business, but shares are not a bargain.
Narrow-moat Constellation Brands (STZ) posted year-end results that matched our expectations, with net sales of $7.6 billion (3.5% growth) and gross margin expanding 220 basis points to 50%. We remain impressed by the firm’s beer business as sales grew 12% during the quarter (on top of double-digit growth in the prior two fourth quarters), driven by a 10% increase in shipment volume. We plan to tick up our near-term outlook for volumes in the beer segment (increasing our outlook for 6%-7% growth in fiscal 2019 by about 2%) to reflect ongoing strength in the firm’s portfolio of imported beers and are reiterating our expectation for 150 basis points of annual improvement in average price per case. However, management’s revised outlook for the wine and spirits business (2%-4% growth next year) falls slightly short of our expectations, and we expect to moderate our outlook for this segment as the firm’s efforts to rationalize lower-margin and value-priced SKUs create a modest drag on sales. We expect to raise our $182 fair value estimate by about 5% but note that around two thirds of this increase is attributable to the time value of money and a lower-than-expected tax rate, rather than a material change in our underlying assumptions. As such, our long-term outlook for around 6% revenue growth and high-single-digit operating income growth on average remains in place.
From our vantage point, Constellation’s focused beer portfolio (concentrated in faster-growing categories like craft and imported beer) and sustained investments behind its brands, including advertising and innovations in packaging sizes, have allowed its offerings to enjoy outsize growth as the overall domestic beer industry continues to flounder (we estimate volume declined 1% in 2017). In this context, we appreciate the 20% increase in dedicated media spend slated for fiscal 2019, which should sustain demand for core brands Corona and Modelo (depletions grew 18% and 6%, respectively, during the quarter).
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Sonia Vora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.