Take a Sip of Undervalued Constellation Brands
Our longer-term outlook on the narrow-moat firm calls for around 6% sales growth and mid-30s operating margin on average.
Shares of narrow-moat Constellation Brands (STZ) fell around 12% after the firm reported third-quarter results, which included sales growing 9% and operating margin expanding 100 basis points to 28%. We primarily attribute this reaction to weak performance in the firm’s wine business (roughly one third of sales), which posted a 3% decline in depletions. Management now expects full-year sales in this business to decline by a low-single-digit rate, versus a 2%-4% increase prior. Accordingly, it estimates comparable earnings per share will fall between $9.20 and $9.30, versus its prior outlook of $9.60 to $9.75 and our $9.63 estimate. We plan to trim our fiscal 2019 earnings per share estimate and near-term outlook for the firm’s wine business, which should reduce our $204 fair value estimate by a low-single-digit percentage. However, our longer-term outlook, which calls for around 6% sales growth and mid-30s operating margin on average, remains intact. Even with these revisions, we think shares offer a compelling entry point for investors.
Constellation’s wine performance was hampered by the sub-$11 price point, which approximates a third of volume in its wine portfolio. While our longer-term outlook for the wine segment has already been quite muted, at just low-single-digit growth, we remain constructive on opportunities within the high-end. Over the last several years, the firm has made several efforts to refocus its wine portfolio on more profitable fare, divesting its lower-margin Canadian wine business in late 2016 and rationalizing lower-margin, value-priced SKUs. Premiumization trends within the wine market should support momentum for Constellation’s higher-end wine brands; according to management, retail sales in the above $11 price point grew at a 13% compound rate between 2012 and 2017, versus 5% for the overall category. As evidence, higher-end brands like Kim Crawford and Meiomi have posted double-digit retail sales growth over the trailing 12 months.
|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.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.