Analyst Note| Nicholas Johnson, CFA |
A raft of Street bulls emerged heading into wide-moat Constellation Brands’ fourth-quarter earnings, as a confluence of developments--including the resumption of unencumbered production in Mexico and the closure of its wine divestiture--improved the near-term commercial backdrop for the business. With the more constructive narrative, however, market expectations may have overextended, as shares were down 5% despite solid results (ahead on revenue and profit relative to FactSet consensus). This was ostensibly due to below-consensus fiscal 2022 EPS guidance which, beyond being myopic, is misguided in our view. Constellation’s convoluted investment in Canopy makes its EPS numbers particularly susceptible to accounting quirks and timing and thus are not particularly reflective of economic reality. We plan to raise our fair value estimate to $250 from $240 to reflect time value as well as near-term puts and takes in the fundamentals. Ultimately, the health of the business remains unassailable in our view, and while the discount in the shares isn’t glaring, we think this is a stock worth owning at current levels.