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A Brighter Constellation (STZ)
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The constellation had been fading, but some of its burnished glow appears to be returning.
Of course, I'm not referring to the great constellations in the sky but to Constellation Brands (NYSE: STZ), a producer and marketer of alcoholic beverage whose portfolio spans wine, imported beer and spirits.
On the former, Constellation is the world's largest producer and marketer. Wines account for 70% of total revenue. At the high end, brands include prestigious names Mondavi Reserves, Eileen Hardy and Inniskillin ice wines, which can fetch $100 for a half bottle in some years. At the low end, brands include the very pedestrian Inglenook, Almaden and Taylor New York. In the middle is Napa's famous Opus One.
Beer is the next biggest contributor to Constellation's top line, accounting for 20% of revenue, even though the company doesn't actually brew the stuff; it imports.
On that front, Constellation recently formed a joint venture, Crown Imports, with Modelo SA, to consolidate the importation of its family of beers. The new entity will have the rights to leading-import Corona Extra, Modelo, Pacifico, and other Mexican brands.
Temporary Hangover
Too much of a good thing can leave one feeling dyspeptic. To wit: a wine glut on the British Isles, one of Constellation's largest markets, has hurt prices and contributed to two profit warnings earlier this year that clipped more than 30% off the stock, dropping the price from a 52-week high above $29 in January to a low under $19 in March. A partial rebound, fueled by the recent announcement of an accelerated $420 million stock buyback, has pushed the price up to $24.
But before the stock shines any brighter, it might grow a little dimmer. Constellation is expected to take a few more financial lumps, particularly in the current quarter, which it will report in late June. Analysts expect the company to announce a temporary 20% drop in revenue and a near-50% drop in earnings.
A Longer-Term View
But real investors think in years, not quarters, and over the years Constellation's revenue has grown at a double-digit rate thanks to mid- to high-single digit organic growth and acquisitions. In fiscal-year 2007, the company reported revenue grew 13.3% to a record $5.22 billion. Admittedly, earnings-per-share growth, has often failed to keep pace, because of charges for restructuring, acquisition integration and increased interest expense. For fiscal-year 2007, EPS posted at $1.38, a mere real 1.5% improvement over fiscal-year 2006's $1.36.
Looking ahead, an improving business environment should boost Constellation's long-term revenue and earnings growth. U.S. Wineries have reported solid gains in revenue and volume over the past several years. A portion of these increases is due to a trend toward premium wines, which is increasing 8% annually.
Constellation's beer business should also show continued improvement. Prospects have begun looking up from a combination of improving fundamentals and the implementation of a successful price hike and discount reduction plan by industry leader Anheuser-Busch (NYSE: BUD). Another price hike, if its absorbed by the marketplace, should continue to increase revenue per barrel. Sales could also be helped from anticipated growth in the 21-to-27-year-old population.
Future Value
My down-and-dirty discounted cash flow (DCF) analysis, assumes an 11% discount rate and 6% annual cash flow growth (even cash flow has grown at a 13.5% clip over the past 10 years) into perpetuity. Based on these inputs, I calculate an intrinsic value of $41 per share. My enthusiasm is tempered by applying Constellation's current price-to-earnings ratio of 17.6 to fiscal-year 2009 estimated EPS of $1.70, which produces a more modest $29 per share. But what the heck, that still leaves a 21% move to the upside.
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Of course, I'm not referring to the great constellations in the sky but to Constellation Brands (NYSE: STZ), a producer and marketer of alcoholic beverage whose portfolio spans wine, imported beer and spirits.
On the former, Constellation is the world's largest producer and marketer. Wines account for 70% of total revenue. At the high end, brands include prestigious names Mondavi Reserves, Eileen Hardy and Inniskillin ice wines, which can fetch $100 for a half bottle in some years. At the low end, brands include the very pedestrian Inglenook, Almaden and Taylor New York. In the middle is Napa's famous Opus One.
Beer is the next biggest contributor to Constellation's top line, accounting for 20% of revenue, even though the company doesn't actually brew the stuff; it imports.
On that front, Constellation recently formed a joint venture, Crown Imports, with Modelo SA, to consolidate the importation of its family of beers. The new entity will have the rights to leading-import Corona Extra, Modelo, Pacifico, and other Mexican brands.
Too much of a good thing can leave one feeling dyspeptic. To wit: a wine glut on the British Isles, one of Constellation's largest markets, has hurt prices and contributed to two profit warnings earlier this year that clipped more than 30% off the stock, dropping the price from a 52-week high above $29 in January to a low under $19 in March. A partial rebound, fueled by the recent announcement of an accelerated $420 million stock buyback, has pushed the price up to $24.
But before the stock shines any brighter, it might grow a little dimmer. Constellation is expected to take a few more financial lumps, particularly in the current quarter, which it will report in late June. Analysts expect the company to announce a temporary 20% drop in revenue and a near-50% drop in earnings.
A Longer-Term View
But real investors think in years, not quarters, and over the years Constellation's revenue has grown at a double-digit rate thanks to mid- to high-single digit organic growth and acquisitions. In fiscal-year 2007, the company reported revenue grew 13.3% to a record $5.22 billion. Admittedly, earnings-per-share growth, has often failed to keep pace, because of charges for restructuring, acquisition integration and increased interest expense. For fiscal-year 2007, EPS posted at $1.38, a mere real 1.5% improvement over fiscal-year 2006's $1.36.
Looking ahead, an improving business environment should boost Constellation's long-term revenue and earnings growth. U.S. Wineries have reported solid gains in revenue and volume over the past several years. A portion of these increases is due to a trend toward premium wines, which is increasing 8% annually.
Constellation's beer business should also show continued improvement. Prospects have begun looking up from a combination of improving fundamentals and the implementation of a successful price hike and discount reduction plan by industry leader Anheuser-Busch (NYSE: BUD). Another price hike, if its absorbed by the marketplace, should continue to increase revenue per barrel. Sales could also be helped from anticipated growth in the 21-to-27-year-old population.
Future Value
My down-and-dirty discounted cash flow (DCF) analysis, assumes an 11% discount rate and 6% annual cash flow growth (even cash flow has grown at a 13.5% clip over the past 10 years) into perpetuity. Based on these inputs, I calculate an intrinsic value of $41 per share. My enthusiasm is tempered by applying Constellation's current price-to-earnings ratio of 17.6 to fiscal-year 2009 estimated EPS of $1.70, which produces a more modest $29 per share. But what the heck, that still leaves a 21% move to the upside.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Stephen Brown
Stephen P. Brown is a Chartered Financial Analyst, former equity analyst, investor, and freelance financial writer living in Brighton, Colorado. His work has been published in Barron's, CFA Magazine, Wealth Manager Magazine and The Denver Post.
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