Filed Under:
Tickers in this Article: STZ, STZ.B, BF.B, TAP, AHBIF
Do consumers increasingly turn to alcoholic spirits to drown their sorrows during times of economic downturn? Although last month's results from Jack Daniel's owner Brown-Forman (NYSE:BF.B) lent credence to the argument, the earnings results from wine, beer and liquor purveyor Constellation Brands (NYSE:STZ) have kept any definitive conclusions on ice for the time being. Overall, however, Constellation Brands is brewing up solid operating trends in its businesses.

Drinking in the Quarter
Constellation's fiscal third quarter earnings release supports the claim that sales of premium spirit brands remain brisk, which already had benefited from a shift in consumer tastes to higher end whiskey, vodka and other liquors at the expense of brewed offerings from the likes of Molson Coors (NYSE:TAP) and Anheuser-Busch Inbev (OTC:AHBIF). On an organic basis (excluding acquisitions and foreign exchange fluctuations), the spirits category grew 5%, as the crown jewel brand, Svedka, reported 60% growth. Crown Imports, Constellation's imported beer business that consists primarily of a joint venture with Mexican beer giant Grupo Modelo, grew 1%. The wine business, which makes up the bulk of sales, fell 2%, mainly due to weakness in Europe and New Zealand. Total reported quarterly sales fell 6%, but only 2% on an organic basis. (To learn how to use revenue, expenses and other factors to analyze a company, read Understanding the Income Statement.)

Constellation's profit picture is a bit cloudy due to a steady stream of acquisition, "strategic business realignments" and other charges that management considers one-time, or non-recurring in nature. As a result, reported net income came in at $83.5 million, or 38 cents per share, but was $132 million, or 60 cents per share, on a non-GAAP basis. However, on a year-to-date cash flow basis, trends looked very favorable, with an operating cash flow improvement of 31%, to $330.9 million, as many charges in the income statement were of the non-cash variety. In other words, many of Constellation's charges did not reduce cash flow generation.

A Cash Cow Business?
Strong operating cash flow and proceeds from the sale of businesses left ample capital for the company to pay down debt that had been taken on to fund past acquisitions, such as the ambitious purchase of Robert Mondavi Corporation in 2004.

However, Constellation has a way to go to exceed last year's $519 million in operating cash flow production and likely will come up short, with current analyst projections pegged at just below $500 million. Still, free cash flow (FCF) could run a few dollars per share, when capital expenditures are subtracted out. Thus, the price-to-FCF multiple would post in the single digits. (Tune out the accounting noise and learn whether a company is generating the stuff of sustainability in The Essentials of Cash Flow.)

Bottom Line
Barring any further volatility in reported sales and earnings figures, Constellation Brands looks to be getting a solid handle on its far-flung stable of leading alcohol brands. Debt levels are still a bit high for my liking, but cash flow trends are definitely moving in the right direction. Expect management to stay aggressive on the acquisitions front. Constellation Brands will be looking to balance the growing clout of its spirits business with the larger wine segment and the company's highly profitable imported beer operation.

comments powered by Disqus

Trading Center