Constellation Brands Finalizing Its "Premiumization" Strategy

By Ryan C. Fuhrmann | April 12, 2011 AAA

Constellation Brands (NYSE:STZ) has been on a mission to jettison less profitable businesses and focus on a smaller portfolio of premium wine and alcohol brands that include Robert Mondavi, Blackstone, SVEDKA Vodka, and a distribution joint venture with Modelo to sell Corona in the U.S. Reported profits are coming in strong, but there is uncertainty over how the remaining businesses will grow over the long haul.
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Fourth Quarter Recap
Reported net sales, which subtract out excise taxes, rose a most 0.9% to $715.3 million. North American sales made up 81.1% of the total and jumped 17%. However, international sales, which consist of the Australian wine and European wine and cider businesses, fell 37% to account for the rest of the top line and were sold off as part of the company's efforts to "further premiumize" its portfolio of alcohol brands. Earnings from the Modelo joint venture increased 18% to $48.6 million. Anheuser-Busch InBev (NYSE:BUD) owns a 50% stake in Modelo.

Lower product costs pushed gross margins up 14.2% to $254 million. SG&A costs fell an impressive 13.2% while much lower impairment and restructuring charges pushed operating income up to $102.9 million after a loss in last year's quarter. Net income reached $279.8 million, or $1.32 per diluted share. On a recurring basis, the company estimated earnings rose 29.6% to 35 cents per share to come in ahead of analyst projections.

Full Year Review
Reported sales fell a modest 1% to $3.3 billion. The company estimated organic sales growth was 5%. Reported net income jumped to $559.5 million from $99.3 million last year. This worked out to $2.62 per diluted share. On a recurring basis, the company estimated net income was $408 million, or $1.91 per diluted share for year-over-year growth of 14%. Free cash flow came in at $530 million, or approximately $2.48 per diluted share.

Outlook
Constellation currently expects earnings between $1.90 and $2 per diluted share and free cash flow between $600 million and $650 million, or between $2.81 and $3.04 per diluted share, based on the current year-end share count.

Bottom Line
With a current share price of just under $22, Constellation's earnings and free cash flow multiples look compellingly low. The forward free cash flow multiple is 7.1, if the company hits the high end of its guidance. However, these multiples could stay low until management can prove it can grow sales organically and turn this into sustainable profit growth.

Wine sales could continue to be flat as consumers don't demonstrate strong brand loyalty, though Chilean rival Vina Concha y Toro (NYSE:VCO) has managed to post steady growth over the past decade. And SVEDKA Vodka competes in a crowded market, with offerings from Fortune Brands' (NYSE:FO) spirits division and Central European Distribution Corp. (Nasdaq:CEDC), which owns a number of vodka brands that do well internationally. Corona sales have also cooled in the U.S. in recent years, though the joint venture continues to be very profitable to Constellation. (For related reading, also check out Beeronomics: Factors Affecting Your Pint.)

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