Tickers in this Article: STZ, STZ.B, BUD, VCO, BUD, SAM, TAP
Constellation Brands (NYSE:STZ) (NYSE:STZ-B) recently closed out its fiscal year by reporting plummeting sales and a slight drop in profits. This masks a corporate reimaging program that has now left a number of higher-end wine and alcohol brands, as well as a very appealing joint venture with Mexican beer giant Grupo Model. With just a minimal level of growth going forward, the stock could move upward.

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Full-Year Recap
Reported sales declined 20.3% to $2.7 billion. However, Constellation has been in a multi-year process of shedding weaker portions of its operations, and 2011 proved to be no exception. During the year, it sold its Australian and U.K. wine businesses, and also made a smaller acquisition. Backing out these changes, management estimated flat organic growth, or negative 1% when stripping out currency movements from its international businesses. What remains is the North American wine business and brands that include Robert Mondavi, Blackstone, Estancia, Ravenswood, and alcohol-related Black Velvet Canadian Whiskey and SVEDKA Vodka.

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Reported operating income fell 3% to $487 million, but would have grown 1% to $540 million when the company backs out the portfolio movements. On the recurring basis, the operating margin was solid at 20.3% of total sales. Constellation also owns a 50% stake in Crown Imports, which owns the rights to sell Modelo Mexican beer brands that include Corona, Modelo, Pacifico, as well as St. Pauli Girl and Tsingtao in the United States. Constellation doesn't book its 50% share of the $2.5 billion (up from $2.4 billion in the previous year). Crown reported in sales on its income statement, but instead accounts for the earnings from the venture. For the year, Crown reported operating income of $431 million. Constellation's share was $215 million.

This boosted pre-tax income to $534 million, though on a reported basis this represented a 3% decline. Reported net income fell 20.5% to $445 million, or $2 per class A common share. Free cash flow was much stronger at $715.7 million, or $3.43 per diluted share, but again included cash generated from the businesses sold off.

Outlook and Valuation
For the coming year, Constellation again expects to report around $2 in earnings per diluted share. Analysts project 4% sales growth and almost $2.8 billion in total sales. The company expects free cash flow between $425 million and $475 million, or roughly $2.04 to $2.28 per diluted share.

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The Bottom Line
Constellation has positioned itself to own higher-end wine brands that it now sells exclusively in North America. In this respect, it competes with the likes of Chilean-based Vina Concha y Toro S.A. (NYSE:VCO), though Concho sells internationally as well. It also owns a couple of appealing alcohol brands and the Crown Imports stake.

Crown could be worth as much as $8 billion, which would put Constellation's stake at around $4 billion. Anheuser Busch InBev (NYSE:BUD) trades at about three times sales, which would be the high end of the range. Molson Coors Brewing (NYSE:TAP) trades at about 2.1 times sales, and Boston Beer Company (NYSE:SAM) trades at a sales multiple of 2.5.

Constellation's current market capitalization is currently around $4.22 billion, which puts its price to sale ratio below 1.6. Overall, the market is currently ascribing little value to its wine and alcohol operations. With any sustainable growth going forward, the stock could move up significantly, or could be of interest to a rival, such as those mentioned above.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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