Constellation Brands' Toned-down Strategy

By Ryan C. Fuhrmann | January 09, 2012 AAA

Over the past five years, wine and spirits firm Constellation Brands (NYSE:STZ) (NYSE:STZ.B) has embarked on a strategy of selling off its less appealing alcohol brands. What remains is a more appealing array of higher-end brands that throw off higher profits. The remaining wild card is if management can grow organically, as opposed to a former strategy of acquiring rivals that failed to pay off for shareholders.

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Third Quarter Recap
Constellation Brands' reported sales fell 27% to $701 million, but the decline was more modest at 8%, when backing out the divestiture of the Australian and U.K. wine operations. The organic decline was attributed to a volume decline in North America, which is the only major region Constellation now operates in. Its portfolio now consists primarily of a wide array of table, sparkling and dessert wines, such as Robert Mondavi brands, Blackstone and Ravenswood. It also owns a number of spirit brands, highlighted by SVEDKA Vodka and Black Velvet Canadian Whiskey, the last of which competes against Beam's (NYSE:BEAM) Jim Beam brand and Diageo's (NYSE:DEO) Johnnie Walker, in the bourbon and whisky space.

Reported operating income fell a modest 5.8% to $160.3 million. A decline in income from Constellation's 50% ownership stake in Crown Imports, which imports Corona beer and other brands from Mexican beer giant Grupo Modelo. Modelo is 35.3% owned by European beverage giant Anheuser-Busch InBev (NYSE:BUD), which is the largest brewer in the world, and also owns a large stake in Brazilian beer giant Companhia De Bebidas DAS (NYSE:ABV). The lower Crown Imports income resulted in a 24.8% drop in net income to $104.8 million. Share buybacks helped reduce the earnings per diluted share decline to 20%, or 52 cents. (To know more about income statements, read Understanding The Income Statement.)

Outlook
For the year, Constellation projects to report earnings between $2.02 and $2.08 per diluted share, which would be up from $1.91 reported in fiscal 2011. It expects free cash flow generation in a range of $700 million and $750 million, or at least $3.45 per diluted share.

The Bottom Line
Over the past few years, Constellation has embarked on a strategy to jettison less appealing brands from its portfolio. It remains to be seen if sales can grow sustainably in the remaining portfolio, but there is little doubt the business is profitable and generates impressive cash flows. At a single-digit multiple of forward earnings (9x) and free cash flow (6x) projections, investors could see an upside if growth trends improve, and there is always potential that a larger rival swoops in to acquire Constellation, to gain access to its more appealing assets such as SVEDKA and the Crown Imports stake. This could include Diageo, Pernod-Ricard or Beam, the last of which is also said to be of takeover interest to the larger rivals in the industry. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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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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