Change within a company can be difficult, not to mention risky, but Constellation Brands (NYSE:STZ) hasn't shied away from reconfiguration. Once known only for its wine business, the company has an attractive niche spirits business and has ponied up significant capital to take control of its Crown Imports joint venture. While these shares are up strongly over the past year and alcohol-related stocks are doing well now, investors may want to pause to consider the valuation before bidding these shares up further.

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Fiscal Third Quarter - Volumes OK, Profits Better
Constellation reported over 9% revenue growth for the quarter, with the wine and spirits business up about 9% and the Crown business up just 1%. The wine and spirits business saw good volume growth (up more than 6%), with positive price and mix as well (up about 2%). While the beer business was held back a bit by the company losing the St. Pauli Girl brand, overall volume trends were still not that impressive.

A big part of the story at Constellation over the last couple of years has been cost/margin restructurings, and that has paid off. Gross margin improved by about 10 basis points, while operating income rose 13%. The wine business did particularly well, with profits up 14%, while income from the Crown business was down 9%.

Still More Work Left to Do?
Although Constellation was once known primarily as a wine business (a lot of people seemed to overlook the meaningful contributions of the Crown Imports beer joint venture), that has certainly changed. As part of Anheuser Busch-InBev (NYSE:BUD) buying what remained of Grupo Modelo for $20 billion, Constellation is buying up the other half of its joint venture. For $1.85 billion, Constellation will have complete control of U.S. distribution, marketing and pricing for those Crown Imports brands, with a perpetual option every 10 years to continue to relationship.

I have no qualms with Constellation expanding its beer business, even if I have my doubts about whether this sort of arrangement will work for both parties over the long term. (ABI certainly doesn't need Constellation's help with distribution.)

What I do wonder, however, is whether Constellation will make any moves in spirits. The company's Svedka may be the third-largest vodka brand in the United States, but the company's spirits business is small overall. I'm not sure that Constellation has the balance sheet to buy more scale in spirits, so I wonder if the company would entertain offers from companies such as Diageo (NYSE:DEO), Beam (NYSE:BEAM) or Brown-Forman (NYSE:BF.B).

Time for More Blocking and Tackling
Given the amount of debt on the company's balance sheet, I don't see a lot of deal-making capacity (unless the company is looking to sell). That suggests to me that growth will increasingly rely on execution.

I think the U.S. wine industry has seen the worst of its reset (as beer and spirits have regained popularity), but the company needs strong new product rollouts to maintain the momentum. On the beer side, however, I think volume could be a tailwind in the coming years - major brewers such as ABI and Molson Coors (NYSE:TAP) have struggled with unimpressive volumes in economies that are more developed, such as North America, but the news has been getting better.

The Bottom Line
I'm well aware that alcohol businesses are popular with investors right now, and that there are few bargains to be had. Accordingly, I'm not too inclined to carp about Constellation stock being overvalued. That said, it doesn't look like much of a relative bargain either. Even with solid ongoing growth over the next decade (including good profitability and consistent revenue growth), the shares look richly priced today, and investors buying today need to have a solid thesis on why or how this company will meaningfully outperform the wider wine/beer/spirits industry.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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