An Alcoholic Beverage Company With Great Potential
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Constellation Brands (NYSE: STZ) recently acquired the U.S. beer business of Grupo Modelo from Anheuser-Busch (NYSE: BUD) for $4.75 billion. Is this a good deal or a bad one, and how will if affect the stock price going forward?
Constellation Brands is kind of a big deal
Constellation Brands has outperformed peers Anheuser-Busch and Molson Coors Brewing (NYSE: TAP) by wide margins year to date:
But you don’t care about the past, right? It’s all about future potential. Considering recent acquisitions and deals made by Constellation Brands, its future growth potential looks good.
As part of the Anheuser-Busch deal, Constellation Brands will have a 50% stake in Crown Imports, including a brewery in Mexico. If you’re currently long Constellation Brands, have a Corona to celebrate. If you purchase a case of Corona from the store, you'll be aiding your investment.
In addition to this massive deal, Constellation Brands has reached an agreement with several of Brazil’s top distributors. The timing here is excellent. Brazil is hosting the 2014 World Cup and 2016 Summer Olympics. Constellation Brands is promoting key brands in Brazil, setting itself up for massive sales once the games begin.
Constellation Brands made these deals in part to address its biggest concern: annual revenue declines. Revenue increased 10.80% last quarter on a year over year basis, on higher volumes and improved product mix. Thanks to the recent deals referred to above, perhaps the company can build on this growth.
As far as earnings are concerned, Constellation Brands has delivered a profit in four consecutive years. Earnings have declined over the past two years, but profits were still very respectable. Earnings declined 20.70% last quarter year over year, but this was mostly due to tax rates and interest related to transactions.
Constellation Brands CEO Robert Sands expects 5% sales growth this year and next year. His confidence likely also relates to the company's recent expansions.
Constellation Brands vs. peers
As mentioned earlier, Constellation Brands has outperformed peers by wide margins year to date . It has also outperformed over one-year and three-year time frames. But what about valuations?
Molson Coors Brewing Company looks the most appealing by this metric, but how do these three companies stack up in profit margin?
- Constellation Brands 13.87%
- Anheuser-Busch 19.27%
- Molson Brewing Company 9.85%
As the chart below indicates, profit margin for Constellation Brands has improved over the past five years.
As you can see, the past year hasn't been overly impressive. Costs have increased, but once the company settles in to its new deals, profit margin should recapture its upward momentum.
Sometimes when it’s difficult to make an investment decision in an industry, it’s best to look at dividend yield. Even if you make the wrong decision, the dividend payments will at least help ease the pain. And if you make the correct decision, the dividends act as a bonus. Below are dividend yields for each company:
- Constellation Brands No Yield
- Anheuser-Busch 2.00%
- Molson Brewing Company 2.60%
Unfortunately, Constellation Brands has a debt-to-equity ratio of 1.17 versus an industry average of 0.60. Therefore, it's not likely that the company will pay any dividends in the near future. Plus, Constellation Brands has a different focus: growth..
Instead of paying dividends, Constellation's using its cash to expand operations and improve brand recognition.
Another important note: CEO Rob Sands stated that he’s not concerned about the global economy’s effect on his business. In his opinion, the company has all the tools to be successful. As an investor, you want to hear this kind of talk, opposed to a CEO warning about the potential effects of the global economy on the business.
Constellation Brands is the world leader in premium wine, the No. 3 beer company in the United States, and the leading wine company in Canada. These are impressive stats, and based on recent expansions, there are likely to be more impressive stats added to this list in the future.
Constellation Brands might not sell healthy products, but it might be a healthy investment.
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Molson Coors Brewing Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!