Meryl Witmer's 2 New Positions

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Meryl Witmer, the newest board member of Berkshire Hathaway, has delivered an outstanding performance for Eagle Capital Management in the past 25 years. Since its inception in 1988, Eagle Capital has produced an annualized return of 14.6%, handily beating S&P 500’s return of only 9.4%.

In the first quarter of 2013, Meryl Witmer initiated long positions in Constellation Brands (NYSE: STZ) and Zoetis (NYSE: ZTS). Let’s take a closer look into those two companies to see whether or not investors should follow Meryl Witmer into them.

Constellation Brands’ strategic beer deal

As of March 2013, Meryl Witmer bought nearly 6.9 million shares of Constellation Brands, accounting for 2% of her total portfolio. Constellation Brands is a global leader in premium wine, owning more than 100 premium consumer brands and operating 37 facilities worldwide. It is also the leader in imported beer in the U.S., via its Crown Imports investment.

The investment into Crown Imports was considered a transformational beer transaction, consolidating the company’s position in the U.S. beer market in the long run. After the deal, Constellation Brands is now effectively the independent producer and supplier of Mondelo brands in the U.S., becoming the biggest multi-category total beverage alcohol supplier.

According to the company, Constellation ranked second in terms of alcohol volume growth at 11%, only behind Anheuser-Busch InBev's (NYSE: BUD) sales growth of 31%. Including the beer business, Constellation Brands could generate $5.36 billion in sales and $1.32 billion in operating income in fiscal 2013. Around 47% of the total operating profit would come from Wine & Spirits, while Beer is expected to represent 53% of the total operating income.

In the period of 2014-2017, Constellation Brands expects to increase its free cash flow from the range of $475-$575 million to more than $1 billion. The significant growth in free cash flow comes from the benefit of beer transaction, brewery expansion, and de-leveraging, which could reduce interest expenses.

The long-term leverage ratio would be reduced from 5 to the range of 3-4 times the net debt/EBITDA (earnings before interest, taxes, depreciation, and amortization). Constellation Brands is trading at around $51.70 per share with a total market cap of nearly $9.8 billion. The market values Constellation Brands expensively at 12.5 times its forward EBITDA.

Anheuser-Busch InBev offers a higher dividend yield

Anheuser-Busch InBev has a lower valuation. It is trading at around $89.10 per share with a total market cap of around $142 billion. The market values Anheuser-Busch InBev at 10.7 times its forward EBITDA. It focuses on four main markets including the U.S., China, Brazil, And Mexico, having a global leading position, accounting for 43% of the global beer industry EBIT (earnings before interest and taxes). The company holds the number one position in the U.S., Brazil, and Mexico, and ranks third in China.

For the full year 2013, it is expected to pursue its premiumization strategy within the U.S. In 2014, the company estimates that its net debt to EBITDA would fall below 2, with the average coupon in the range of 4.8% -5.3%. At the current trading price, it offers investors a decent dividend yield of 2.1%, while Constellation Brands has not offered any dividends yet.

This leading animal health company is still expensive

Meryl Witmer began to accumulate Zoetis in the first quarter of 2013. However, the amount was quite small, at only 70,000 shares. After being spun off from Pfizer, Zoetis has become a fully independent publicly traded company. What I like about Zoetis is its leading position in animal health, with 300 medicines and vaccine products in 120 countries.

The company held around 19% market share of the $22 billion global animal health market, generating a lot of revenue from emerging markets such as Brazil, India, and China. Zoetis estimates that it could generate around $4.43 billion to $4.53 billion in revenue, while the EPS might come in the range of $1.00 to $1.06 per share.

Despite its leading position, what makes me worried about Zoetis is its high valuation. It is trading at around $30.40 per share with a total market cap of around $15.2 billion. The market values Zoetis at as much as 14.9 times its forward EBITDA. Moreover, at the current trading price, it offers investors quite a low dividend yield at only 0.8%.

My Foolish take

Constellation Brands seems to be a good pick after the Crown Imports acquisition, which will give it a lot of scale in the alcoholic beverage industry. In contrast, I do not like Zoetis due to its high valuation. I would rather wait for a price correction to initiate a long position.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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