This Board Member Has Some Drink Recommendations

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

According to a filing with the SEC, Jeremy Fowden, a Board member at Constellation Brands (NYSE: STZ), purchased nearly 3,100 shares of the company’s stock on Oct. 8 at an average price of $36.22. Constellation is an alcoholic beverage company which provides, among other brands, Robert Mondavi and SVEDKA. Our records show that Fowden purchased 1,250 shares in August 2010 at an average price of $16.66. He earned a sizable profit on that trade, though he had to wait some time to see the full gains: Constellation’s stock is up 71% so far this year after gaining 24% (about even with the market) between the time of his purchase and the end of 2011.

Constellation Brands recently announced its results for the second quarter of its fiscal year. According to the company’s 10-Q, sales were only 3% higher than in the second fiscal quarter of last year, and higher expenses caused a decline in net income. For the first half of its fiscal year, net income dropped to $125 million from $163 million a year earlier, a 23% decrease. Read further analysis of Constellation's recent quarterly report. At a market capitalization of $6.3 billion, Constellation Brands trades at trailing and forward P/E multiples of 16 and 13, respectively. This range of multiples would be about right for a company of Constellation’s size that was growing slowly, but would likely prove too high if it cannot stabilize its business.

Empyrean Capital Partners liked the stock during the second quarter of 2012. The fund, managed by Michael A. Price and Amos Meron, had not owned any shares at the beginning of April but by the end of June had initiated a position of 2 million shares (find more stock picks from Empyrean Capital Partners). The largest hedge fund position in Constellation, according to our database of 13F filings, belonged to billionaire Ken Griffin’s Citadel Investment Group. Citadel increased its stake to a total of 2.8 million shares (see more stocks billionaire Ken Griffin liked).

Alcoholic beverage companies Diageo (NYSE: DEO), Brown-Forman Corporation (NYSE: BF-B), BEAM (NYSE: BEAM), and Molson Coors Brewing Company (NYSE: TAP) are four of Constellation’s peers. All four of these companies are larger than Constellation in terms of market capitalization, with Diageo being the industry giant. Its stock is valued at over $70 billion, and it trades at a premium to Constellation in terms of its earnings multiples: Its trailing P/E is 23 and its forward P/E is 16. Even though it pays a good dividend yield of 3.0%, and owns well-known brands such as Johnnie Walker and Smirnoff, this gap in valuation is probably a bit high. Brown-Forman (owner of Jack Daniels, among others) also tends towards high earnings multiples (its forward P/E is 22, in fact) but it has the advantage of having delivered growth in both revenue and earnings last quarter compared to a year ago. We’re still wary of its valuation.

Beam trades at 13 times trailing earnings, but Wall Street analysts expect that 2013 will not go quite as well for the company, and so it trades at 22 times consensus earnings for next year--again, too high for us to consider it on a purely value basis. With a poor performance in terms of earnings recently, we would prefer to own Constellation. Molson Coors has a value case going for it (its forward P/E multiple is the lowest of any of these companies, at 11) but its earnings were down 53% in the second quarter versus the second quarter of 2011. We would want to look at the company in more depth to see if its problems were temporary, as the valuation otherwise looks good and the dividend yield is 2.9%.

Constellation is considerably cheaper than most of its peers, but its business has been struggling recently (of course, so has Beam’s). Brown-Forman has been growing nicely but is so much more expensive on a forward basis we’d have to avoid it. Molson Coors is the only comp that looks cheaper, and that company has problems of its own.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Beam, Diageo plc (ADR), and 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus