Hold This Glass For More!
Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Corona, Blackstone, and Paul Masson Grande Amber Brandy are some of the famous brands from the stable of Constellation Brands (NYSE: STZ), which has invigorated the taste buds of scores of people across the globe for a good number of years. What now remains to understand is whether or not this company that experienced a 5% gain in net income deserves to be a part of your portfolio
Numbers you should know
Net income went on the upside by around 4.96% to $110 million, or 63 cents per diluted share, versus an EPS of around 52 cents, or $104.8 million, in the same quarter a year ago. Revenue increased by around 9.4% to settle at $767 million this quarter.
The diluted EPS expectation has been increased to the range of $2.10 to $2.20 from our previous $2.00 to $2.10 range in the light of favorable quarterly results.
Let’s talk business
The essential strategies that were put into place for this quarter as well as the entire year was around building the brand name and rolling out innovations for further product development. One of the big moves that has gotten more business to the company is the 100% acquisition of Crown imports, which has displayed results in line with management expectations. This acquisition has given the full rights of marketing and selling of the Modelo brands to Constellation, which is expected to increase its foothold in the beer markets.
Having a market cap of almost 12 times that of Constellation Brands, Diageo (NYSE: DEO) has some of biggest names in the world of alcoholic drinks, like Guinness, Johnnie Walker, and Smirnoff, under its umbrella. This alcohol giant has recently made a move to pick up a majority stake in India’s largest alcoholic beverages company, United Spirits Limited, which strengthens its presence in the Indian domestic markets. 2012 has turned out to be impressive for this conglomerate, as it achieved a growth of 6% in net sales and a growth of 9% in the operating profits for the year. This highlighted Diageo’s progress towards efficient growth in established as well as emerging markets. The current dividend yield of around 3% is an assurance for a better 2013, where the giant is set to continue its expansion plans and gain momentum in emerging markets.
The maker of Jim Beam whiskey, Beam (NYSE: BEAM), was established in the year 2011 as a spin-off from Fortune Brands holding company. Since this time, Beam has shown brilliant performance as a business that is focused exclusively on spirits and related products, as its stock price has gained approximately 16% in the last year. Beam is an exception as of now (owing to its young age) to the game of mergers and acquisitions that is prominently prevalent in the liquor industry. It shows promising potential for organic growth with an increasing customer base and product modifications with the help of higher reinvestment of profits.
Brown-Forman Corporation (NYSE: BF-B) has been a good gainer in the last year, as it witnessed a surge of around 19%. The leading brands from the company’s stable include Jack Daniel’s whiskey, Finlandia vodka, and Southern Comfort liqueur. The company achieved good bounce back as a result of better product innovation strategy and revived its customer base amidst huge competition in the industry. Brown-Forman has a current dividend yield of around 1.60%, which is anticipated to increase in the oncoming quarters with the revival in market share and improving gross margins.
The Bottom Line
To begin with, let us look at the current P/E ratio of Constellation, which is at around 16, quite lower than the industry average of around 23. If we do a very simple calculation based on a forecasted EPS for the next two years, taking a modest growth rate of 25%. Pulling it back to the present using a rate of return on common equity of 15%, we get a present EPS of around $5.5. This, when multiplied by a P/E ratio of 16, gives us an estimated price of around $88. This analysis is definitely not accurate, as it does not take a lot of factors like seasonality, growth opportunities, new investments, etc., into account. However, it gives us a slight sense of the direction of the favorable share price movement in the coming years for better stock judgment.
The liquor industry as of now is a highly competitive one, where companies are coming out with different strategies based on pricing, product innovation, cost control, etc, to provide the customers with a quality product at good prices. Constellation has been no exception to this, and the recent acquisition of Crown Imports will be a significant aid to the inorganic growth of the company. The company is gaining a strong foothold in the Canadian and US wine businesses, which are high-sales locations in the liquor industry.
The cash position of the company has been impressive over the last two years, but for fiscal 2013 it experienced some downturn as a result of higher U.S grape and bulk wine purchases. Another interesting point behind higher free cash flows in 2012 was the receipt of tax refunds arising from the sale of Constellation’s U.K business. Hence, the decrease in the free cash flows is not really a point to worry when it comes to investing in the stock. The management should now look forward to framing solid strategies revolving around cost control and reduction, in order to sustain the net margins.
Looking at the points mentioned above, I would not hesitate in recommending Constellation to be a part of your portfolio.
MihirMehta has no position in any stocks mentioned. The Motley Fool recommends Beam and Diageo plc (ADR). 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!