Deal or No Deal, This Spirits Maker is a Winner

Robert 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) has spent the past decade transforming itself from a sleepy, regional wine maker into the world’s largest premium wine company, with well-known brands that include Robert Mondavi and Ruffino. From 2009 through 2011, the company sold off its value-priced spirits and wine operations, while reinvesting the funds into the premium-priced beer and wine category, an area that continues to win a larger percentage of the industry’s total sales volume. After a doubling of its stock price over the past twelve months, is Constellation still a worthy investment?

What’s the value?

In the first nine months of FY 2013, Constellation reported decent financial results, with increases in net sales and adjusted operating income of 3.7% and 1.3%, respectively, versus the prior-year period. Its sales benefited from a small, organic increase in its wine business, as well as the acquisitions of Ruffino in 2011 and Mark West in 2012. In addition, Constellation’s operating margin held its level near a five-year high, as pricing in the premium wine category remained generally strong.

However, most of Constellation’s recent stock appreciation is due to its potential acquisition of the rest of Crown Imports, the domestic distributor of Grupo Modelo’s Mexican beer portfolio. Currently, Crown Imports is a joint venture between Constellation, Grupo Modelo, and Anheuser-Busch InBev (NYSE: BUD). InBev is selling its share of Crown Imports in a bid to win approval for its acquisition of the remainder of Grupo Modelo. With stagnant overall sales volumes in the global beer industry, InBev sees growth opportunities in Mexico, a growing country and the world’s fourth largest beer market.

While the federal government opposes the Crown Imports deal, Constellation should benefit with or without a completed transaction. The company’s stake in Crown Imports continues to appreciate in value as Americans gravitate toward its Mexican beer offerings, including Corona, Modelo Especial, and Pacifico. In FY2013, Crown Imports’ sales have risen 5.9% as each of its brands has generated volume increases, led by Modelo Especial’s 21% gain. Looking forward, Crown Imports believes that it can acquire a 20% share of the U.S. market, a sharp increase from current levels.

Looking at the craft breweries

Constellation also continues to pursue acquisitions in the craft beer segment, an area of the industry that has grown at double-digit rates for the past decade. The industry is led by trailblazer Boston Beer (NYSE: SAM), which was founded by Jim Koch in his kitchen in 1984. The company has grown sales by 45% over the past four fiscal years, due to both the increased popularity of its brews and the introduction of new products in the malt and cider categories.

In FY 2012, Boston Beer reported strong financial results, with increases in net sales and adjusted operating income of 13.1% and 14.2%, respectively, versus the prior year. The company achieved 10% growth in its core shipments to 2.7 million barrels, with solid performance in its Twisted Tea malt and Angry Orchard cider beverages. Despite higher commodity costs, Boston Beer maintained a solid operating margin due to consumers’ willingness to pay higher prices for better quality beers.

Looking forward, Boston Beer is forecasting another solid year in 2013, with stable pricing and another double-digit increase in volume growth. The company has reduced its operating risks by continuing to add to a product portfolio that includes 50 styles of craft beer. In addition, Boston Beer is investing in future craft brewers through its Alchemy & Science incubator, which should provide a pipeline of new products that will lead to future growth opportunities.

The bottom line

Constellation has markedly improved its financial profile and operating position with its recent string of acquisitions and divestitures.  While any further control of the global beer market by InBev would be bad for consumers, due to its dominance in key markets, the federal government will likely approve the revised Crown Imports deal.  The new deal also gives Constellation ownership of InBev's Piedras Negras brewery and direct control of the distribution process.  Regardless of the outcome, though, Constellation will increasingly be looking to expand its presence in the premium-priced beer segment, which includes both craft and import beers. Its 19 P/E multiple may give investors some pause, but the stock needs to be on investors’ buy list in any market pullback.

Robert Hanley has no position in any stocks mentioned. The Motley Fool recommends Boston Beer. The Motley Fool owns shares of Boston Beer. 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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