Is Investing In This Wine Company A Smart Investment?

Sidhi 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)  is the largest wine company in the world with more than 100 brands in its portfolio. Its brands include Robert Mondavi, Clos du Bois, Manischewitz, Rex Goliath wines and Svedka vodka. This brand has always remained with people while celebrating big moments or enjoying quiet ones, staying true to its vision: to elevate life with every glass raised.

Let’s analyze it further to know what make this company a wine giant.

You want more, They will give you more

The company’s focus brand portfolio, including Woodbridge, Rex Goliath, Kim Crawford, Ruffino and Mark West are performing well in the market. Its continuous innovation initiatives helped it to launch 20 new wines in the last fiscal year. The company’s new labels include Simply Naked, Primal Roots and the Dreaming Tree.  The Dreaming Tree is named after a 1998 song by the Dave Matthews Band. One of the most promising new entries launched in 2011 is Simply Naked, which sold nearly 200,000 cases in its first six months and is expected to surpass 300,000 cases in fiscal year 2013.

During the industry's busiest season for wine and spirits sales, the company launched a new mobile marketing program featuring popular wine brands within the shopkick mobile app. The free shopkick mobile app, which has more than 4 million iPhone and Android users, rewards customers in several ways.  Constellation Brands is the first wine, beer, and spirits company to be featured on the mobile application.

Third quarter results: A Preview

Investors reacted favorably to the financials of this wine giant as the numbers beat the analysts’ expectations and the company raised its adjusted income estimate for fiscal 2013 for the second time this year. The company earned $109.5 million, or 58 cents per share, for the quarter ended November 30, up from $104.8 million or 52 cents per share earned in the same months a year ago. Excluding restructuring, acquisition, and related charges, earnings rose to 63 cents a share; jumping over 21% from the year-ago quarter’s earnings. Quarterly sales reached $766.9 million, up by 9% from the prior year’s $700.7 million as sales volume rose.  

Gross margin edged up to 40.5% from 40.4%, though input costs surged 9.2% to $456.1 million in the quarter. Adjusted selling, general, and administrative (SG&A) expenses totaled 25.4% to $141.3 million in the quarter primarily due to increased promotional and marketing expenses incurred to support innovation initiatives at the company’s U.S. wine and spirits business. Its core markets include the United States, Canada, and New Zealand. Net sales of wine and spirits rose 6% on an organic basis during the third quarter.

Constellation said its earnings from its 50% stake in the Crown Imports beer joint venture declined from $43 million to $39 million.  The share price has been hitting fresh highs, since it has agreed to buy the remaining half at $1.85 billion in the first quarter of 2013. Crown supplies the U.S. with Grupo Modelo beers such as Modelo and Corona. Acquiring the entire venture, Constellation is expected to almost double its revenue. The joint venture is the No. 3 beer supplier in the U.S., with Corona being the best-selling imported beer in the country.

Who got the best wine?

Above all, the company faces intense competition from other well-established players in the industry, such as Brown-Forman, Molson Coors Brewing Company and Diageo.

Brown-Forman (NYSE: BF-B), one of the leading producers and distributors of premium alcoholic beverages in the world, has a strong portfolio of more than 25 premium brands. The company recently released its earnings on December 5 and reported $0.80 earnings per share on revenue of $1.01 billion.

The company has a consistent track-record of returning cash to its shareholders in the form of share repurchase and dividend payment for the past 65 years and has been increasing cash dividend for the last 29 years.  

Molson Coors Brewing Company (NYSE: TAP), one of the world’s largest brewers, includes signature brands like Coors Light, Molson Canadian, Staropramen, and Carling. The company’s strong brand portfolio, continuous innovation and cost-saving initiatives help it to maximize profitable growth opportunities in the core markets and expand into new and emerging markets.

Diageo (NYSE: DEO), the biggest and best diversified of the lot, is up 37% over the past 52 weeks. Some well-known brands in its portfolio include Smirnoff, Guinness, Johnnie Walker, Baileys, Captain Morgan, Tanqueray, and Sterling Vineyards wines. Diageo, with current annual dividend yield of 2.4%, offers to buy 26% stake in India’s United Spirits is delayed as it awaits regulatory approvals in India.

The bottom-line

This wine and spirits maker boosted its profit prediction from $2.10 to $2.20 per share for its fiscal year, which ends in February. Fiscal third-quarter profit rose 4.5% on the back of lower than expected tax rate of 28%, increased marketing driven higher volumes,  better product mix and improved margins, though input costs and promotional costs rose.  

The company has a market cap of about $6.7 billion with return on equity more than 15% and the operating margin higher than the industry average. Constellation Brands has a 1-year low of $18.50 and a 1-year high of $37.57. The share price have risen more than 80% in the past year. Constellation, with attractive valuations, is improving growth in beer and wine. With a favorable wine industry supply, I would definitely like to have this company’s in my diversified portfolio.

sidhikharkia has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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