Earnings Preview: Constellation

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I have always believed that a company’s earnings should meet realistic investors’ expectations to support the movement in stock prices. If it is not so, then the company’s stock cannot sustain an upsurge based only on investor sentiment for long. With Constellation Brands (NYSE: STZ) about to release its earnings on July 2, the only thought that crosses my mind is whether or not it will be able to perform well enough to sustain its growing share price.

The largest wine maker in the world has gained more than 60% in the last year and is still going strong. On average Constellation’s revenue is estimated to rise 6% compared to the same period last year to $674.24 million. On the upper side it can reach up to $689 million. Constellation’s revenue has risen 5% year-on-year in the last four quarters and increased 10% in the most recent quarter.

Constellation has a portfolio of some of the most recognized brands of wine, spirits, and beers in the world such as Corona Extra, Pacifico, St. Pauli Girl, Black Velvet and Fleischmann's. The company has been strategically adding new products in its wine and spirits business, driving growth in its market share in the U.S. Further, Constellation has increased its distribution points in retail, which should only help the top line and make the estimates more achievable.

About earnings

Currently the earnings for Constellation are estimated to be $0.41 a share, an increase from $0.40 per share, keeping up a positive vibe about the company. The company’s earnings have beaten analysts’ estimates in the last four quarters, with a double-digit surprise in two of them. As everything on the top line and acquisition is falling in place, there is good reason to believe that Constellation might best analysts in this quarter too.

Let’s brew it up 

In the last quarter, Anheuser-Busch InBev NV (NYSE: BUD) had to sell 50% of its stake in its Crown Imports joint venture to Constellation in order to satisfy an antitrust agreement with the Justice Department. Furthermore, as a part of the deal, Constellation bought the Piedras Negras brewery, which will be the company’s principal production facility of Corona beer and other Crown Import products to the U.S. market.

Post the Modelo deal,Constellation is now the third largest beer producer in the U.S. Moving forward, it has plans to invest $500 million to $600 million in a span of three years to increase its production in Nava and Mexico breweries in order to double its capacity to meet the growing demand of beer in the U.S. It has been noticed previously that beer drinkers are more brand loyal, which should give Constellation more leverage in pricing, thus improving its margins in the long run.

Grab some Buds

Anheuser-Busch InBev has also gained immensely from the acquisition of Grupo Modelo. The $20 billion deal will help the company to enter South American markets. Anheuser-Busch InBev has added some of the most recognized beer names to its portfolio. That, along with the business insights and better liquidity position of the company, should only add further value.

The acquisition should add $7 billion in sales currently, with around 15% growth in 2013 and 2014. Anheuser-Busch InBev can generate this growth as it is a big brand name in the emerging markets, where beer sales are also on the rise compared to the U.S. market. However, the synergies of this acquisition will not continue perpetually, so the top line growth should reduce to 2%-3% in 2015-2017 unless the company goes shopping again.

Apart from acquisitions adding tremendous upside potential to the stock prices of Anheuser-Busch InBev, it also has a stable dividend of 2.2% with enough free cash flow to support it in the future. Moving forward, as the company repays its debt used to finance Modelo’s acquisition and its balance sheet gets better, it would become a more attractive investment.

Final words

Constellation is moving strong and is surprising its investors every quarter with something extra. In this quarter analyst’s estimates should be met easily. However, in case analysts’ estimates are missed and it triggers share price depreciation, it should be seen as a buying opportunity. The acquisition of Modelo and company’s strategic operations should only help in delivering better performance in the future.

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