Constellation Brands Stock Shoots for the Stars (STZ)

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In case you were wondering, Constellation Brands (STZ) has nothing to do with astronomy, although you may feel like you’re in the night sky after consuming their wine, beer, spirits, and specialty beverages.

constellationbrands185STZ is behind everything from Svedka Vodka to Casa Noble Tequila, Corona beer, and Robert Mondavi wines. They literally own dozens of different labels across all kinds of alcoholic beverages.

And people are liquoring up these days, based on the earnings results.

Overall sales increased 6% year over year to $1.8 billion, with gross profit increasing 10% to $737 million. Operating income increased 9% to $427 million, giving STZ those very nice operating margins of 23%. After paying interest and taxes, the net income came in at $239 million, up a very impressive 15% over last year’s $207 million. That’s quite a leap for a beverage company, and puts STZ firmly in the growth stock category.

Like everyone else, STZ had some currency impact, but not as bad as most. Consolidated net sales rose 7% after backing out 1% in currency effects. This was led by beer, with 11% net sales increases. That segment had no currency impact because apparently only Americans really drink the beers that STZ offers. Shipment volume popped 10%. Beer is simply more popular with STZ consumers, and accounts for about two-thirds of total sales. Segment operating income rose 17% over last year.

Wine and spirits got clocked, dragging the 4% increase down by 300 basis points to a 1% increase. Shipment volume in wine and spirits rose 4%, which makes sense since they tend to be more expensive. STZ really isn’t in the super-premium wine business. They have good, meat-and-potatoes labels like Ravenswood, which target lower price points. If you think of their wines as being the Coronas of beer, then you get my drift. Wine net sales were flat while spirits rose 8%, but operating income overall only grew 1%.

Still, this all contributed to $206 million in operating cash flow and $76 million in free cash flow. STZ repaid $79 million in debt, which we always like to see, taking long-term debt down to $7 billion. That’s a lot of debt, but it’s only accruing interest at about 4%.

What’s going on in the world of alcoholic beverages that drove these results? For starters, Modelo Beer seems to be a big hit. Imported beer is catching demand, and the sector saw a 13% increase in volume in Q1. That’s a pretty huge leap in any business, and it seems like Americans are taking to these Mexican imports like Modelo and Corona. It’s likely that the increasing Mexican-American population contributes to this trend.

Now, part of the reason the wine segment is struggling is because Constellation Brands sells good solid table wines, but they tend to compete for artisan and imported beers. Consequently, wine exports declined by 1.3% in Q1, and since its these table wines that account for almost 80% of exports, we can see what Constellation Brands suffered in that category.

However, because Constellation Brands doesn’t focus on the high-end liquor business, it misses out on the 18% increase in distilled spirits imports.

The Bottom Line

Is STZ stock a buy after this report? Well, it’s mighty expensive. With FY16 estimates of $4.60 to $5 floating around, the stock is trading at a price-to-earnings ratio of 23 even the highest estimate, with FY EPS growth of 15% at best.

That’s not an insane valuation, but it is expensive for my taste, so to speak.

As of this writing, Lawrence Meyers did not hold an interest in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/constellation-brands-stock-shoots-for-the-stars-stz/.

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