Constellation Brands — How to Play Thursday’s Earnings Report

by Jamie Dlugosch | October 5, 2011 2:06 pm

Wine and beer company Constellation Brands (NYSE:STZ[1]) reports earnings for the quarter ending Aug. 31 on Thursday. With a market that is highly correlated at the moment, the earnings news should help investors separate fact from fiction.

Historically, the beer and wine industry is said to be defensive. Sales in the category are likely to show incremental growth irrespective of economic conditions. Given the stresses in the economy at the moment, one might think more consumers are drinking their troubles away[2].

The market, of course, is focused on other items at the moment — mainly issues in Europe and the possibility of a double-dip recession.

During the past four quarters, Constellation has exceeded average Wall Street estimates:

Constellation Brands STZ

In the last quarter ending May 31, the company beat estimates but reduced guidance for the year. The company stated it would make less because of charges associated with layoffs. Normally such a one-time event would not be a concern, but in this market environment, investors ran for the hills.

Interestingly the Wall Street estimates for the quarter ending Aug. 31 have increased during the past 90 days. The expectation today is for the company to make 66 cents per share, up from 62 cents per share. For the fiscal year ending Feb. 28, 2012, the average Wall Street estimate is $1.98 per share. That number increases 9% to $2.15 in the following year.

Constellation Brands STZ
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At current prices, STZ shares trade for nine times current-fiscal-year estimated earnings. Since the last earnings report, shares have fallen in value by 11%. During the past 12 months, the stock is flat.

Given the volatility in the market, one would think investors would be flocking to Constellation. The defensive nature of the company combined with strong demand for its products ought to be attractive to anyone looking to preserve capital with the prospect of incremental growth.

Constellation is trading for a multiple of earnings equal to its expected profit growth rate. That is cheap considering other alternatives. If demand for spirits is growing because of distress around the globe, earnings are likely to be better than expected. I don’t think investors can get hurt owning Constellation at these levels.

Look for the company to meet increased Wall Street expectations in the period when it reports results Thursday. Shares likely will jump 3% to 5% with solid numbers.

Other companies reporting results this week include Helen of Troy (NASDAQ:HELE[3]).

As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.

  1. STZ:
  2. more consumers are drinking their troubles away:
  3. HELE:

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