Take a guess and see if you can name the number one total beverage alcohol company in the world. Well I guess I gave it away with the headline for this article. It’s Constellation Brands, Inc. (NYSE:STZ). You’re going to be astonished at the famous names that are under Constellation’s holding company. But you’ll see why Constellation stock is solid.
Beers: Corona, Modelo, Tokoyo, Victoria.
Wines: Nobilo, Robert Mondavi, Wild Horse Winery, Clos du Bois, Franciscan Estates, Kim Crawford, Meiomi, Mark West, Ruffino, and The Prisoner
Spirits: Casa Noble Tequila, Svedka, Black Velvet, Paul Masson, High West
Alcohol is a terrific business. It is also a resilient business. Think about it when times are good, everybody’s drinking to the good times. When times are bad, people are drowning their sorrows in liquor. You can’t keep a good business down. Even during prohibition, demand was so high that a black market developed and gangsters killed each other over booze.
Constellation Stock Has a Bright Future
Constellation stock is been doing exceptionally well, and its cash flow has been so robust that it is been able to raise its dividend every year for quite some time. It just raised its dividend a whopping 42% following a year that generated record earnings-per-share and operating cash flow.
For the year, revenues grew very respectable 3% to $7.59 billion while operating income jumped 13% to $2.47 billion. Diluted EPS jumped 29% to $8.72 per share. The quarterly numbers were even more impressive in certain ways. Net sales actually increased 8% to $1.76 billion, operating income grew 10% to $545 million and diluted net income per share grew 28% to $1.90 per share.
Just at soak in a moment, like you’re marinating in a fine brandy. 29% EPS growth? That’s exceptional. This next year isn’t going to be quite as explosive, with EPS pegged between $9.40 per share $9.70 per share, but that’s still pretty darn good. Particular impressive is free cash flow.
Constellation stock generated $874 million of it last year and is projecting between $1.2 billion and $1.3 billion this coming year. We love free cash flow, especially when it comes a company selling alcoholic beverages, because it means a lot of that cash flow can be put towards the dividend. While there is overhead in the beverage business, there is not a tremendous amount of it.
And when you drill down into the details, most things hold up nicely. Shipment volume increased 8.8% for the year, and was up 10.2% for the quarter. The company is improving its efficiency regarding costs, as operating margin increased 320 basis points to 39.5%. Corona and Modelo are on fire, particularly Modelo, whose depletion volume was up 18% for the quarter.
The Bottom Line on Constellation Stock
One area where STZ stock is struggling is with wine and spirits. Shipment volume declined about 1% for the quarter and the year. That’s not horrible, but not something we want to see.
STZ stock is expensive at about 30x earnings, but earnings are growing at 20%. I have no problem paying a PEG ratio of 1.5 for a company growing at that rate.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
