Should You Buy Constellation Brands Stock After Its Earnings Plunge?

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STZ stock - Should You Buy Constellation Brands Stock After Its Earnings Plunge?

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Shares of Constellation Brands (NYSE:STZ) will make new 52-week lows on Wednesday, after the company reported earnings before the open. Shares plunged more than 7% in pre-market trading and STZ stock opened down 10% at the start of trading. As of this writing, STZ stock is off 7.3%.

On the surface, the report seemed to hit all the right notes. Third-quarter revenue of $1.97 billion came in $60 million ahead of estimates and grew 9.4% year-over-year. Earnings of $2.37 per share came in 31 cents a share, or 15%, above analysts’ estimates. However, that was the company’s non-GAAP results. GAAP earnings came in at $1.56 cents per share, 52 cents per share below consensus estimates.

The results were a speed bump, but guidance caused the real accident. Management now expects full-year earnings of $9.20 per share to $9.30 per share, down from its previous expectation of $9.60 per share to $9.75 per share and below Street expectations of $9.43 per share. It’s no surprise that investors are whacking STZ stock following the results.

Missing GAAP expectations is one thing, guiding down is another. What’s causing the issue?

Breaking Down Constellation Brands Earnings

The company’s investment in Canopy Growth Corp (NYSE:CGC) isn’t helping matters at the moment. On Nov. 1, the company officially completed its $4 billion investment in the cannabis company. STZ used debt to finance the deal, and it estimates the deal will result in a 25 cent per share hit to 2019 earnings. That’s included in the recently reduced guidance, but doesn’t accord for all of it.

Further, Constellation Brands’ equity investment in Canopy also has an impact on STZ’s earnings, as the latter’s stock price fluctuates. While the company has recorded $1.2 billion in unrealized gains since its initial investment in November 2017, it saw a $162 million decrease in CGC value for Q3 2018. Just ask Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) how it feels about having to record fluctuations in unrealized gains and losses.

Worth noting is that the company’s guidance does not include future potential value changes in CGC. These price swings would be practically impossible to predict, but also adds to investor uncertainty. These factors have weighed on investors’ ability to see through the weeds. Meaning that, visibility is now cloudier than it was before and that’s being reflected in the stock price in the form of higher volatility.

The company still remains optimistic on its long-term trajectory. As investors, that’s what should be the focus, but when the quarter comes up short it’s hard to look through the negativity. There are still positives though. For instance, operating cash flow and free cash flow generation remains strong, while the company recently pushed through a more than 40% increase to its dividend in May.

Good? Yes. Enough to offset the quarter? Apparently not.

Trading STZ Stock

chart of STZ stock
Source: Chart courtesy of StockCharts.com

It’s quite discouraging to see STZ stock rally up to the 200-week moving average this week, only to be effortlessly swatted aside. The stock took out its December lows, although is currently holding up right near those levels now. Either way, it’s an uninspiring chart.

We flagged the ~$200 level last year as a level to buy against. However, below $200 and the buy-the-dip strategy vanishes. We’re now down almost $50 per share from that level, highlighting how important it is to stay disciplined when it comes to investing.

At this point, I don’t see notable support until $140 to $143. On the upside, I’m not too interested in STZ stock until it gets back over its 200-week moving average. That or investors are going to have to warm up to Constellation Brands earnings and buy the stock this week. Let’s see how STZ stock shakes out the rest of this week before putting our hard-earned money to work.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/constellation-brands-stz-stock-earnings-buy-or-sell/.

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