Read Us And Find Out Why Constellation Brands Is a Great Investment Idea
This leading international producer and marketer of alcoholic beverages has a broad portfolio of imported beer, wine and distilled spirits brands
The Business
We expect net sales to decline by roughly 1% in FY 22 (Feb.) before increasing by 6% in FY 23, driven by a 23% decline in Wine and Spirits net sales, partially offset by an 8% increase in Beer sales. STZ’s net sales rose 3.3% in FY 21. We see growth for beer brands aided by market share gains in on-premise taps and cans over the next few years, increased marketing, and new product launches (particularly Corona Hard Seltzer). Wine and Spirits net sales should decline, driven primarily by the sale of approximately 30 lower-grade Wine brands to E&J Gallo Winery for $1.7 billion and the sale of Black Velvet Canadian Whisky for $266 million, as STZ divested underperforming brands. We see adjusted gross margin expanding by 20 bps in FY 22 from the 52.4% margin achieved in FY 21, primarily due to higher Wine & Spirits margins due to the divestiture of some lowermargin brands, partially offset by weaker Beer margins from higher marketing costs to support new product launches. STZ is expanding brewery capacity in Mexico, which we expect to boost volumes and lower operating costs longer-term.
The company aims to position its product portfolio to benefit from favorable alcohol industry trends. U.S. industry trends include high-end beer (led by imported, craft and domestic super premium) growing faster than total beer; growth in U.S. per capita consumption of wine and spirits and volume of premium and above wine and spirits growing faster than value-priced wine and spirits; and consolidation of suppliers, wholesalers and retailers. To capitalize on these trends, the company’s strategy focuses on a combination of organic growth and acquisitions, with a focus on the higher-growth, highermargin premium categories of the beverage alcohol industry.
Investment Case
Our Buy opinion reflects a positive view on STZ’s pivot toward premium brands and planned share repurchases. We calculate the intermediate-term value of its 38.6% Canopy Growth stake has increased due to shifting prospects surrounding the timing of U.S. federal cannabis deschedulization. STZ's wine and spirits business has experienced soft demand in recent years. Longer term, we see earnings benefiting from an expansion of beer production capacity and are positive on STZ's stake in Canopy, particularly given its exclusive rights to purchase leading U.S.cannabis license holder Acreage Holdings. Risks to our rating and target price include risks related to a capacity expansion in its Mexican production facility, higher commodity costs, cannabis market fundamentals, increased discounting, and weaker-than-expected consumer demand.
Our 12-month price target of $270 reflects a FY 23 P/E of 22.5x, a slight discount to STZ's 5- year mean forward P/E of 22.7x that we believe is justified by stronger future growth prospects. We see various near-term risks weighing on valuation, but expect strong U.S. demand for imported beers and its beer capacity expansion should drive market share gains
Our risk assessment is Medium. STZ operates in an industry that we think has demonstrated stable revenue streams. However, we have corporate governance concerns relating to STZ's dualclass stock structure with unequal voting rights.
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