Constellation Brands, Inc.

STZ Details

Constellation Brands, Inc. (NASDAQ: STZ) is an international producer and seller of beer, wine, and spirits with strong base in the U.S., Mexico, New Zealand, and Italy.

Result Performance – For the First Quarter Ended 31 May 2021 – (Q1FY22)

• Rise in Net Sales: Net sales stood at $2,027 million, up 3% YoY. The wine and spirits business segment reported strong, organic net sales growth led by a sound performance from Meiomi, The Prisoner Brand Family, Simi, Ruffino, and High West. Meanwhile, the beer depletion growth gained momentum led by strong consumer demand and business delivers strong operating margin
• Reported basis EPS of $(4.74) and comparable basis EPS of $2.33, including Canopy equity losses of $0.18, while excluding Canopy equity losses, attained comparable basis EPS of $2.51, an increase of 3%
• Generated $716 million of operating cash flow and $602 million of free cash flow, up 4% and 11%, respectively

Key Data (Source: Company Reports) 

Recent Update:

• On 26 July 2021, the company stated that it has offered a notice for full redemption before the maturity of all its outstanding 2.700% Senior Notes due 2022 and 2.650% Senior Notes due 2022 to be affected on August 25, 2021. As of 26 July 2021, the outstanding principal note stood at $1.2 billion.
• On 30 June 2021, the company stated that it has accelerated share repurchase agreement with Goldman Sachs & Co. LLC to repurchase $500.0 million of its Class A common stock.

Risk:

The company is exposed to the risk of quality water, agricultural, and other raw materials, packaging materials, limited group of suppliers of glass bottles. Further, the company is exposed to complex information systems and third-party global networks, cyber-attacks, design, and ongoing implementation of new global ERP, among other factors.

Outlook:

• The company plans ~$500 million of share repurchases in Q2FY22, and ~$1.0 billion of share repurchases by FY22, while still committed to ~$2.5 billion of share repurchases by FY23
• FY22 EPS on the reported basis is expected in the ambit of $2.70-$3.00 and on a comparable basis (Excl. Canopy) in the range of $10.00-$10.30. Other FY22 forecasts include:
  • Beer: net sales growth 7-9%; operating income growth 3-5%
  • Wine and Spirits: net sales decline 22-24% and operating income decline 23-25%; organic net sales growth 2-4%
  • Operating cash flow: $2.4-$2.6 billion
  • Capital expenditures: $1.0-$1.1 billion, including ~$900 million targeted for Mexico beer operations expansion activities
  • Free cash flow: $1.4-$1.5 billion

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

Over the last nine months, the stock was up by ~+9.7% and in 1 year the stock increased by +23.44%. The stock is trading above the average price of the 52-week low-high range of $160.6296-$244.75, respectively.

We have applied P/E multiple based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a slight discount to peer average P/E multiple (NTM basis) considering the risk associated with COVID-19 related circumstances, higher cash conversion cycle at 107.9 days in Q1FY22 versus an industry median of 23.1 days.

Considering, the aforementioned factors, decent returns, and associated risks, we suggest investors to book profits and give a “Sell” recommendation on the stock at the current market price of $217.58 per share, as on 9.53 am Washington DC, USA Time, as on 11^th August 2021. 

Daily Technical Price Chart

Source: REFINITIV, Note: The purple color line reflects RSI (14-Period) 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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