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Constellation Brands - Q2 2012

October 06, 2011 | About:
The Science of Hitting

The Science of Hitting

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Constellation Brands (STZ), the world’s leading premium wine company, reported Q2 2012 results on Thursday morning. I wrote an article about the company on Monday, and have added some of the key points below on the company and where they are trying to take their business:

In wine, the company has more than 100 brands (with 12 new items launched in 2011) sold in over 100 countries. They are the number one premium wine company in the U.S., and the number one wine company overall in Canada.

The company formed a joint venture in January 2007 with Grupo Modelo called Crown Imports, through which the company is the leader is the imported U.S. beer category and has six of the top 25 brands including Corona Extra (leading imported beer), St. Pauli Girl (number No. 2 German beer), and Tsingtao (No. 1 Chinese beer). Crown Imports holds a 43% dollar share of the imported beer market in the United States and is the third largest U.S. beer company overall (8% dollar share), with 2011 sales of $2.4 billion.

The report on Thursday gave the stock a jolt, which ended nearly 9% higher; here are some of the highlights from the conference call and the press release:

Net sales decreased 20% in the quarter, due primarily to the divestiture of 80% of the Australian and U.K. wine businesses in January. On an organic constant currency basis, sales were flat, due to favorable product mix and decreasing volume cancelling each other out.

For the quarter, gross margins jumped substantially, up to 41% from 36.5% in 2011; as noted on the call, this is largely due to the fact that the Australian and U.K. divestiture removed lower gross margin businesses from the company. On a reported basis, GAAP earnings of $0.76 were 77% higher than last year; however, the majority of this increase was driven by the tax rate, which was 3% compared to 35% in Q2 2011.

For the quarter, the Crown JV generated net sales of $727 million (up 7%), and operating income of $126 million (down 4%), $63 million on which is attributable to Constellation Brands. For the full year, management is targeting low to mid single digit depletion growth, and flat/down operating earnings due to agreed upon incremental funding levels for marketing and promotion.

As management noted at the Barclay’s conference, part of the company’s strategy is using free cash flow to reduce their outstanding debt levels, which is down from $5.2 billion in 2008 to $2.9 billion today; in the words of CFO Bob Ryder, “We've generated $478 million of free cash flow for the first 6 months, $215 million more than the same period last year. This strong performance has enabled us to reduce debt by $290 million since the end of fiscal 2011,” which continues the company’s strong move towards debt (and interest expense) reduction - “Our continued strong free cash flow generation and deleveraging efforts have created flexibility in the management of our capital structure.”

Due to this flexibility, management was able to repurchase 9.8 million shares at a cost of $188 million during the second quarter. In the words of CEO Rob Sands, “While we plan to continue to pay down debt in fiscal 2012, we have redeployed a portion of our free cash flow to repurchase our stock. We currently believe that Constellation's shares represent good value, especially as our market momentum builds in the second half of this year, and as we continue to reap the benefits of our ongoing transformation initiatives.”

For the full year, management upped their EPS guidance to a range of $2.00-2.10, from previous estimates of $1.90-2.00; based on 2011 EPS of $1.91, management’s expectations suggests year over year EPS growth will fall in the range of 5-10%. As noted on the call, the increase reflects the benefit from share repurchases, along with a change in the expected tax rate (27% versus earlier guidance of 29%).

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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Comments

sjzhao2003
Sjzhao2003 - 2 years ago
STZ is in a terrible business since the average wine drinker is notorious for the lack of brand/label loyalty, which as a wine aficionado I can testify. Most wine drinkers don't care about the label, they just want a red or a white or something from Nappa or whatever. And the selection is simply mind boggling: there are tens of thousands of wineries in CA alone, so you'll have hundreds of different labels to choose from any given store. You only get strong loyalty when you move to the premium or even superpremium labels. Most of STZ wines are mass market or low-to-mid tier premium labels. So they may have minimal pricing power.

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