As we are all well aware, the Covid-19 pandemic has wrecked havoc on numerous parts of the economy. Among the hardest hit were those companies that supply food and beverages to restaurants and bars.
Constellation Brands Inc. (STZ, Financial) was not immune to the spread of the coronavirus. The beer, wine and spirit maker recorded a 7% drop in revenue in its first quarter. Beer volumes declined 7.2%, while net beers sales were down 6%.
The most recent quarter was much better, with signs of growth returning to the company. As a reuslt, long-term investors should consider buying Constellation Brands at the current price.
Quarterly highlights
Constellation Brands announced earnings results for the second quarter of fiscal 2021 on Oct.1. The company's revenue fell 3.6% to $2.3 billion, but managed to come in $75 million above what Wall Street analysts had expected. Adjusted earnings per share increased 4 cents, or 1.5%, to $2.76. This was 25 cents above consensus estimates.
Beer net sales were down marginally year over year. Organic net sales ticked higher by 1%, which was an improvement from the first quarter of the fiscal year. Shipment volumes were lower by 1.6% with organic shipment volumes declining 0.9%.
However, beer depletion volumes remained strong at 4.7%. This was driven by strong off-premise channels, which more than offset a 50% decrease in on-premise volumes due to the restrictions placed on bars and restaurants related to the pandemic. Even as on-premise volumes were cut in half, beer depletion volumes improved by almost 5% because of the quick pivot to off-premise distribution. This is a nimble feat for such a large company.
Even with the headwinds it faced, the beer category performed quite well. The Corona Brand Family continues to be in high demand. Corona Hard Seltzer, Corona Premier and Corona Extra grew double-digits in the quarter. Corona Hard Seltzer, which debuted in the spring time, is already the fourth best-selling hard seltzer. The company plans to introduce new flavors over time as it aims to be a major player in this category. This should aid the company's business as it expands into this growing category.
Modelo Especial outperformed Constellation Brands' beer segment with depletion growth of 9% and cemented its place as the third best-selling beer brand in the entire U.S. The brand is on pace for its 35th consecutive year of growth. Pacifico grew nearly 30% and was one of the top share gainers among all imported beers.
Reduced marketing expenses and better pricing helped the operating margin for the beer segment improve 70 basis points to 42.5%.
Wine and spirits weren't nearly as successful as beer. Net sales dropped 11%. Organic sales decreased 9%, matching the previous quarter's figure. Shipment volumes were down more than 19%, with organic shipment volumes falling 16.5%. Depletion volume was lower by 3.3%
While this segment as a whole suffered a decline, there were pockets of growth within wine and spirts. The company's Power Brands outpaced the entire higher-end wine category. This was due to double-digit growth rates for Kim Crawford, Meiomi and The Prisoner Brand Family.
Constellation Brands is taking advantage of the popularity of their high-end wine lines and introducing new products in the third quarter, including additional names for the Meiomi and The Prisoner Family brands. In spirits, ready-to-drink cocktails for Svedka and High West will also be made available.
Despite the weakness of the wine and spirits category, operating margins improved 310 basis points to 25.9% due to product mix, pricing and lower advertising spending.
Continuing a theme from last quarter, Constellation Brands has leveraged its e-commerce business in an effort to offset the drop off of on-premise consumption. The company's online business is seeing between three and four times pre-Covid-19 volumes. This should be a major source of revenue even when restaurants and bars begin to operate on a more typical basis as consumers grow comfortable purchasing alcohol online.
The company also addressed its investment in Canopy Growth Corp. (CGC, Financial), which once again was a headwind to results. Adjusted earnings per share included Canopy Growth equity losses of 15 cents. Still, leadership points to the potential for cannabis products. Canopy Growth has 75% market share for cannabis beverage products in Canada and will be launching its product line in the U.S. next summer.
As seen with Canopy Growth, Constellation Brands has never been shy about making acquisitions or investments in companies it feels can supplement its business. In the second quarter, the company purchased the remaining interest it didn't own in premium spirts maker Cooper & Kings. Constellation Brands also announced that it took a minority stake in Booker Vineyard's, a super-luxury, direct-to-consumer wine company.
Constellation Brands closed Friday at $185.60. According to analysts surveyed by Seeking Alpha, the company is expected to earn $9.18 this fiscal year, which gives the stock a forward price-earnings ratio of 20.2. The stock has traded with an average price-earnings ratio of 22.6 over the last five years according to Value Line, meaning shares are presently undervalued compared to the historical average.
If the stock were to trade with its average valuation then the share price would reach $207 using fiscal year 2021 earning per share estimates. Achieving this price target would reward shareholders with an 11.5% gain in share price. In addition, the stock would offer a 1.5% dividend yield at this price, resulting in possible total returns of 13%.
Final thoughts
Constellation Brands saw improvements in the second quarter. While net sales were still down year over year, they were much better from the first quarter of the year.
Beer depletion volumes were almost 5%, with top products continuing to acquire additional market share. Constellation Brands is a very innovative company, with the performance of Corona Hard Seltzer a prime example of this. Wine and spirits as a segment were weak, but high-end brands continue to gain popularity amongst consumers.
Shares of Constellation Brands continue to trade below their average price-earnings ratio using this year's estimates.
It should be noted that next fiscal year, in all likelihood, will be better for Constellation Brands as a recovery from the Covid-19 pandemic should take place at some point. The recovery of on-premise consumption, whenever that takes place, will only add to the company's performance. Off-premise sales and the leadership position of key products throughout the portfolio are evidence of the popularity of Constellation Brands' offerings.
This belief that next fiscal year will be better is reflected in analysts' estimates of $10 of earnings per share in fiscal year 2022. Based off of next year's numbers, Constellation Brands appears even more undervalued than it does today. Those with a long-term view of the company could see solid returns by purchasing shares of Constellation Brands.
Disclosure: The author has no position in any stocks discussed in this article.
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