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Nathan Parsh
Nathan Parsh
Articles (218) 

Constellation Brands' 3rd Quarter Was a Barnburner

Both the beer and wine and spirits businesses had double-digit organic growth, but the valuation has become rich

January 10, 2021 | About:

I have been bullish on Constellation Brands, Inc. (NYSE:STZ), the #3 beer company in the United States, for quite some time. The last time I discussed the company, I stated the stock was undervalued by almost 12%.

Since then, shares have blown past my price target and are higher by 24%. Thus, it's time to re-assess the situation: is there more room to grow for the stock, or should investors wait for a pullback before purchasing Constellation Brands?

Earnings results

Constellation Brands reported earnings results for its third quarter of fiscal 2020 on Jan. 7 that easily topped what analysts had expected (the company's fiscal year ends in February). The company's revenue surged 22% year-over-year to $2.44 billion, which was $220 million above what Wall Street analysts had expected. Adjusted earnings per share improved 95 cents, or 44%, to $3.09. This was 68 cents higher than the market had expected. Comparable operating income was up 30% to $835 million.

Beer was the top performer as organic net sales grew 30% and organic shipment volume was up 28%. Beer depletion volume was up more than 12% as off-premise channels continue to more than offset a 35% reduction in the company's on-premise business due to Covid-19. Constellation Brands continues to see consumers flock to its brands so much that the results of on-premise almost don't matter at the moment. This bodes well for the company.

Volume growth of this magnitude was aided by the performance across multiple brands. Modelo Especial's depletion volume accelerated from 9% to 20% quarter-over-quarter. The brand was also the top import share gainer. The Corona Brand Family also achieved double-digit depletion volume growth. Corona Hard Seltzer, which debuted last spring, continues to see excellent results. Constellation Brands plans to continue to innovate in this channel and will be bringing additional products to market in early fiscal 2022. Pacifico grew nearly 35% and was the top share gainer in its segment. Leadership stated that they expect shipment volumes will continue to be considerably higher than depletion.

The beer business operating margin was quite good as the 42.6% result was an improvement of 330 basis point improvement. Constellation Brands expects beer to deliver 7% to 9% sales growth and 8% to 10% operating income growth for the fiscal year. These are very high growth rates for beer, especially considering weaker results in the prior quarter. This again points to high demand for products.

Wine and spirits were much improved from the previous quarters of the fiscal year, where sales were down double-digits and organic shipment volumes were lower by 9%. Net sales returned to growth and were higher by 10% year-over-year. Organic net sales climbed 13%. Organic shipment volumes improved 6.5% though depletion volumes were lower by 0.8%. Still, this is a remarkable change in fortunes from just a quarter ago. As with beer, this quick reversal shows that Constellation Brands' brands are in high demand among consumers.

Constellation Brands' high-end wine brands continue to lead this category for the company. Kim Crawford, Meiomi and the Prisoner Brand Family all produced double-digit growth, a theme continued from the prior quarter. The company continues to bring new products to market, such as the Meiomi cabernet sauvignon. Constellation Brands says that this product is now the largest ultra-premium wine launch this year.

The past year has been a year of change for the wine and spirits as Constellation Brands has divested several lower priced brands in order to focus on premium names. While wine and spirits are expected to see a 9% to 11% decrease in sales and 16% to 18% decline in operating income, the retained product portfolio should grow net sales of 2% to 4%. Given the weakness in the category through the first three quarters of the year, I take this small increase as a positive.

The operating margin for wine and spirits fell 220 basis points to 24%. This was due to costs related to wildfires that impacted business operations and higher marketing expense more than offsetting the benefits from product mix and pricing.

I think the company's focus on higher-end products in its wine and spirits business is likely a long-term winner. These products have showed impressive growth rates the past few quarters and the continued innovation should only drive higher demand.


Following third-quarter results, Constellation Brands reissued its guidance for the year after previously pulling it. The company expects adjusted EPS in a range of $9.80 to $10.05 for full fiscal 2021, which would be a 9% improvement from the previous fiscal year.


While the quarter was great, the stock's valuation is now less attractive.

Using Friday's closing price of $230.21 and the midpoint of fiscal 2021 guidance, Constellation Brands has a forward price-earnings ratio of 23.2. This is a slight premium to the stock's five-year average price-earnings ratio of 22.6 and higher than the price-earnings ratio of 20.2 that shares traded with at the time of my last article on the company.

GuruFocus also finds the current valuation to be above its GF Value:


Constellation Brands has a GF Value of $202.65, meaning that the stock currently has a price-to-GF Value ratio of 1.14. This earns the stock a rating of modestly overvalued from GuruFocus. Shares would have to decrease 12% to trade with the GF Value.

Final thoughts

Constellation Brands had an excellent third quarter. The beer business rebounded from a weak second-quarter to post 30% organic sales growth and a double-digit depletion volume gain. Wine and spirits recovered from a double-digit drop in sales to produce a 13% organic growth rate in the most recent quarter. Depletion volume was still down, but much improved quarter-over-quarter. The company also reinstated guidance that would be a solid improvement from the previous fiscal year.

Constellation Brands' results show that its business is incredibly strong as its products continue to be sought out despite the limits of on-premise usage.

That said, shares have gained 24% since I last covered the stock. Given that it now trades above both its five-year average valuation and its GF Value, I now rate the stock as a hold. Constellation Brands is an excellent company with products that remain in high demand, but I would rather wait for a pullback before buying the stock due to its valuation.

Author disclosure: the author has no position in Constellation Brands.

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About the author:

Nathan Parsh
I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.

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