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The Science of Hitting
The Science of Hitting
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Constellation Brands: Conference Notes

October 02, 2011 | About:

In early September, Constellation Brands (NYSE:STZ), the world’s leading premium wine company, presented at the Barclay’s Back to School Conference (guess this portion was for college kids). Outside of wine, the company is also well known for a joint venture formed 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 (No. 2 German beer), and Tsingtao (No. 1 Chinese beer). Presenting at the conference was CFO Bob Ryder, who has held that role at STZ since May 2007; here are some of the highlights from the presentation:

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.

From 1999 to 2007, in a period management calls “scale building.” the company acquired numerous brands; as a result, sales tripled over the period ($2.6 billion in FY2011), while earnings before interest and taxes (EBIT) increased six-fold. “These acquisitions helped us to become the largest premium wine company and to achieve the size and scale that we benefit from in the marketplace today.”

The second phase of the companies transformation, which began in 2007, is focused on driving profitable organic growth; in the past four years, they have shed their value brands (such as Almaden & Inglenook) in order to focus on the premium category. As a result, the company increased their North American segment operating margin by 300 basis points (to 25%) since 2008, while using proceeds from divestitures (including an 80% interest in their Australian/UK business for $230 million at the end of 2010) to reduce their debt-load by $2 billion (nearly 40%) over the same time period, resulting in a $150 million interest expense reduction.

Wine consumption in the U.S. has grown for 17 consecutive years to more than 300 million cases per annum (based on this figure, STZ holds an estimated 20% market share). In the past decade, volume has been growing at a compounded annual rate of 3% (with revenues growing mid-single digits), driven by off-premise (home) consumption despite the economic downturn, which hit on-premise consumption (restaurants, bars, etc.). While it may come as a surprise, the premium category (representing wine that costs $5 or more per bottle) has increased by 6% since the start of 2000, compared to just 2% for the value category, suggesting that consumers are trading back up after initially switching to value brands during the recession that started in late 2008.

On a per-capita measurement, both the U.S. and Canada lag other developed market countries, based on company estimates. On the other, the United States has recently become the largest wine consuming country in the world on a volume basis, pushing France to number two. According to management, today’s wine market is being driven by the Millenials, which accounts for more than 50 million people between the ages of 21-34 in the United States, a number that will increase to 70 million by 2016. According to data from the Wine Market Council, the proportion of core wine drinkers (meaning at least one glass a week) is increasing as well, with roughly 50% of Millenials and more than 60% of Gen X (age 35-46) meeting the requirements, compared to roughly 40% for both in 2005.

Crown Imports, which I discussed above, 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). In 2010, the JV outperformed the import and total beer categories (based on comparative growth), despite relatively high price points in a tough economic environment highlighted by high unemployment levels. For the year, net sales reached $2.4 billion, and operating income surpassed $450 million.

On Friday, the stock closed at $18/share, giving the company a market cap of $3.86 billion; the P/E ratio is currently less than ten times trailing earnings (however, this does not adjust for net debt on the balance sheet).

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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