Constellation Brands (STZ, Financial), the $30.8 billion beverages maker, fell by 7%Â Thursday. Jim Cramer discussed this selling:
"Investors are worried that the company could get hurt if the Trump administration imposes some kind of cross-border tariff on Mexican imports." – Jim Cramer of CNBC’s "Mad Money"
According to a CNBC interview of Constellation CEO Rob Sands, fears are overblown, and if Constellation made Mexican beer in the U.S. instead of Mexico, then it would not really be a Mexican beer.
As of fiscal 2016, Constellation Brands had one owned brewery, one equally owned joint venture glass production plant and one warehouse, distribution and other production facilities in Mexico under its beer segment (1).
Constellation Brands also announced in early 2016 that it will construct a state-of-the-art brewery in Mexicali, Baja California, Mexico that will be called the Mexicali Brewery. The Mexicali Brewery is expected to deliver between 10 million and 20 million hectoliters of production capacity in the future. The project was expected to be completed by 2020.
Earnings
Meanwhile, Constellation delivered its third fiscal 2017 results. For its nine months operations, Constellation delivered great figures with sales growing by 14% to $5.7 billion and profits by 32% to $1.08 billion.
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"We sold our Canadian wine business as part of our strategy to focus on premium, margin accretive, growth opportunities. We increased our functioning brewery capacity and innovation flexibility to support our fast-growing, high-end Mexican beer portfolio with the purchase of the Obregon brewery operation in Mexico. We strengthened our premium wine and spirits portfolio with the acquisitions of Charles Smith Wines and High West Distillery, and we repurchased a significant number of our shares. Our business has never been stronger and the future prospects across our beer, wine and spirits portfolio are compelling." –Â Rob Sands, president and CEO, Constellation Brands
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Outlook
(Press release)
Accordingly, Constellation sees its earnings per share (EPS) growing by 40% compared to midpoint fiscal 2017 EPS estimates. The company also expects a near 20% free cash flow growth. Meanwhile, Constellation had a five-year EPS and free cash flow growth averages of 14.6% and 6% (2).
Market return
Constellation Brands had a 50.5% total return in the past five years and 5.5% for the past year compared to the Standard & Poor's 500 index’s 14.7% and 16.9% (2).
Valuations
According to GuruFocus data, Constellation Brands had a trailing price-earnings (P/E) ratio of 25.7 times (industry median 23), price-book (P/B) ratio of 4 times (industry median 2) and price-sales (P/S) ratio of 4 times (industry median 2). The company also had a trailing dividend yield of 1% with a 24% payout ratio.
(10-K)
Constellation Brands
The 71-year-old Constellation Brands is the third-largest producer and marketer of beer for the U.S. market and the world’s leading premium wine company with a leading market position in the U.S. and Canada (3). The company is the largest beer, wine and spirits supplier in the U.S.
Constellation Brands has three segments: beer, wine and spirits and corporate operations and other.
(10-K and 10-Q)
Beer
Constellation Brands’ beer segment is the leader in the high-end U.S. beer market having Mexican beer brands such as Corona Extra, Corona Light, Modelo Especial, Pacifico, Negra Modelo and Victoria.
In fiscal 2016, the beer segment grew 13.6% and contributed 55.3%, or $3.62 billion, in total Constellation Brands sales. In the period, the segment also delivered an operating margin of 34.9%, compared to 31.9% the year prior.
Nine months into fiscal 2017, the beer segment grew 18.5% year on year while delivering a 35.8% margin, compared to 34.9% the prior year.
Wine and spirits
Constellation Brands’ wine and spirits segment is the world’s leading producer and marketer of premium wine. The segment sells table wine, sparkling wine and dessert wine across all price points (popular, premium and luxury categories) primarily within the $5 to $25 U.S. retail price range.
(Wine and Spirit Top Selling Brands, 10-K)
The segment has a leading market position in the U.S. and Canada. In fiscal 2016, the beer segment grew 3% to $2.9 billion in sales. In the period, it also delivered an operating margin of 24.8%, compared to 23.7% the year prior.
Nine months into fiscal 2017, the beer segment grew 8.1% year on year while delivering a 25.6% margin, compared to 24.8 the year prior.
Overall, Constellation Brands had five-year sales, profit and operating margin averages of 14.5%, 13.5% and 27.8% (2).
Cash, debt and book value
As of Nov. 30, Constellation had $197 million in cash and $8.28 billion in debt with a 1.18x debt-equity ratio. The beer and wine brewery had 60% of its $18.3 billion assets in goodwill and intangibles while having a book value of $7 billion compared to $6.6 billion in its previous year period.
Cash flow
(10-Q)
Nine months into its fiscal 2017, Constellation Brands grew its cash flow from operations by 29.7% to $1.4 billion year on year. Accounts payable and other accrued expenses and liabilities demonstrated growth for the period.
Capital expenditures were $591.6 million, leaving Constellation with $824 million in free cash flow. The company allocated 74%, or $610 million, of its free cash flow in shareholder dividends and stock repurchases. Constellation Brands provided neither dividends nor share repurchases in fiscal years 2014 and 2015.
Constellation Brands also reduced its principal debt and notes payables by making a payment of $963.6 million. The company also took in $1.35 billion in long-term debt issuance for the period.
(10-K and 10-Q)
As observed, Constellation Brands has been actively using its cash flow in funding investments and acquisitions in recent years.
(10-K)
Conclusion
Constellation Brands indicated that Thursday's market reaction regarding its Mexican beer plants was overblown. This was partially accepted by the market itself and resulted in a 1.8% share price recovery Friday.
(Google Finance)
Constellation Brands’ segments, especially beer, demonstrated outstanding growth and profit margins in recent years. The company seemed to have the expertise on which beer-related companies are best for its growing portfolio as it took a little more debt each year for the last five years to support these acquisitions.
Constellation Brands also authorized a $1 billion share repurchase program in 2013 and had a $1 billion program in 2017 (4). So far the company has spent $1.15 billion in total repurchasing 19.7 million shares outstanding, or $59 a share. Meanwhile, having inflated traditional valuations, a shareholder may prefer receiving more dividends at this point of the market cycle.
Bank of America Merrill Lynch sees Constellation Brands as a buy. Meanwhile, multiplying five-year P/E average with the company’s EPS projection for fiscal 2017 and applying a 20% margin gave a value of $125 a share.
Absent any recent headline threats and given the company’s leveraged balance sheet and a current higher valuation than its peers, Constellation Brands is a pass.
Notes
(1) 10-K
(2) Morningstar data.
(3) Moving forward, the information here would be mainly from Constellation Brands’ 10-K and 10-Q unless indicated.
(4) Constellation Brands has three classes of shares outstanding: class A, class B — which is convertible, and a small count of class 1 common stock. The company authorized share buybacks in reference to both class A and B shares.
Disclosure: I do not have shares in any of the companies mentioned.
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