Humans like to socialize and alcohol has always been our most coveted way of lubricating nightly interactions. More importantly, alcohol consumption will only continue to rise along with the wealth of society and population increases around the world. Constellation Brands Inc. STZ is on sale, trading at discounts to its earnings, book, sales and cash flow multiples.
The company is the third-largest beer brewer in the United States and continues to shine as one of the leaders in the global alcoholic beverage industry with over 90% of its revenue coming from the U.S. market thanks to exclusive rights on beers like Corona, Modelo and Pacifico as well as Robert Mondavi wine and Svedka vodka.
Over the last decade, Constellation has grown sales from $3.6 billion to over $8 billion, book value from $10.70 to $59.28 and went from losing $301 million to earning over $2.3 billion in fiscal 2018. Just last week, the company released its third-quarter numbers, beating on both non-GAAP earnings with $2.37 per share and revenue with $1.97 billion, up 9.4% year over year.
Yet, the stock has been under pressure recently and is down 30% ($66) since October. This is a gift for investors looking to build a new position or dollar-cost average with an existing one. Constellation is set to earn close to $10 a share in the next year. If the price multiple gets back to historical averages in the 22 times range, the shares would also get back above $200 per share, good for a 25% gain.
It also pays out a small dividend; however, investors can take solace in the fact that Constellation is a cash flow machine with a steady stream approaching $1.5 billion a year, while capital expenditures are less than $1 billion and total debt sits at $13.5 billion. These are important as the industry is becoming more and more saturated with new, “would be” brands. Yet, regardless of any economic uncertainty in the U.S. over the next year, long-term alcohol is still a growth industry that the federal and state governments rely on to the tune of $10 billion a year in taxes.
Looking forward, Constellation is setting itself up nicely. In August, it made a $4 billion strategic investment in cannabis company Canopy Growth (CGC) to help the company pursue medicinal use in more than 30 countries. Constellation is betting Canopy will be one of the leaders in an industry that is quickly becoming decriminalized. In fact, many political experts see marijuana eventually being legal across the United States. If so, with a 38% ownership stake, Constellation is set up for huge profits. If not, the company will absorb the investment and keep moving higher with its traditional line of products.
In fact, two guru investors continue to add to their position, with Steve Mandel (Trades, Portfolio) of Lone Pine Capital and  Daniel Loeb (Trades, Portfolio) of Third Point placing sizable portions of their total portfolio in Constellation Brands. They could be wrong about the price, but it’s not likely they would be wrong about the company considering the focused nature of their holdings.
The bottom line is this: Constellation Brands will continue to grow and if some of its investments pay off (Canopy’s stock is already up 100% since August), then investors will be in line for a massive windfall of capital gains.
Disclosure: I am not long or short any stocks mentioned in this article.
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