Constellation Brands (STZ): Beverage Buy, Hold or Sell Before This Week's Earnings?

Constellation Brands, Inc. (STZ), a leading beverage company, topped analyst estimates for revenue and earnings in the first quarter of fiscal 2024, primarily driven by higher pricing and solid demand for its alcoholic beverages. The company reported quarterly revenue of $2.51 billion, beating Wall Street expectations of $2.47 billion and up 6% year-over-year.

Also, the company’s non-GAAP EPS came in at $2.91, above the analysts’ estimate of $2.83 and an increase of 9.4% year-over-year.

STZ’s beer business posted an increase of 11% in sales during the first quarter, mainly due to solid growth across Modelo Especial, the Modelo Chelada brands, and Corona Extra. However, net sales from the Wine and Spirits business segment witnessed a decline of 10.5%, and segment gross profit and operating income were 8% and 13% down year-over-year, respectively.

Further, the company’s overall operating income decreased 6.3% from the previous year’s quarter to $764.70 million. It generated a free cash flow of $388 million, a decline of 31% year-over-year.

Also, higher costs and continued inflationary headwinds dented its beer segment operating margins by 220 basis points during the last reported quarter, which is quite disappointing.

STZ is scheduled to report financial results for its second quarter ended August 31, 2023, on Thursday, October 5, 2023, before the markets open. The company reiterated its full-year adjusted profit per share forecast of $11.70 to $12. Its annual guidance for the beer business remains unchanged, and it continues to target 7% to 9% of net sales growth and operating income growth of 5-7%.

For the Wine and Spirits business segment, organic net sales are expected to decline 0.5% to growth of 0.5% and operating income growth of 2-4%. The company’s corporate expenses for the fiscal year 2024 are expected to be $270 million and interest expense to be $500 million.

As anticipated in its guidance for the year, Constellation continues to face higher packaging, raw materials, freight, and overhead costs.

Shares of STZ have gained 10.3% over the past six months and 9.2% year-to-date to close the last trading session at $248.64. However, the stock plunged 4.2% over the past month.

Here’s what could influence STZ’s performance in the upcoming months:

Positive Latest Development

In June 2023, STZ completed the Craft Beer Divestitures. The Craft Beer Divestitures are consistent with the company’s strategic focus on continuing to grow its high-end imported beer brands through the maintenance of leading margins and enhancements to its results of operations.

Mixed Financials  

STZ’s net sales increased 6.4% year-over-year to $2.51 billion for the first quarter ended May 31, 2023. Its gross profit came in at $1.26 billion, up marginally year-over-year. The company’s non-GAAP EPS was $2.91, an increase of 9.4% from the prior year’s quarter.

However, the company’s operating income declined 6.8% year-over-year to $764.70 million. Net income attributable to CBI was $135.90 million, significantly down from $389.50 million reported in the corresponding quarter of 2022. Its adjusted EBIT decreased 44.4% from the year-ago value to $349.30 million.

Mixed Historical Growth

STZ’s revenue grew at a CAGR of 5.4% over the past three years. The company’s EBITDA increased at a CAGR of 2.8% over the past three years. However, its total assets and levered free cash flow declined 1.8% and 19.4%, respectively, over the same time frame.

Mixed Profitability

STZ’s trailing-12-month gross profit margin of 49.74% is 50.9% higher than the industry average of 32.96%. Its trailing-12-month EBITDA margin of 34.05% is 232.9% higher than the industry average of 10.23%. Moreover, the stock’s levered FCF margin of 8.15% is 139.2% higher than the 3.41% industry average.

However, the stock’s trailing-12-month net income margin of negative 3.38% compares unfavorably to the industry average of 4.02%. Its trailing-12-month ROCE and ROTA of negative 3.28% and negative 1.31% are lower than the industry averages of 11.24% and 4.10%, respectively.

Favorable Analyst Estimates

Analysts expect STZ’s revenue to increase 6.3% year-over-year to $2.82 billion for the second quarter (ending September 2023). The consensus earnings per share estimate of $3.37 for the to-be-reported quarter indicates a 6.4% year-over-year improvement. Moreover, the company has surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

In addition, Street expects STZ’s revenue and EPS for the current fiscal year 2023 to increase 6.9% and 9.9% from the previous year to $10.11 billion and $11.71, respectively. The company’s revenue and EPS for fiscal year 2024 are expected to grow 6.4% and 14.5% year-over-year to $10.75 billion and $13.40, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, STZ is currently trading at 21.24x, 23.2% higher than the industry average of 17.25x. The stock’s forward EV/Sales of 5.79x is 243% higher than the industry average of 1.69x. Likewise, its forward EV/EBITDA multiple of 15.81 is 38.1% higher than the industry average of 11.45.

Furthermore, the stock’s forward Price/Sales and Price/Cash Flow of 4.51x and 17.75x are significantly higher than the respective industry averages of 1.07x and 11.90x.

POWR Ratings Reflect Uncertainty

STZ’s mixed prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a B grade for Sentiment, in sync with its favorable analyst expectations.

STZ has a C grade for Quality, consistent with its mixed profitability. It has a C grade for Stability, in sync with its five-year beta of 1.05.

On the contrary, the stock has a D grade for Value, justified by its higher-than-industry valuation.

Within the B-rated Beverages industry, STZ is ranked #19 out of 35 stocks.

Beyond what I have stated above, we have also given STZ grades for Growth and Momentum. Get all STZ’s POWR Ratings here.

Bottom Line  

Despite topping Wall Street analysts’ expectations for revenue and earnings in the first quarter of fiscal 2024, STZ grapples with significant pressure on its margins due to rising operating costs and expenses.

While the beverage company’s long-term outlook appears bright, driven by its diversified product portfolio and strategic divestitures, acquisitions, and investments, its margins are expected to remain under pressure in the near term due to higher packaging and raw material costs and escalating freight and overhead expenses.

Given STZ’s mixed financials, elevated valuation, and bleak near-term outlook, it could be wise to wait for a better entry point in the stock.

Stocks to Consider Instead of Constellation Brands, Inc. (STZ)

Given its uncertain short-term prospects, the odds of STZ outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Beverages industry instead:

Coca-Cola Consolidated, Inc. (COKE)

Primo Water Corporation (PRMW)

Suntory Beverage & Food Ltd (STBFY)

To explore more A and B-rated beverage stocks, click here.

What To Do Next?

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STZ shares were unchanged in premarket trading Tuesday. Year-to-date, STZ has gained 8.44%, versus a 12.37% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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