Company Profile: Constellation Brands

STZ: NYSE

After profiling a penny stock last week with Peekaboo Beans Clothing, I am back to a larger company this week. Constellation Brands produces and markets high-end beer and premium wine and spirits brands. Many of these brands are more prevalent in the United States but I have tried a few of their brands including Corona Beer and Kim Crawford, Mark West and Robert Mondavi wine. All seemed good to me! They have many brands under their portfolio but other readers may be familiar with: Ravage, Simply Naked, Selaks, Pop Crush, DIseno, Black Velvet or Svedka Vodka. I also see they are getting into “Chelada” which is popular for us Canadians when we visit the US. It is beer and clamato juice premixed together and sold. While I am not overly familiar with their brands, I am interested in learning about this industry and what some of the research says about this category. As one final note, I see that Constellation Brands owns Black Velvet whisky and this is produced in a facility in Lethbridge, Alberta (near where I live) so it does have a Canadian connection. Let’s get into it below.  

 Courtesy of Constellation Brands website

Courtesy of Constellation Brands website

·      As stated many times on this site, I, nor ZSM Creative Inc. operating as The Capital Pink, are financial advisors and have no financial accreditations. I am applying some basic evaluation tools to this stock along with some commentary but this should only serve as a starter for your further research. The information below is only current to the day this post was written which may or may not be the same day as this post was published so please update the ratios and numbers to the current day before relying on them as they may have significantly changed (see How Do I Evaluate a Stock? (Part One) for information on where to find the ratios and numbers online). Please read my Legal Disclaimer.  Also, I do not own Constellation Brands stock and am not affiliated with them in any manner.    

What is Constellation Brands (Constellation)? 

Constellation operates in the Total Beverage Alcohol (TBA) category of business. The US market represents the vast majority of its profitability and the TBA category is worth $50 billion and is growing at a much higher rate than the Consumer Packaged Goods (CPG) category. Consumers in the TBA category usually buy all three of beer, wine and spirits, which means they spend more on average for beverage alcohol purchases. Constellation is focused on the premium end of things as that is where the most growth in the TBA category lies. Consumers are willing to pay more for a premium product which translates to higher profit margins. US consumption of high end and premium beer is growing. Due to the margins and growth, more retailers are allocating more floor space to alcoholic beverages. Of course, in Canada, this does not happen as alcohol can only be sold in regulated environments. Nonetheless, the category is growing.

Other interesting information about this company:

·      Has the #1 imported vodka in the US – SVEDKA;

·      #1 high end and imported beer company in the US and #3 beer company in the US;

·      9,000 employees in 40 facilities;

·      Among other prestigious awards won by the company, its CEO won the 2016 Harvard Business Review’s “World’s Best- Performing CEO’s”;

·      Targeting diluted EPS growth of at least 10%;

·      Growth in the TBA category is the primary goal, that includes among other things, knowing their consumers and being bold and innovative;

·      In particular, the company is focusing on Millenials and Hispanics. The youngest millennials are now of drinking age! According to its research, Milennials drink more per occasion and drink across the categories of beer, wine and spirits. Milennials represent nearly half of high-end beer consumption;

·      In terms of Hispanics, the Hispanic population enjoys beer and likes Mexican and craft beer brands – perfect for Constellation’s beer portfolio;

·      Any purchases of other companies (M&A) is focused on high-growth, high-margin brands;

·      Constellation Ventures is a separate venture aimed at future growth and trends likely by investing in smaller companies; and

·      #1 in the US with a unique Helix closure that combines the ever popular cork with the more convenient screw cap.

There is a lot more information on this company and category on their website and investor presentations. It is fascinating to learn about this category and such things as how consumer preferences as to the shape and feel of a wine bottle sell more bottles. We are all more susceptible to this type of marketing then we realize.   

What is Constellation’s stock doing?

As at January 11, 2018, the numbers from our basic stock evaluation tools are as follows:

Share price: $218.89 USD

One share of Constellation would cost you $218.89 USD.  The price over the past 52 weeks has ranged from $146.71 USD  to $229.50 USD.

Price to Earnings (P/E): 23.9 (Forward)  

Recall this is the stock price divided by the earnings per share. If the P/E is high, you should expect to get some growth for having paid a bit more for the stock however, it could indicate the stock is overvalued.  The industry average here according to Morningstar is 26.5. To put this figure into perspective, the market is giving Constellation a value equal to 24 years of its earnings so it would appear investors are still looking for some growth on this company.

Dividend Yield: 0.9%

Dividend paying stocks are something many investors look to buy as they are like an interest rate on your shares. Dividend payouts are discretionary. Dividend yield represents the amount the company pays out in dividends relative to its share price. While a higher dividend yield is usually more desirable, you still need to consider the health of the underlying company before making a generalization either way. The industry average for dividend yield here is 1.7% so Constellation is not that far off.

Earnings per Share (EPS): 9.18 TTM (Trailing Twelve Months, takes the numbers for the past twelve months to come to this figure)

This figure will tell you a great deal about the growth of the company. It takes what the company earns and divides it by the number of shares outstanding. It is essentially the profit allocated to each share of the company. The bigger the number the better because the more the company earns, the more attractive it is to investors. EPS that is increasing every quarter shows earnings momentum and shows growth potential. 

Constellation’s EPS has been increasing each year - $5.18 and $7.52 the last two years. 

Revenue: $7.447 TTM

Increasing revenue is a good sign that the company is growing. If you look at past revenue figures, Constellation’s Revenue has grown 14.6% over the past three years as compared to the industry average growth of only 4.5%.

Return on Equity (ROE): 24.6% TTM

ROE tells you what sort of return the company is getting on the shareholders money. An increasing ROE is a good sign. Constellation’s ROE is increasing from 22% last year.

Market Capitalization: $42.6 Billion

This indicates Constellation is a large cap stock. Recall that small cap stocks usually have the most room for growth as opposed to large, established, stable large cap companies. Constellation is a huge company and its stock price no doubt reflects this aspect.

Net Profit Margin: 24.8% TTM (Trailing Twelve Months)

This ratio tells us what profit is left over after the company pays its expenses for the year. The more money it keeps, the better. High net profit margins mean that a company is good at keeping profit after expenses are paid, which may mean they are adept at keeping their expenses down. It is a good idea to compare these over an industry to see what companies are good at operating and maintaining a high net profit margin. Here, the industry average is 21.5% so Constellation is close to the average and these are both rather high net profit margins. 

Cash Flow per Share: 3.74 (end of 2016)

Recall that this number is the cash flow through the business divided by the number of shares outstanding. It represents the net cash a company can produce per share and many investors consider this a better indicator of a company’s health than the more popular, earnings per share ratio because it is more difficult to manipulate cash flow numbers than it is earnings numbers. A higher value usually indicates the company is in a healthier position. 

This ratio should be considered along with the EPS figure for a better picture of the company’s health as there should not be a wide discrepancy between the two figures. If there are large variances between those numbers, you may want to consider if there were large, non-recurring one-time items that account for the large variance. It is also wise to look at a company’s cash flow picture in the long term as that should take into account one time, large capital expenditures (money spent by a company to buy or maintain an asset like land, buildings or equipment, ie. “fixed assets”) that required large amounts of cash.   

Price to Sales (P/S): 5.9 TTM

This ratio compares the total market value of the company with its sales revenues. There is not a great deal of manipulation a company can do with its sales data so this can be a good indicator of how well the company is doing. Recall that a lower ratio relative to its peers in the industry can indicate a potentially good investment opportunity. Morningstar indicates the industry average is 5.9 so Constellation is directly on the mark.

Price to Book (P/B): 5.3

This compares the stock price with how much the stock would be worth if the company was liquidated or sold off. It is the value of the stock in comparison to the underlying assets of the company. Thus, a low P/B relative to the stock price suggests you are not paying too much for what would be leftover if the Constellation is somewhat lower.

Price to Cash Flow (P/CF): 25.2

Having cash left over after expenses are paid off is crucial to remaining in business so this is a good indicator about the health of a company. Generally lower is better as it could indicate the company is obtaining large cash flows not yet reflected in the stock price. Morningstar indicates the industry average for this industry is 28.4. 

This completes a basic evaluation of Constellation. As always, there are tons of articles and discussions online about this stock and all stocks so they are also a good place to look at for further consideration. I think this is a very exciting company and area. They are active in their growth strategy and according to the statistics, the premium side of things is set to have high growth. That combined with a group of Milennials that apparently are keen to drink (!) makes for a positive outlook for this company.  

 

** Top photo by Diego PH on Unsplash