Constellation Brands is anticipated to report first-quarter earnings before the market opens on Tuesday, July 2.
Wall Street is expecting a brew like that from the corresponding period last year, with profits of 40 cents per share. Estimates range from 33 up to 47 cents per share. I think Constellation will have to beat by at least two cents, or the market will be disappointed. In other words, if the company doesn't post 42 cents or more, anticipate share price weakness.
Constellation makes and markets alcoholic beverages, with a portfolio across the wine, spirits and imported beer categories. Well-known brands include: Corona Extra, Pacifico, St. Pauli Girl, Black Velvet and Fleischmann's. Shares closed on Friday at $52.12.
When I started college, um, I mean after I turned 21, I couldn't help but notice posters and neon signs featuring the St. Pauli Girl, and the marketing worked. I haven't drunk a St. Pauli Girl beer in decades, but at least I tried the beer and I still remember the posters.
What's more impressive than the St. Pauli Girl to a college freshman? A stock more than doubling over the last year, signaling the best is yet to come. After Constellation reached a new 52-week high about a month ago near $55, it retraced and found support at $50.
Constellation is now ready to retest May's highs, and with a forward P/E ratio under 20, there isn't a reason why it can't extend above $60 into autumn. The average analyst target price is $58, but shareholders should expect analysts' targets to increase if the company beats this quarter.
Over the last four quarters, the company has beat estimates every time, and last quarter's result of 47 cents beat by 4%. On a per-share diluted basis, the company made 41.8 cents.
The stock's price appreciation is running into headwinds from revenue concerns, as well as potential investors noticing that stocks don't normally travel straight up for long without taking a break. They'll want to focus on revenue and company statements at Tuesday's post-announcement conference call to evaluate Constellation's revenue-increasing ability.
Another positive sign, despite the meteoric share price increase, is that short sellers are steering clear. Short interest is relatively small, near 2.5%, and stable in front of the next report. Short sellers are always on the look for anything that doesn't look right. When they start hammering a stock, it's usually for a good reason. Another positive sign is that institutions continue to believe in the investment thesis.
The safe bet is to wait until after earnings, and watch for $50 as an entry point. Investors wanting exposure into earnings can sell put options to capture the increase in volatility. The July $50 strike price put options can be sold for about 70 cents at the time of writing. By selling puts instead of buying shares, you reduce your total risk while increasing your odds to profit.
Keep in mind that investors do surrender upside potential If the earnings release totally pops the cork off the bottle. If you focus on risk instead of potential profits like me, that's OK.
At the time of publication, the author held no position in any stock mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.