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Constellation Brands Efforts Well on Track: Should You Hold?

Zacks Equity Research

Constellation Brands, Inc. STZ looks in good shape on the back of its brand strength, strategic initiatives and superb earnings surprise history. Shares of this Zacks Rank #3 (Hold) company have outperformed both the Zacks categorized Beverages-Alcoholic industry and the broader sector in the last one year. While the stock rose nearly 10%, the industry gained 1.8%. Moreover, the Zacks categorized Consumer Staples sector returned 4.9% over the same time frame.

In addition, the stock exhibits a Momentum Score of ‘A’ with a long-term earnings growth rate of 19%, thereby instilling confidence amongst investors.

Let’s Delve Deep

Armed with a formidable portfolio of well-known brands, Constellation Brands is amongst the largest wine company in the world. Moreover, it holds a dominant position in the premium wine and beer segment in the U.S. This provides the company with a competitive edge and bolsters its well-established position in the market.

Constellation Brands’ focus on brand building, strength in its beer business and initiatives to include new products in its wine and spirits business are the key growth drivers for the company. In the beer segment, the company’s buyout of Obregon Brewery from Grupo Modelo will enable the company to serve its high-end Mexican beer portfolio. Further, the company is on track with its glass plant expansion, which is expected to cater to more than 50% of the glass demand. Also, it made small investments in Catoctin Creek Distilling Company and Bardstown Bourbon Company, during the third quarter of fiscal 2017.

Constellation Brands appears compelling from the earnings perspective as well. In fact, the company’s earnings have outpaced the Zacks Consensus Estimate in nine straight quarters, while it reported third-quarter fiscal 2017 results.

Additionally, it had surpassed sales estimates in the trailing five quarters. Encouraged by the splendid third quarter performance, management raised its fiscal 2017 earnings outlook to a range of $6.55–$6.65, thereby reflecting its confidence on the company’s future performance. The Zacks Consensus Estimate for fiscal 2017, which is currently pegged at $6.64, has increased by 20 cents in the past 90 days.

Constellation Brands Inc Price and Consensus

Constellation Brands Inc Price and Consensus | Constellation Brands Inc Quote

However, the stock is not devoid of challenges and/or concerns. Any excise tax increase in the future can have an adverse effect on Constellation Brands’ financial performance. Distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may increase the risk of a potential excise tax on spirits by governments of these countries.

In addition, the company’s high debt concentration may adversely affect its creditworthiness, making it more susceptible to macroeconomic factors. As of Nov 30, 2016, the company had $7,362.5 million in long-term debt (excluding current maturities).

Further, stiff competition coupled with other macroeconomic headwinds may also hamper the company’s growth and profitability, going ahead.

Stocks that Warrant a Look

Better-ranked stocks in the same industry include Ambev S.A. ABEV, Castle Brands Inc. ROX and Compañía Cervecerías Unidas S.A. CCU, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ambev S.A., with a long-term earnings growth rate of 7.2% has increased 7.2% in the past one year.

Castle Brands has surged nearly 45.8% in the past one year.

Compañía Cervecerías Unidas has jumped 24.7% in the past six months.

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