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Constellation Brands (STZ) Tops Q2 Earnings & Sales Estimates

Zacks Equity Research

Constellation Brands Inc. STZ posted robust second-quarter fiscal 2018 results, wherein both the top and bottom line topped estimates and improved year over year. Notably, this marked the 12th consecutive quarter of earnings beat for the company. Further, to perk up investors’ confidence management raised earnings guidance for fiscal 2018.

Consequently, shares of Constellation Brands rallied nearly 6% in the pre-market trading session following the sturdy results. Further, driven by splendid past performance, this Zacks Rank #2 (Buy) stock jumped 31.5% year to date, outperforming the industry’s 20.7% growth.

During the quarter, Constellation Brands benefited from efforts to drive consumer demand for its robust brand portfolio. Also, results were driven by contributions from acquisitions along with continued strength in the company’s beer business in particular.

Q2 Highlights

The company’s adjusted earnings for second-quarter fiscal 2018 surged 40% year over year to $2.47 per share, surpassing the Zacks Consensus Estimate of $2.16. Reported earnings came in at $2.48 per share, up 42% year over year.

Constellation Brands Inc Price, Consensus and EPS Surprise

Constellation Brands Inc Price, Consensus and EPS Surprise | Constellation Brands Inc Quote

Net sales advanced 3% to $2,084.5 million, on the back of a rise of 8% in organic sales and gains from recent buyouts. Moreover, the top line was ahead of the Zacks Consensus Estimate of $2,058 million, consequently returning to the beat trend after a miss in the prior quarter.

Sales at the company’s beer business improved 12.8%, thanks to 11.7% rise in shipment volumes and depletions growth of 8.1%. Further, beer sales benefited from strong portfolio as well as successful key summer selling season driven by its ‘120 Days of Summer’ marketing campaign. This campaign aided the market share gains in the 4th of July holiday and through the rest of the summer season into the Labor Day.

Wine and spirits’ sales fell 11.7%, due to lower shipment volumes and 0.9% decline in organic sales partly negated 5% rise in depletions. During the quarter, the U.S. shipment volume lagged depletion volumes, mainly due to the timing. Notably, the company’s recently acquired wine brands — The Prisoner and Charles Smith reported superb depletions growth of 30% and 74%, respectively. Also, the High West Whiskey portfolio delivered depletions growth of 37%.

Cost and Margin Performance

Adjusted gross profit for the quarter improved 9% year over year to $1,061.9 million. Adjusted gross profit margin expanded 290 basis points (bps) to 50.9%.

Constellation Brands' comparable operating income grew nearly 14% to $709.8 million with the comparable operating margin expanding 340 bps to 34.1%. This growth was backed by 26% operating income improvement at the beer segment, offset by operating income decline at the wine and spirits business. The beer segment gained from solid performance during the summer selling season, along with favorable pricing and foreign currency benefits. Meanwhile, operating income at the wine and spirits business was hurt by increased spending on marketing initiatives.

Financial Position

Constellation Brands ended the quarter with cash and cash equivalents of $125.6 million. As of Aug 31, 2017, the company had $8,036.9 million in long-term debt (excluding current maturities) and total shareholders’ equity was $7,945.3 million.

In first-half fiscal 2018, Constellation Brands generated $1,102.9 million in cash from operations and free cash flow of $597.8 million.

The company’s solid cash flows and financials provide it with the flexibility to pay dividends. Incidentally, on Oct 4, the company announced quarterly dividend of 52 cents per share for Class A and 47 cents for Class B shares. This dividend is payable on Nov 21, to shareholders on record as of Nov 7.

Other Developments

On Aug 11, Constellation Brands acquired Funky Buddha Brewery, a leading craft brewery in Florida, in sync with its strategy to strengthen position in the high-end beer segment in the United States. The acquired brewery will form part of Constellation Brands’ Craft & Specialty Beer group in the beer division. This fast-growing craft brewery has a cherished portfolio led by Floridian Hefeweizen and Hop Gun IPA.

Fiscal 2018 Outlook

Management remains encouraged with superb results, which was marked by significant market share gains, margin expansion, strong free cash flow and solid execution. This along with the strength in the beer business led the company to raise earnings outlook for fiscal 2018. Further, management raised fiscal 2018 operating income target for the beer segment, tweaked forecast for the wine and spirits business. However, it retained the sales forecasts for both businesses.

The company now envisions adjusted earnings guidance in a range of $8.25-$8.40 per share, compared with previous guidance range of $7.90-$8.10. On a reported basis, EPS for fiscal 2018 is anticipated in the range of $7.90-$8.05, up from $7.55-$7.75 projected earlier.

The company expects net sales for the beer segment to grow 9-11%. Operating income at this segment is anticipated to increase in a band of 17-19%, compared with the prior guidance of 13-15%.

Sales at the wine and spirits’ segment are still projected to decline 4-6%, while the operating income is now expected to remain flat compared with a rise of 5-7% predicted earlier. Earlier, the company expected operating income at this segment to remain flat year over year. These projections include the impact from the sale of its Canadian wine business, and benefits from the High West, Charles Smith and Prisoner buyouts. Excluding the effects of these, operating income for the wine and spirits business is expected to improve 5-7% in fiscal 2018.

Certain other factors were taken into consideration in providing the earnings guidance. These include an interest expense expectation of $330-$340 million, an approximate tax rate of 21% and weighted average diluted shares outstanding of approximately 201 million.

The company anticipates capital expenditure for fiscal 2018 in the range of $1.175-$1.275 billion with roughly $1.0 billion estimated for expansion of Mexico beer operations.

The company’s free cash flow expectation for fiscal 2018 lies in the range of $725-$825 million. Operating cash flow is projected in the range of $1.9-$2.1 billion.

Looking for Some More Promising Stocks? Check these

Some other top-ranked stocks in the same industry include Craft Brew Alliance, Inc. BREW, Boston Beer Company Inc. SAM and Brown-Forman Corp. BF.B. While Craft Brew sports a Zacks Rank #1 (Strong Buy), Boston Beer and Brown-Forman carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Craft Brew has improved 9.5% year to date. Moreover, the company has delivered an average positive earnings surprise of 222.7% in the trailing four quarters.

Boston Beer has an average earnings surprise of nearly 50% in the last four quarters. The stock has advanced 25.9% in the last three months.

Brown-Forman has delivered an average positive earnings surprise of 2.7% in the last four quarters, while estimates for the current fiscal have improved in the last 30 days. Moreover, the stock has surged 12% in the last three months.

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