Growth Efforts to Aid Constellation Brands (STZ) Amid High Costs
Constellation Brands STZ has been gaining from strength in the company’s beer business, as well as its premiumization strategy. These factors have led this Zacks Rank #3 (Hold) stock to gain 4.9% in the past three months against the industry’s decline of 1.7%.
Analysts also seem optimistic about the stock. The Zacks Consensus Estimate for STZ’s fiscal 2024 sales and EPS is pegged at $10.1 billion and $11.61, suggesting respective growth of 6.8% and 9% from the year-ago reported figures. The Zacks Consensus Estimate for fiscal 2024 earnings has moved up 0.2% in the past seven days.
Let’s Delve Deeper
Constellation Brands has long been gaining from strength in the beer business, driven by higher shipment volumes and growth in depletion volume stemming from continued robust performances of Modelo Especial, the Modelo Chelada brands, Corona Extra, Pacifico and Modelo Oro. Consequently, fiscal first-quarter sales advanced 11% year over year to 2,098.6 million in the beer business and beat our estimate of $2,006.5 million.
The depletion volume increased 5% for Modelo Especial and about 40% for Modelo Chelada in first-quarter fiscal 2024. Modelo Especial continued to be the No. 1 beer brand in the high-end category, strengthening its leadership position. It was also the largest share gainer in dollar sales in the U.S. beer category in IRI channels.
Meanwhile, Modelo Chelada was the No. 1 brand in the U.S. beer market and held more than 65% share of the entire Chelada category. Additionally, the depletion for Corona Extra improved 1%. The brand remained the third share gainer in the U.S. beer category in IRI channels. For fiscal 2024, sales are likely to increase 7-9% for the beer segment, in line with our estimate of 8.5% growth.
Encouraged by the robust performance of beer, the company is on track with plans to invest in the next phase of capacity expansion in Mexico. This will help meet the potential demand for the high-end Mexican beer portfolio. The latest expansion will support an addition of up to 30 million hectoliters of modular capacity and includes the construction of a brewery in Southeast Mexico’s Veracruz. It also targets continued expansion, and the optimization of the existing Nava and Obregon breweries.
Also, the company has been focused on the premiumization strategy on the back of accelerated growth in the Power Brands, including The Prisoner Brand Family, Kim Crawford and Meiomi. The beer segment witnessed gains from premiumization, driven by growth in traditional beer, as well as the flavors category, including seltzers, flavored beer, RTD spirits, and flavored malt beverages. The company is making investments to fuel growth of its power brands through innovation, capitalizing on priority and consumer trends, with successful product introductions.
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Driven by these factors, management expects fiscal 2024 comparable earnings of $11.70-$12 per share (excluding canopy growth impacts), in line with our estimate of $11.84. Notably, the company reported comparable earnings of $11.40 (excluding canopy growth impacts) for fiscal 2023. It anticipates earnings of $9.35-$9.65 per share on a reported basis, suggesting an improvement from a loss of 11 cents reported in fiscal 2023.
However, Constellations Brands is reeling under the ongoing inflation. As part of it, the company has been witnessing higher packaging and raw material costs, which are likely to persist in the near term. Moving on, higher overhead costs related to its brewery expansion and increased logistics costs related to higher shipment volumes act as deterrents.
We hope that strength in Constellation Brands’ beer business, solid demand and premiumization strategy will offset cost headwinds and drive growth in the near future. Topping it, a VGM Score of B drives optimism.
Better-Ranked Stocks to Consider
Flowers Foods FLO emphasizes providing high-quality baked items. The company currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 2.3%.
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The Zacks Consensus Estimate for Flowers Foods’ current financial-year sales suggests growth of 6.7% from the year-ago period’s actual. FLO has a trailing four-quarter earnings surprise of 7.6% on average.
The J. M. Smucker Company SJM, which manufactures and markets branded food and beverage products, currently carries a Zacks Rank of 2. SJM has a trailing four-quarter earnings surprise of 14% on average.
The Zacks Consensus Estimate for The J. M. Smucker’s current financial-year earnings suggests growth of 6.8% from the year-ago reported figure.
Utz Brands Inc. UTZ manufactures a diverse portfolio of salty snacks. It currently has a Zacks Rank #2. UTZ’s expected EPS growth rate for three to five years is 11.4%.
The Zacks Consensus Estimate for Utz Brands’ current fiscal-year sales suggests growth of 3.7% from the year-ago reported number. UTZ has a trailing four-quarter earnings surprise of 12.3% on average.
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