Constellation Brands, Inc. (NYSE: STZ) reported fourth-quarter results that came in better than expected. The company also announced an agreement to divest around 30 of its wine and spirits brands and related facilities for $1.7 billion.
- Bank of America's Bryan Spillane maintains a Buy rating on Constellation Brands with a price target lifted from $188 to $216.
- Macquarie Research's Sarah Stein maintains at Neutral, price target lifted from $162 to $183.
- Wells Fargo's Bonnie Herzog maintains at Outperform, unchanged $235 price target.
- BMO Capital Markets' Amit Sharma maintains at Outperform, unchanged $225 price target.
After a sharp rise Thursday, shares of Constellation Brands traded around $190.75 Friday afternoon.
BofA: Better Cost Controls
Constellation's earnings beat was driven by better-than-expected cost controls and higher sales, Spillane said in a research report. By segment, beer revenue rose 9.3 percent from a year ago to $1.1 billion and wine and spirit revenue fell 7.6 percent to $707 million. The company's loss from unconsolidated investments was $15.2 million, which was better than the -$20 million expected.
Spillane says the company's move to divest many low-priced wine and spirits brands will be dilutive in the near-term but accretive to margins over the longer term. The deal will also "lend stability" to the company's sales and profit streams and investors should be pleased with the fast pace of deleveraging.
Macquarie: Good News Priced In
Constellation's move to reposition its wine category should "mark the bottom" for the company's core EPS which is estimated to be down 6 percent in fiscal 2020 at $8.76, according to Stein. Exiting 2020, EPS should grow at 15-16 percent in the two following years as organic sales should grow 7-8 percent from 2020 to 2022.
Similarly, Stein says free cash flow should fall 10 percent in fiscal 2022 but rise 14 percent in the following two years. The company should return $4.5 billion to investors over the same time period.
Constellation's stock appreciated sharply and this "more than reflects this good news."
Wells Fargo: 'Clearing Of The Decks' Moment
Corona's parent company showed it boasts an "enviable and defensible" leadership position in the high end of the alcohol market, says Herzog. The divestiture of lower-tiered brands marks a full "clearing of the decks" for the company, which will help usher in a three- to five-year period of 10 percent earnings growth.
Management's 2020 EPS guidance looks conservative and this may have been done on purpose, says Herzog. However, management didn't include its Canopy Growth Corp (NYSE: CGC) stake in its guidance, which has the analyst "slightly less confident" profits will inflect positively by fiscal 2021.
BMO: End Of 'Hangover'
The "hangover" associated with the wine and spirits segment has come to an end, which Sharma says solidifies Constellations' status as one of the top large-cap growth staples stories. Coupled with solid momentum in the beer segment, the company has a clear trajectory to recording a double-digit core EPS growth.
Constellation's stock is trading mostly in-line with large-cap staples peers on core earnings but comes with a "very valuable free call option" as much as $60 per share from its stake in Canopy, the analyst wrote in the note.
Latest Ratings for STZ
|Apr 2019||Deutsche Bank||Downgrades||Buy||Hold|
|Mar 2019||Credit Suisse||Initiates Coverage On||Outperform|
|Jan 2019||Atlantic Equities||Initiates Coverage On||Overweight|
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