A month has gone by since the last earnings report for Constellation Brands (STZ). Shares have added about 8.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Constellation Brands due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Constellation Brands Q1 Earnings & Sales Beat Estimates
Constellation Brands has delivered stellar first-quarter fiscal 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. With this, the company reported earnings beat in 17 of the last 18 quarters, with the sixth straight positive sales surprise.
Constellation Brands reported first-quarter earnings of $2.21 per share, which outpaced the Zacks Consensus Estimate of $2.07. The reported figure includes Canopy Growth (CGC - Research Report) equity loss of 20 cents. Excluding the Canopy effect, it posted earnings of $2.40, which grew 9% from the year-ago quarter.
Net sales improved 2% to $2,097.2 million and surpassed the Zacks Consensus Estimate of $2,065 million.
At the company’s beer business, sales improved 7.4% to $1,477.4 million, driven by a 5.4% rise in shipment volume and 6.6% depletions growth. Solid portfolio depletions and market share gains mainly stemmed from continued strength in the Modelo and Corona brand families. Notably, the company’s beer business was the most significant contributor to the U.S. beer market, courtesy of gains at Modelo Especial, Corona Premier and Corona Refresca.
However, sales at the wine and spirits segment declined 7.8% to $619.8 million in the fiscal first quarter. The downside can be attributed to an 8.1% fall in shipment volume and a 0.7% decline in depletions.
Adjusted gross profit grew 5% year over year to $1,091.2 million. Moreover, adjusted gross profit margin expanded 120 basis points (bps) to 52%.
Constellation Brands' comparable operating income grew 9% to $697.7 million while comparable operating margin expanded 220 bps to 33.3%. The upside was driven by improved operating margins at both segments.
Operating margin at the beer segment increased 150 bps to 39.3% owing to gains from higher pricing and currency, which were partly offset by higher transportation and logistics costs.
Moreover, the wine and spirits segment recorded operating margin expansion of 90 bps to 25.9% owing to SG&A leverage and favorable price, somewhat mitigated by adverse mix.
Constellation Brands ended the fiscal first quarter with cash and cash equivalents of $98.7 million. As of May 31, 2019, it had $11,745.8 million in long-term debt (excluding current maturities) along with total shareholders’ equity of $12,488.2 million.
At quarter-end, Constellation Brands generated operating cash flow of $593.1 million and free cash flow of $437 million. Moreover, the company paid dividends of $143 million in first-quarter fiscal 2020.
On Jun 27, 2019, the company announced a quarterly dividend of 75 cents per share for Class A and 68 cents for Class B stock. This dividend is payable Aug 27 to its shareholders of record as of Aug 13.
Fiscal 2020 Outlook
Management updated guidance for fiscal 2020. To account for the adjustments related to Canopy Growth deal-related losses and other activities, the company provided earnings per share projections on a GAAP basis and comparable (excluding Canopy) basis.
In the reported quarter, Canopy Growth and Acreage Holdings’ shareholders has approved the proposed acquisition of Acreage. This transaction is expected to help Canopy Growth enter the U.S. cannabis market. As a result, Constellation Brands is likely to gain in the second quarter of fiscal 2020.
For fiscal 2020, this Zacks Rank #3 (Hold) company now envisions comparable earnings per share (EPS) of $8.65-$8.95, up from prior projection of $8.50-$8.80. In fiscal 2019, the company comparable EPS of $9.28 and $9.34 (excluding Canopy). This guidance includes the impact of wine and spirits divestitures but excludes impacts of Canopy Growth equity earnings and gain or loss on the wine and spirits transaction. On a reported basis, EPS for the fiscal year is anticipated to be $4.95-$5.25 compared with $17.57 reported in fiscal 2019.
Constellation Brands continues to anticipate net sales and operating income for the beer segment to increase 7-9% in fiscal 2020.
Further, the company expects to close the wine and spirits transaction by the end of second-quarter fiscal 2020. Consequently, net sales for the wine and spirits business are estimated to decline 20-25%, with operating income likely to fall 25-30%.
Certain other factors were also taken into consideration in providing the earnings guidance. These include an interest expense expectation of $425-$435 million, including incremental interest of $105 million related to the financing of the 2018 Canopy investment. Further, the company expects tax rate of 17% and weighted average diluted shares outstanding of approximately 195 million.
Constellation Brands anticipates capital expenditure for fiscal 2020 to be $800-$900 million, with roughly $600 million estimated to be incurred for the expansion of Mexico beer operations.
The company’s free cash flow expectation for fiscal 2020 lies around $1.2-$1.3 billion. Operating cash flow is projected to be $2.1 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Constellation Brands has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Constellation Brands has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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