Keeping its trend alive, Constellation Brands Inc. STZ posted superb third-quarter fiscal 2017 results, following which it raised its earnings outlook for the fiscal. During the quarter, both earnings and sales saw double-digit year-over-year growth, alongside exceeding expectations. While the quarter marked the company’s ninth consecutive earnings beat in a row, Constellation Brands has surpassed sales estimates for seven straight quarters now.
Apart from having a superb earnings history, Constellation Brands has displayed solid stock performance over the past one year. Evidently, this Zacks Rank #2 (Buy) stock has improved 10.4% over one year, crushing the Zacks categorized Beverages – Alcoholic industry’s dip of 0.7%.
Results improved due to the company’s effective integration and growth of its recently acquired brands, higher margins across its portfolio along with strong consumer demand. Further, strength in the company’s beer business, improving trends at its wine and spirits business and solid overall depletion trends boosted the beat.
Q3 Highlights
The company’s adjusted earnings for the third quarter of fiscal 2017 rose 38% year over year to $1.96 per share, clearly outperforming the Zacks Consensus Estimate of $1.72. Reported earnings came in at $1.98 per share, up 49%, year over year.
Net sales advanced 10% to $1,810.5 million, driven by strong organic sales growth and gains from acquisitions. On a currency adjusted basis, organic sales grew 7%. Moreover, the top line exceeded the Zacks Consensus Estimate of $1,784 million.
Sales also benefited from strong volumes, favorable pricing and Ballast Point’s contribution, at the beer business – which drove 16% sales growth at the segment. Organic net sales for the segment grew 12%. The segment recorded double-digit sales and profit growth in the third quarter, alongside capturing significant market share in the premium beer space across the U.S. This was backed by growth across all core brands.
Wine and spirits’ sales improved 5% year over year, on the back of Prisoner wine acquisition and favorable mix, somewhat negated by soft volumes. Further, during the quarter, the company successfully integrated the newly acquired Charles Smith and High West businesses into its portfolio. Also, the wine business generated solid IRI volume and dollar share in the quarter, helping it emerge as the top share gainer across the U.S. wine space.
Cost and Margin Performance
Adjusted gross profit for the quarter improved 16% year over year to $884.4 million. The adjusted gross profit margin expanded 260 basis points (bps) to 48.8%.
Constellation Brands' comparable operating income grew nearly 12% to $531.6 million, with the comparable operating margin expanding 40 bps to 29.4%. This was backed by solid operating income growth at both the beer (26%) and wine and spirits (4%) businesses. The beer segment gained from higher organic volume and effective pricing, while growth at the wine and spirits segment was attributed to the Prisoner acquisition, favorable mix and reduced cost of goods sold. This was partly offset by soft volumes and higher SG&A and marketing expenses.
Financial Position
Constellation Brands ended the quarter with cash and cash equivalents of $197.3 million. As of Nov 30, 2016, the company had $7,362.5 million in long-term debt (excluding current maturities) and its total shareholders’ equity was $6,997.7 million.
In the first three quarters of fiscal 2017, Constellation Brands generated $1,415.7 million in cash from operations and free cash flow of $824 million.
In Nov 2016, the company announced a share buyback program of $1 billion. This buyback program is in addition to the company’s existing repurchase authorization of $1 billion. During the third quarter, the company bought back 2.4 million shares for $367 million, taking its total repurchases to 5.4 million shares for $823 million, as of Dec 31, 2016. Consequently, the company concluded its previous buyback authorization of $1 billion, and had shares worth $847 million remaining under its latest program.
On Jan 4, 2017, the company declared a quarterly dividend of 40 cents per share for Class A and 36 cents for Class B shares. The dividend is payable on Feb 23, to shareholders on record as of Feb 9.
Other Developments
During the third quarter, Constellation Brands made small investments in Catoctin Creek Distilling Company and Bardstown Bourbon Company. While Catoctin Creek is a manufacturer of superior quality rye whisky and gin (prepared organically), Bardstown Bourbon is the largest new distillery in the country.
Further, Constellation Brands recently completed the sale of its Canadian Wine business to Ontario Teachers' Pension Plan, which is Canada’s largest single-profession pension plan. Under the sale, the company disposed off its Canadian wine brands like Jackson-Triggs and Inniskillin, vineyards, facilities, wineries, offices, along with Wine Rack retail stores.
Also, during the third quarter, Constellation Brands agreed to buy the Obregon Brewery from Grupo Modelo, a subsidiary of Anheuser-Busch InBev SA/NV BUD. The Obregon Brewery, situated on Mexico’s west coast in the state of Sonora, is expected to generate nearly four million hectoliters of production capacity on the deal’s closure. The acquisition will enable Constellation Brands to capture immediate functional brewery capacity that will help serve its high-end Mexican beer portfolio, alongside providing it with the flexibility for future innovation strategies.
Finally, Constellation Brands concluded the buyouts of Charles Smith Wines and High West Distillery for $121 million and $137 million, respectively, in Oct 2016.
Fiscal 2017 Outlook
Encouraged by robust year-to-date results, management raised its adjusted earnings guidance to a range of $6.55–$6.65 per share, from $6.30–$6.45, projected earlier. On a reported basis, earnings per share (EPS) for fiscal 2017 are now anticipated in the range of $7.55–$7.65, compared with $6.25–$6.40 guided earlier.
CONSTELLATN BRD Price, Consensus and EPS Surprise
CONSTELLATN BRD Price, Consensus and EPS Surprise | CONSTELLATN BRD Quote
Further, the company continues to expect net sales for the beer segment to grow in the 16–17% range. Operating income at this segment is anticipated to increase at the high teens level. This outlook also accounts for the gains coming from the recent Ballast Point acquisition.
Also, the company reiterated its wine and spirits’ sales and operating income view. Sales at this segment are still projected in the mid single-digit range, while operating income is expected to grow in the mid-to-high single-digit range, including gains from the High West, Charles Smith, Meiomi and Prisoner acquisitions, partly offset by effects from the sale of its Canadian wine business.
Certain other factors were taken into consideration before providing the earnings guidance. These include an interest expense expectation of $335–$345 million, an approximate adjusted tax rate of 27%, and weighted average diluted shares outstanding of approximately 204.5 million.
The company now anticipates capital expenditure for fiscal 2017 in the range of $825−$925 million, compared to $1.125−$1.225 billion expected earlier.
The company’s free cash flow expectation for fiscal 2017 lies in the range of $575−$675 million. Operating cash flow is projected in the range of $1.4–$1.6 billion.
Other Stocks to Consider
The Boston Beer Company, Inc. SAM with a Zacks Rank #2 is worth considering in the same industry. Another stock worth considering in the broader consumer staples sector includes Dean Foods Company DF with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Boston Beer has a long-term EPS growth rate of 12%. Also, the company has a favorable industry rank that ranks in the top 34% out of over 250 industries. The company’s VGM score of “B” also makes it a sound bet.
Dean Foods has to its credit a long-term EPS growth rate of 12% and positive estimate revisions over the past 60 days. Further, the company’s earnings have outperformed estimates by an average of 5.4% in the trailing four quarters.
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