Factors Likely to Shape Constellation Brands (STZ) Q2 Earnings

Constellation Brands, Inc. STZ is scheduled to release second-quarter fiscal 2019 results on Oct 4.

Notably, this leading wine company missed earnings estimates in the previous quarter after 14 consecutive beats. Nevertheless, it pulled off an average positive earnings surprise of 5.4% in the trailing four quarters.

The Zacks Consensus Estimate for second-quarter earnings remains stable at $2.58 over the last 30 days but reflects a year-over-year growth of 4.5% from the prior-year quarter.

Factors at Play

Increased marketing expenses due to product launches and rise in transportation costs at both the beer and wine segments have been hurting Constellation Brands’ operating performance. Evidently, the company reported soft margins in first-quarter fiscal 2019, with gross margin contracting 80 basis points (bps) and operating margin declining 320 bps. At the beer segment, operating margin shriveled 230 bps due to planned marketing expenses pertaining to the launch of Corona Premier and Corona Familiar alongside increased transportation and unfavorable currency. The wine and spirits segment reported operating margin contraction of 430 bps due to higher cost of goods sold and increased marketing investments on key focus brands and product innovations. Higher expenses might continue denting margins in the to-be-reported quarter as well.

Furthermore, the market remains concerned about the outcome of its recent $5 billion investment to expand stake in Canada’s Canopy Growth. Stiff competition, higher debt position and taxes remain added concerns.

Nevertheless, Constellation Brands’ robust beer business has been significantly boosting the company’s performance. Solid portfolio depletions and market share gains mainly stemmed from strength in Modelo and Corona brands. New products, including Corona Premier and Familiar, have also been contributing to the segment’s results. For the beer segment, management continues to expect high-single digit volume growth as well as 9-11% net sales and operating income growth in fiscal 2019. This apart, Constellation Brands’ bullish outlook for the fiscal year indicates that the company is likely to report strong results in the fiscal second quarter.

Constellation Brands’ top-line performance in recent quarters has also been impressive. It has delivered sales beat in nine out of the trailing 11 quarters. Significant market share gains, margin expansion, strong free cash flow and solid execution have also been aiding the company’s performance. Investments in digital enablement for e-commerce initiatives and the new ERP platform as part of the ‘Fit for Growth’ strategy are also commendable. Further, the company’s solid lineup of marketing and promotional activities positions it well for growth through fiscal 2019.

Notably, analysts polled by Zacks expect quarterly revenues of $2.24 billion, up 7.6% year over year.

What Does the Zacks Model Say?

Our proven model does not conclusively show that Constellation Brands is likely to beat earnings estimates in the fiscal second quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Constellation Brands has an Earnings ESP of -0.36% and a Zacks Rank #4 (Sell), which makes our surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Altria Group, Inc. MO has an Earnings ESP of +2.44% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Avon Products, Inc. AVP has an Earnings ESP of +60.00% and a Zacks Rank #3.

Monster Beverage Corporation MNST has an Earnings ESP of +1.10% and a Zacks Rank #3.

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