Why Is Constellation Brands (STZ) Down 9.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Constellation Brands (STZ). Shares have lost about 9.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Constellation Brands due for a breakout? 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 drivers.

Constellation Brands Q2 Earnings Beat, FY19 EPS View Up

Constellation Brands delivered stellar second-quarter fiscal 2019 results, wherein the top and bottom line surpassed estimates and improved year over year. Also, the company’s earnings reverted to its 14 quarter long record of positive surprises, after a miss in the previous quarter with a third positive sales surprise. As a result, management raised its earnings guidance for the fiscal year.

Q2 Highlights

The company’s adjusted earnings in second-quarter fiscal 2019 increased 16% year over year to $2.87 per share and outpaced the Zacks Consensus Estimate of $2.58. Reported earnings were $5.87 per share, up 136% year over year.

Net sales improved 10.1% to $2,299.1 million and came above the Zacks Consensus Estimate of $2,248 million.

At the company’s beer business, sales improved 10.5% driven by an 8.7% rise in shipment volume and depletions growth of 10.1%. Solid portfolio depletions and market share gains mainly stemmed from strength in Modelo and Corona brand families.

During the reported quarter, the company witnessed significant momentum from the new product launches, including Corona Premier and Familiar. Notably, the company’s beer business was the top share gainer in the U.S. beer market in the fiscal second quarter, courtesy of gains from Corona and Modelo Especial’s brands.

Further, wine and spirits segment’s sales were up 9.3% owing to an 8.8% growth in shipment volume and a 0.2% rise in depletions.

Margin Performance

Adjusted gross profit improved 10.8% year over year to $1,180 million. Also, adjusted gross profit margin expanded 30 basis points (bps) to 51.3%.

Constellation Brands' comparable operating income grew 9.5% to $780.7 million, while comparable operating margin contracted 20 bps to 34%. The decline was due to higher transportation costs coupled with increased marketing expenses at both the beer and wine segments.

Operating margin at the beer segment expanded 10 bps as gains from higher pricing and robust operational performances were compensated by increased transportation expenses and marketing investments. However, the wine and spirits segment recorded operating margin contraction of 20 bps due to higher cost of goods sold and increased marketing investments, somewhat mitigated by favorable pricing and lower SG&A expenses.

Financial Position

Constellation Brands ended the fiscal second quarter with cash and cash equivalents of $206.1 million. As of Aug 31, 2018, it had $9,187.6 million in long-term debt (excluding current maturities) and total shareholders’ equity of $11,535.2 million.

In the first six months of fiscal 2019, Constellation Brands generated $1,338.5 million in cash from operations and $967.9 million of free cash flow.

The company’s solid cash flow and financials provide it with the flexibility to pay dividends. Incidentally, on Oct 3, 2018, it announced a quarterly dividend of 74 cents per share for Class An and 67 cents for Class B stock. This dividend is payable Nov 20, 2018, to shareholders of record as of Nov 6. Further, it repurchased 1.9 million shares for $404 million in the fiscal second quarter and 2.4 million shares for $504 million in the first half of fiscal 2019.

Other Developments

Recently, Constellation Brands announced that it will buy additional 104.5 million shares of Canopy Growth for C$48.60 per share, expanding its stake in the marijuana company to 38% from the initial 9.9% acquired in November 2017. This will mean an investment of nearly $5 billion (C$4 billion) in the Cannabis producer.

The transaction, which is expected to be funded by debt, will close by the end of October. Management anticipates interest expenses related to the transaction to be roughly $60 million before tax. Further, the transaction is expected to impact fiscal 2019 adjusted earnings by 25-30 cents per share.

Fiscal 2019 Outlook

Following the impressive quarterly results, the company raised its adjusted and GAAP earnings view for fiscal 2019, and reiterated other forecasts.

For fiscal 2019, the company envisions adjusted earnings per share of $9.60-$9.75, up from the $9.40-$9.70 range, guided earlier. On a reported basis, EPS for the fiscal year is now anticipated to be $14.10-$14.25, up from the $10.93-$11.23 projected earlier.

Constellation Brands continues anticipating 9-11% growth in net sales and operating income at the beer segment. Moreover, sales and operating income for the wine and spirits segment is likely to improve 2-4%.

Certain other factors were taken into consideration in providing the earnings guidance for fiscal 2019. These include an interest expense expectation of $335-$345 million, an approximate tax rate of 18% and weighted average diluted shares outstanding of approximately 196 million.

For the fiscal year, the company anticipates capital expenditures in the band of $1.15-$1.25 billion, with roughly $900 million estimated due to the expansion of Mexico beer operations.

The company’s free cash flow expectation for fiscal 2019 lies around $1.2-$1.3 billion. Operating cash flow is projected to be in the range of $2.35-$2.55 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -13.65% due to these changes.

VGM Scores

Currently, Constellation Brands has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Constellation Brands has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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