Constellation Brands Inc. (STZ) reports results for its fiscal second quarter, which ended Aug. 31, on Thursday, Oct. 5. With the stock stalled out is the party over?
Shares of Constellation Brands have been partying hard. Year to date, the stock is up nearly 31%, but it seems to have stalled out in the last month. In the last 30 days, the stock is up a little more than 1%.
I have been bullish on shares of Constellation Brands all year. I thought investors could party on with the acquisition of several Mexican beer brands. The deal-making has been immediately accretive to revenue and earnings. The company is constructing some of the largest brewing facilities in the world to supply an unquenchable thirst for premium Mexican beers that is driving operating margins much higher.
Earlier this month at the Barclays Back-to-School Consumer Conference, Constellation Brands management updated investors on the company's prospects. According to industry data cited by the company, the total U.S. beverage alcohol category grew 3% versus the rest of the consumer packaged goods industry, which only grew 1%. Only bottled water (8%) grew faster than alcohol. Interestingly, cigarettes grew 2%.
Constellation Brands believes "premiumization" drives growth. In the beer category, the high end grew 7% while the rest of the category grew just 2%. Premium wine grew 7% versus 4% for the lower-quality brands. And again, in spirits, the high end of the business grew 8% while the rest of the category was up only 5%. The 10-year average growth rate for high-end beer jumped 5% and craft beer rose 10%, while the total beer category has been flat. And in the last three years, craft beer has surged ahead by 13% while the total beer category grew just 1%.
Americans love to drink. According to Constellation Brands, 55% of all drinkers drink across all three categories -- beer, wine and spirits -- and spend an average of $454 a year to keep their fridges stocked and their liquor cabinets filled.
High-end drinkers live in the large metro areas on the coasts, including Los Angeles, San Francisco, New York, Miami, Boston, Washington, D.C. Approximately 30% of the population consumes about 55% of the high-end booze. Everybody else swills the low-end stuff.
The changing demographics of the U.S. also have been favorable for Constellation Brands. From 2010 to 2015 nearly 80% of the counties in the U.S. saw double-digit Hispanic population growth. The company believes there were 36 million Hispanics of legal drinking age in the U.S. in 2016, and that number is expected to grow at a compounded rate of 3% until 2025, when the number reaches 46 million. An estimated 44% of Hispanics prefer imported beers and the company's brands, such as Corona and Modelo. Indeed, 70% of Hispanics choose to drink Modelo beer.
According to an industry survey from IRI, Constellation sold approximately 93 million cases of Modelo in the 52 weeks ended May 14, up 18% year over year. According to that same survey, the company sold 116 million cases of Corona, which was up 4% and which makes Corona the No. 1 imported beer in the U.S.
The popularity of the company's products has translated to the bottom line. Fully diluted earnings grew 28% over the last four years, while net sales increased 15% and earnings before interest and taxes (EBIT) jumped 21%.
Management believes it can keep the party going. The beer category is expected to grow in the high single digits, while wine and spirits are expected to increase in the middle single digits over the next two years. With high single-digit growth in consolidated EBIT, fully diluted earnings are forecast to grow about 10%.
In fiscal 2017, the company reported $1.7 billion in operating cash flow. With capital expenditures expected to peak in fiscal 2018, free cash flow is expected to exceed $1 billion.
In late June STZ reported first-quarter earnings of $2.34 per share, $0.36 better than expected. Revenue rose 3% to nearly $1.94 billion. The company raised fiscal 2018 earnings guidance to a range of $7.90 to $8.10 a share from its previous range of $7.70 to $8.00. For the year, the beer business is targeting sales growth in the range of 9% to 11% and operating income growth of between 13% and 15%.
The analyst consensus is looking for second-quarter earnings of $2.16 a share on $2.05 billion in revenue.
I remain optimistic that Constellation Brands can continue to trade higher as the company is perfectly positioned to capture the high-end drinker as well as the shifting demographics in the United States.