Should Constellation Brands sell brands?
Constellation Brands (STZ) is selling roughly 30 "low-end" wine and spirit names for $1.7 billion. While Constellation's beer segment has continued to do very well, their wine and spirits have been rather stagnant. I suspect these "low-end" brands are what have been a bit of a hold up. To that end, I think this is a good move.
Their fiscal 2019 fourth quarter and full year results support the move to focus on beer. Wine sales were particularly weak in the fourth quarter; dropping 11% year over year to $599.4 million. For the year, wine sales were down 1% to $2.53 billion. Conversely, spirit sales increased 18% in the fourth quarter to $107.7 million in total sales. Unfortunately, spirits remain such a smaller portion of the business that their growth did not compensate for the weakness in wine. Wine and Spirits sales as a whole declined 8% year over year in the quarter to $707.1 million. For the full year, the segment remained rather flat at $2.913 billion in sales vs. $2.919 billion the year prior. Full year operating income from the segment declined 3% for the year to $771.2 million.
Operating in a polar opposite in terms of performance, Constellation's beer segment is still going strong. Net beer sales grew 9% in the fourth quarter to $1.09 billion. Gross profits increased 10%, and operating income increased a whopping 16% to $441.4 million. For the full year, net beer sales increased 12% to $5.2 billion, while operating income increased 11% to $2.04 billion. Based on the deviation in performance, it's clear that some weeding off of poor performing assets isn't the worst thing. Wine and spirits has always been a smaller portion of the business, and I don't see a problem with the move. They're not getting rid of all of them.
I had expressed concerns that the stock had become more attractive after the dip of the last six months. With a better valuation, the stock can now be gauged a little more in relation to earnings. Fiscal 2019 earnings performed well relative to the stock price. Fourth quarter comparable earnings per diluted share were $1.84. That's a 3% decrease year over year, but above many estimates. For the full year, Constellation reported comparable earnings of $9.28 per share, a 7% increase. That would give the stock a trailing P/E of around 20. Looking into fiscal 2020, guidance suggests comparable earnings of $8.50-$8.80 per share (excluding equity gains from Canopy Growth's (CGC) stock). In all, I think the mixed guidance makes this one a hold. It's a strong business, but there's plenty of work to be done.
Tesla's weak deliveries...
I've been pretty upfront about my stance on Tesla (TSLA) . They rarely deliver on time, and their CEO is comfortable stretching the truth. The competition is fierce in their industry, and I don't see the long term ability to outperform rivals. The latest reports on deliveries are proving my point. Tesla reported the delivery of 63,000 cars in the first quarter, with another 10,600 in transit. They were supposed to put up around 76,000 in order to hit expectations. The company also included in the release that they expect net income to be negatively impacted by the production delays and pricing shifts. I'm honestly not even mildly surprised by the underwhelming deliveries at this point. On the plus side, it's nice to think that a company has more orders than it can handle. The problem here is that Tesla is trying to prove it can perform like the big names. It also needs to keep growing orders and deliveries so it can create much needed organic cash.
The stock was down over 10% today at one point, but has recovered to -8.45% at the time of writing. The stock has not done well over the last month, but I highly doubt it will last. This is such a cult stock for lack of a better term that it doesn't seem to matter what happens. The bulk of investors in Tesla simply won't let this thing go. It has become a religion, and Elon Musk owns some 30% of it (he sure ain't selling shares). When you look at the stock performance over the past few years, every time something negative happens, the stock does a dip/recovery. I've given up trying to gauge the pricing. It doesn't operate in any relation to value. For those diehards out there, all it's going to take is a relatively in line earnings number and this stock will be right back up. I'm not saying that's where it should be, but that's what happens.
What I do know is that Tesla now faces a tumultuous uphill battle in order to meet its full year guidance of at least 360,000 vehicle deliveries. We're likely going to have to wait for the second quarter to see any profits, and though the capital situation is okay for now, cash is always a factor for Tesla. How long will investors tolerate the risk associated with the ever present threat of further capital raises? How long will investors tolerate the ever changing story? How long will investors tolerate the ongoing SEC drama? How long before investors realize that bigger names are all making electric cars? To me the stock should be down much more.
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