On Thursday morning, Constellation Brands (STZ) , which is a leading beverage and alcohol company, released the firm's fiscal fourth quarter financial results.
For the three months ended February 28th, Constellation Brands posted GAAP EPS of $1.98 (adjusted EPS: $2.15) on revenue of $1.998B. This amounts to an EPS beat of about 16 cents on a slight revenue miss. That revenue print also amounted to a year over year contraction of 4.8%. The adjusted number largely reflects the performance of the beverages business less its stake in Canopy Growth (CGC) .
Cost of products sold increased 9.6% to $1.037B, thus dropping gross profit 15.1% to $961.2M. Administrative expenses increased 8.7% to $494.5M, taking operating income down to $466.7M (-31.1%). After accounting for investments, interest and taxes, net income decreased 43.6% to $223M.
Segment Performance
Beer
Net sales decreased 2% to $1.536B.
Segment gross profit dropped 7% to $781.2M.
As a percentage of sales, gross profit dropped from 53.7% to 50.9%.
Segment operating income dropped 15% to $523.1M
Operating profit as a percentage of sales decreased from 39.2% to 34.1%.
Wine and Spirits
Net sales decreased 14% to $462.2M.
Net wine sales decreased 13% to $406.1M.
Net spirits sales decreased 18% to $56.1M.
Segment gross profit dropped 5% to $228.8M.
As a percentage of sales, gross profit improved from 44.8% to 49.5%.
Segment operating income improved 5% to $127.9M
Operating profit as a percentage of sales improved from 22.7% to 27.7%.
Canopy
Net sales decreased 33% to $74.6M.
Segment gross profit dropped from $8M to a loss of $1.8M.
As a percentage of sales, gross profit dropped from 7.1% to -2.4%.
Segment operating income improved from a loss of $122.1M to a loss of $113.3M
Operating profit as a percentage of sales is not meaningful.
Guidance
For the current fiscal year, Constellation Brands is guiding toward an adjusted (ex-Canopy) EPS of $11.70 to $12.00 and GAAP EPS of $11.60 to $11.90. Wall Street was looking for $11.70 (adjusted), so this is positive guidance. The firm sees net beer sales growth of 7% to 9% leading to operating income growth of 5% to 7%. For wine and spirits, the firm sees sales growth largely flat from this year, landing anywhere from -0.5 to +0.5%. On that, the firm sees operating income growth of 2% to 4%.
The firm also expects to generate operating cash flow of $2.4B to $2.6B and capital expenditures of $1.2B to $1.3B. This would result in free cash flow of $1.2B to $1.3B.
Fundamentals
For the full year just concluded, STZ drove operating cash flow of $2.757B, while purchasing $1.035B worth of property, plants and equipment. This left the firm with full year free cash flow of $1.722B. At least now, you have something to compare to the above guidance on this metric.
Out of this, the firm purchased $1.7B worth of stock and paid $587.7M in dividends. One can see that while the firm is indeed a free cash flow beast, that unless they are willing to cut the dividend, then it would probably be wise to reduce share repurchases. That said, the firm announced this morning that its quarterly dividend will be increased to $0.89 per share from $0.80, producing a forward yield of 1.61%.
Turning to the balance sheet, this firm ended the period with a cash position of $133.5M and inventories of $1.899B. I don't love that balance, but at least inventoried booze is probably better at holding its value than inventoried widgets or other retail items much more vulnerable to the whims of fad or the realities of an economic slowdown.
This puts current assets at $3.496B. Current liabilities add up to $2.968B, including short-term debt of $1.175B. Now, the current ratio of 1.18 is not unhealthy, at least not on the surface. That said, the firm's quick ratio (booze or not) is a much more troublesome looking 0.54. I also don't think anyone would like the balance between the cash balance and the debt labeled as "current." Just wait till you see the next paragraph.
Total assets amount to $24.662B. This includes goodwill and other intangibles of $10.653B. At 43% of total assets, this is a bit on the high side. It's not alarming just yet, but I would like to see tangible assets comprise a greater percentage of the whole. Total liabilities less equity comes to $15.928B. This includes another $11.287B in long-term debt.
In short, the firm, despite producing enough free cash flow to right the ship, runs with a balance sheet bearing $133.5M in cash and $12.461B, of which $1.175B has to be dealt with this year. Nice job, management. Not.
Wall Street
I have seen two highly rated sell-side analysts react. Last night, Lauren Lieberman of Barclays, who is rated at four stars by TipRanks, reiterated her "buy" rating on STZ as well as her $279 target price. This morning, I saw Stephen Powers of Deutsche Bank, who is rated at five stars by TipRanks, reiterated his "hold" rating on STZ while also reiterating his target price of $210. Powers had recently lowered his target price from $245 to $210 coming in to these earnings.
My Thoughts
The quarter, obviously, wasn't great. The guidance, however, I do like very much. I love the cash machine that this firm is. I do not love how that cash has been managed and the balance sheet in my opinion does not come close to passing muster. I am old school and my standards may be outdated, but gee whiz...
That said, I do like the beer, especially Modello, of either variety, but liking it as a consumer and as an investor are two different things.
The market does not seem to be reacting all that much to this report. What I see is what might be the start of a closing (almost) symmetrical triangle going back to the start of the year. The stock is testing the top trendline of that triangle as I type. Should this triangle continue to a point where the two trend-lines converge or come close to it, the stock will be set up for a potentially violent move.
At that point, what will matter, from a technical perspective, would be where the last sale is relative to its 50 day SMA (simple moving average) and 21 day EMA (exponential moving average). There will need to be something there to support the stock, because there is traffic to the upside. Key Fibonacci levels come in at $227 and $240, while that 200 day line currently runs between the two at $234.
At 21 times forward looking earnings, this stock may be expensive for this environment. Just remember, that with that free cash flow, this firm does have the tools to fix what needs fixing more quickly than other firms could in a similar situation sans the beefy FCF (free cash flow).
I can see investing in this name, but I would need a serious discount. Unless that $208 low back in early January is retested... that spot had been tested back in February 2022 as well, then I think I take a pass for now. If one were interested in buying this name at a discount and was open to some risk, the $210 puts expiring in July are trading above $6. That sounds interesting.
