Constellation Brands reported an earnings beat on Wednesday that was driven by strength in its beer business. However, shares fell 4% after an initial move up, as investors — including us — remain troubled by continued weakness in the wines and spirits business. Comparable net sales for the three months ended May 31 increased 6% year over year to $2.662 billion, missing Wall Street’s expectations of $2.671 billion, according to LSEG. Adjusted earnings-per-share (EPS) increased 17% compared with the same period last year, to $3.57, a beat versus the $3.46 per share predicted by analysts. Constellation Brands Why we own it : We like Constellation Brands for its beer franchise, which includes popular Mexican brands Modelo, Corona and Pacifico. We would like Constellation to concentrate on beer and divest its wine and spirits business. Competitors : Anheuser-Busch Inbev and Molson Coors Weight in Club portfolio : 2.5% Most recent buy : April 16, 2024 Initiated: May 5, 2022 Bottom line This quarter reaffirmed our belief that Constellation has a great beer business that is weighed down by its wine-and-spirits unit. While overall sales came up short, CEO Bill Newlands said it still beat the overall consumer packaged goods growth by 4.5 percentage points. That outperformance was largely driven by the growth of its beer business, which attained the second largest share gain in the entire beverage industry and the top share gain in alcoholic beverages. We were again pleased to see that the increase in beer sales was driven by strong growth in shipment volume. Remember, the ability to grow sales via increased volume is crucial given the inflationary dynamics we’ve had to deal with coming out of Covid. That’s because consumers are starting to push back on high prices. The ability to grow sales via increased volumes alleviates some pressure on management to take action on prices, a key factor that should help the company continue gaining market share. Operating cash flow came in light, but free cash flow was largely in line with expectations. As members know, cash flow is the key to shareholder returns and indeed, management paid out $185 million in dividends during the quarter, while repurchasing $200 million worth of shares and repurchased another $40 million worth of shares in June. The team continues to target a net leverage ratio of 3 times by the end of the fiscal year. Management said it is working to right the wine-and-spirits business and expects to see improvements in the back half of the year as “operational and commercial execution initiatives” identified in the fourth quarter of the last fiscal year and started in the first quarter of this year take hold. Guidance is in line with the expectation that weakness in the business is bottoming out. We maintain the view that a rebound or divestiture of the wine-and-spirits segment remains key to the stock reaching new highs. While we are sticking with the name given the strength in beer, we…
Read More: Constellation delivers on beer, but wine weakness prompts downgrade
