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Constellation Brands Tops Q3 Earnings, View Cut Hurts Stock


Constellation Brands Inc. STZ has delivered stellar third-quarter fiscal 2019 results, wherein the top and bottom lines surpassed estimates and improved year over year. With this, the company reported positive earnings surprise in 15 of the last 16 quarters, with the fourth positive sales surprise.

However, management cut its outlook for fiscal 2019, owing to higher interest expenses related to investment in Canopy Growth CGC and expected softness in the wine and spirits business.

Consequently, shares of Constellation Brands have declined nearly 12% in the pre-market trading session. Moreover, this Zacks Rank #3 (Hold) stock has lost 22.3% in the past three months, much wider than the industry’s 11.2% decline.

Q3 Highlights

The company’s adjusted earnings in third-quarter fiscal 2019 increased 17.9% year over year to $2.37 per share and outpaced the Zacks Consensus Estimate of $2.04. Moreover, reported earnings were $1.56 per share, down 36.3% year over year.

Net sales improved 9.5% to $1,972.6 million and surpassed the Zacks Consensus Estimate of $1,911 million.

At the company’s beer business, sales improved 16% to $1,209.8 million, driven by 14.1% rise in shipment volume and depletions growth of 7.8%. Solid portfolio depletions and market share gains mainly stemmed from continued strength in Modelo and Corona brand families. These brands were aided by superb distribution gains and strong innovations.

In the fiscal third quarter, the company’s beer business was the most significant growth contributor in retail in the high-end U.S. beer market, courtesy of gains from Corona and Modelo Especial’s brands.

Further, the wine and spirits segment’s sales increased 0.4% to $762.8 million, owing to 1.5% growth in shipment volume, offset by 3.2% decline in depletions.

Margin Performance

Adjusted gross profit improved 8.5% year over year to $991.9 million. However, adjusted gross profit margin contracted 40 basis points (bps) to 50.3%.

Constellation Brands' comparable operating income grew 10.7% to $611.9 million while comparable operating margin expanded 30 bps to 31%. The decline was due to higher transportation costs coupled with increased marketing expenses in the beer segment.

Operating margin at the beer segment declined 60 bps to 37.3% as gains from higher pricing were compensated by increased transportation and operating expenses as well as marketing investments. Marketing expenses, as a percentage of sales, rose nearly 11%, owing to marketing investments for product launches of Corona Premier and Corona Familiar, and to back other portfolio growth initiatives.

However, the wine and spirits segment recorded operating margin expansion of 70 bps to 27% due to SG&A leverage, somewhat mitigated by an unfavorable mix.

Financial Position

Constellation Brands ended the fiscal third quarter with cash and cash equivalents of $130.6 million. As of Nov 30, 2018, it had $11,772.5 million in long-term debt (excluding current maturities) along with total shareholders’ equity of $11,520 million.

In the first nine months of fiscal 2019, Constellation Brands generated $2 billion of operating cash flow and $1.4 billion of free cash flow.

The company’s solid cash flow and financials provide it with the flexibility to pay dividends. Consequently, the company plans to return $4.5 billion to shareholders in forms of share repurchases and dividends within the next three fiscal years (or by fiscal 2022).

On Jan 8, 2019, the company announced a quarterly dividend of 74 cents per share for Class A and 67 cents for Class B stock. This dividend is payable on Feb 26 to shareholders of record as of Feb 12.

Fiscal 2019 Outlook

Despite solid fiscal third-quarter results, the company slashed its adjusted and GAAP earnings view for fiscal 2019, owing to higher interest expenses due to the Canopy Growth deal, and an anticipated softness in its wine and spirits business in the fiscal fourth quarter.

Constellation Brands completed its $4 billion investment in Canopy Growth in November 2018, which was financed with debt. Consequently, the company is likely to incur additional interest expenses, which are expected to lower earnings per share by nearly 25 cents in fiscal 2019.

For fiscal 2019, the company now envisions adjusted earnings per share of $9.20-$9.30, down from $9.60-$9.75 mentioned earlier. On a reported basis, EPS for the fiscal year is now anticipated to be $12.95-$13.05, down from $14.10-$14.25 stated earlier.

Constellation Brands now anticipates net sales for the beer segment to be at the high-end of the previously expected 9-11% growth. Further, operating margin is expected to be nearly 39%. However, sales and operating income for the wine and spirits business is estimated to decline in a low-single digit. Earlier, the company projected sales and operating income for the wine and spirits segment to improve by 2-4%.

Certain other factors were taken into consideration in providing the earnings guidance. These include an interest expense expectation of $380-$390 million compared with $335-$345 million mentioned earlier. Further, the company expects tax rate of 18% and weighted average diluted shares outstanding of approximately 196 million.

Constellation Brands anticipates capital expenditure for fiscal 2019 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 $2.35-$2.55 billion.

Better-Ranked Stocks in the Consumer Staples Space

Archer Daniels Midland Company ADM pulled off average positive earnings surprise of 26.9% in the preceding four quarters. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Coca-Cola Company KO has an impressive long-term earnings growth rate of 7.3% and a Zacks Rank #2 (Buy).

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