Better Buy: Constellation Brands or Brown-Forman?

The past few months have been hard on alcohol brands, and with bars and restaurants closed revenue has taken a hit across the market. Increased off-license sales have compensated somewhat, but the makers of fine wines and smooth whiskeys are only starting to recover since businesses have been allowed to re-open. 

The Corona Beer-maker Constellation Brands (NYSE: STZ) and the Jack Daniels owner Brown-Forman (NYSE: BF.B) are two companies who have weathered the pandemic pretty well, although neither have yet fully recovered to their pre-COVID-19 heights.

Constellation Brands, a bull and bear case

Constellation has an impressive array of brands in its portfolio including the likes of Corona, Modelo Especial beer and SVEDKA.

In the bull corner, 'Modelo Especial' is a popular beer in states like California, whilst its Corona brand is now the 5th-largest growth beer in the U.S. Corona also brought out a hard seltzer drink in fruity flavours. Similar in strength to its beers, with a fraction of the calories, who wouldn't want to drink this? In fact, it has been a big hit; within four months of launching it has won 6% of the seltzer market share, while 75% is still dominated by the hugely popular 'White Claw' and Boston Beer's (NYSE: SAM) 'Truly' seltzer.

Constellation Brands has proven itself to be innovative even in the face of losing 75% of its on-premise sales due to the closure of restaurants and bars. Additionally, in a strange coincidence that its most popular beer shares its name with the coronavirus, the alcoholic beverage company worked hard to build brand equity and as a result sales of the drink had increased 50% by June.

Though many would disagree and consider this a bull case, its 38.6% stake in Canopy Growth (NYSE: CGC) has been problematic; the original $4 billion investment saw a loss of $56 million in 2019 alone. Despite this financial drain, Constellation finished up the fiscal year with $1.8 billion in free cash flow to spare. 

Additionally, slow growth over the past year has also led to no increases in dividend payments as Constellation has paid the same amount in dividend for the last 5 consecutive quarters. However, this is not necessarily bad news as the company has been protecting its dividend as it sought to strengthen its balance sheets, for example, paying off $2.2 billion of its debt in 2020. 

Bull and bear case for Brown-Forman

Brown-Forman, a rival to Constellation Brands in the alcoholic beverages industry holds only about 25 brands to its name, but it specializes more on liquors such as whiskey -- Jack Daniels and Old Forester being the most well-known -- Chambord and Finlandia Vodka.

There is a strong bull case here. First, despite the pandemic slashing sales across the market, Finlandia Vodka found a new creative marketing team in DDB Unlimited and Haygarth, which are a division of the Omnicom Group (NYSE: OMC). This is a big move as marketing campaigns cost a huge amount, but if done right the payout for the company is worth a buck or two. 

Second, Brown-Forman weathered the pandemic better than expected despite slowing sales before it all hit. Although Q1 saw a decrease of 5% in sales leading to a 20% loss of net income, the Jack Daniels-owner recovered its losses well enough and came into Q2 looking relatively healthy. 

For the bear case, analysts are expecting Brown-Forman's earnings per share to drop by around 5% for this fiscal year but an expected increase of 11.5% for the following year should help ameliorate that loss. 

Looking at Brown Forman's balance sheet you can see that the company has not repaid any debt in the last 2 years. Although having debt can show investors that a company is able to manage its money and operates with sufficient enough cash flow to pay off debts, the lack of payments in the last 2 years could signal a larger problem.

So, which is a better buy? 

As always, the choice is yours as an investor. I would personally choose Constellation Brands as their balance sheet is better overall and is likely able to weather a rocky future. For me, Brown-Forman does not have the potential for much growth whereas Constellation Brands remains innovative in spite of the last few months.

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