Constellation Brands has posted a terrific quarterly report as a result of continued pandemic-fueled drinking, but should you invest?
Constellation Brands (NYSE: STZ), founded in 1945 by Marvin Sands as Canandaigua Industries, produces and markets beer, wine, and spirits. The company has over 100 brands in its portfolio including Corona, Ruffino, and Svedka Vodka. The company grew through acquisitions and the introduction of its wildly popular Richard's Wild Irish Rose brand of dessert wines. It went public in 1973 and continued acquisitions of popular brands including leading Kosher wine-maker Manischewitz, in 1987. Constellation's most recent investment was in cannabis company Canopy Growth, in 2018 to the tune of $4 billion.
Constellation Brands' business model
Constellation Brands has grown its business through the acquisitions of premium vintners like Franciscan Vineyards and Opus One and high-grade distillers like Nelson's Green Brier Whiskey and Casa Noble Tequila. On the other end of this practice, the company divests lower-margin and lower-priced wines and spirits, thereby concentrating all its strength on higher-priced labels. This premiumization is limited to the company's Wine and Spirits segment, which records lower sales than its Beer segment. Constellation's other two divisions are Corporate Operations and Canopy -- the Cannabis segment which is currently recording losses.
The company is optimistic about Canopy's offering of THC and CBD infused beverages, which currently hold the market lead in Canada. If they perform anything like Constellation's Corona Hard Seltzers, then the company has a real winner on its hands. The seltzer brand, launched last year, has already gained a 6% U.S. market share without taking sales from other segments in the company. This is no doubt thanks to the company's strong brand loyalty, which it continues to reinforce with its operating paradigm. The beverages are due to launch in the U.S. this year, and not a moment too soon, as the global cannabis beverage market is projected to reach $2.8 billion by 2025.
How does Constellation Brands make money?
Constellation is the number one seller of imported beer in the U.S. and beer accounted for 67.3% of the company's total sales in fiscal 2020, with wine comprising 28.4% and spirits, 4.3% of all sales. As per the company's Q3 2021 report, earnings of $3.09 per share beat estimates (for the 12th consecutive time) of $2.41 and were a 44% increase year-over-year (YoY). Additionally, net sales were up 22% to $2.44 billion surpassing projections of $2.27 billion. Beer sales were up 28% to $1.68 billion and wine and spirits sales increased 10% to $760 million.
Adjusted gross profit went up 22.4% YoY to $1.28 billion and adjusted gross profit margin expanded 20 basis points to 52.5%. For fiscal 2021, the company projects depletion, or unit sales, growth of 2 to 4% for its premium Power Brand portfolio after the divestitures of its most recent poor performing brands.
Constellation Brands pays a dividend of $0.75 and recently authorized a $2 billion share repurchase program.
What's next for Constellation Brands?
Along with Canopy's Tweed brand cannabis beverages due in the U.S. markets this year, Constellation is also expanding its Corona Seltzer flavor offerings. Moreover, the company will be growing its online presence which it started with the purchase of digitally-native brand Empathy Wines last July. Constellation is expecting to achieve 7 to 9% net sales growth in fiscal 2021.
Should I invest in Constellation Brands?
This is a market-leading adult beverage company that knows what it's doing. Keeping up with trends of premiumization and hard seltzers, as well as having its eye on future developments in the cannabis sector, all while limiting spending on lower-priced and lower-margin products has kept Constellation thriving and will no doubt serve it well in the future.
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