Constellation Brands Inc. (NYSE: STZ). We expect STZ to emerge from the coronavirus pandemic in a position of strength as beer shipments remain brisk and the company moves past the headwinds created by the sale of certain products to Gallo. We think that Constellation has done a good job of keeping popular brands like Corona and Modelo in stock during the pandemic.
For the fiscal second quarter (ended August 31, 2020), Constellation’s comparable sales decreased 4% to $2.26 billion, but topped the consensus by $70 million. The lower sales reflected a slight decrease in beer revenue to $1.64 billion, and strong beer depletions (orders by wholesalers to meet retailer demand).
In FY20, comparable sales increased 3% to $9.1 billion while EPS fell to $9.12 from $9.28 a year earlier.
EARNINGS & GROWTH ANALYSIS
In its fiscal 2Q earnings release, the company said that beer depletion rates remained strong and that normal production in Mexico had resumed. We expect inventories to return to normal levels by the end of fiscal 3Q21 as wholesalers stock up on beer, wine and spirits in anticipation of increased demand.
Reflecting prospects for higher beer sales and positive earnings surprises over the last eight quarters (at times by double digits), we are maintaining our FY21 EPS estimate of $9.10 and our FY22 estimate of $9.95. This estimate assumes high single-digit growth in beer revenue.
FINANCIAL STRENGTH & DIVIDEND
Inventories declined 3% from the end of FY20 to $1.3 billion.
Management notes that a significant portion of the company’s $2 billion credit line remains available and that maintaining STZ’s investment-grade credit rating remains a priority.
In the 1Q21 press release, management said the company would pay a $0.75 per share dividend on August 25, 2020 to shareholders of record as of August 11.
MANAGEMENT & RISKS
Bob Newlands became the company’s chief operating officer in 2017 and president in 2018.
Despite the company’s better-than-expected fiscal 2Q revenue, margins and earnings, the shares closed down 2.6% on October 1, likely reflecting investor disappointment in the lack of company guidance. STZ is trading at 20.4-times.