Modelo brewer Constellation falls despite an earnings beat. Here’s why we’re not concerned

By admin On Oct 3, 2024

Modelo and Corona brewer Constellation Brands is a tale of two businesses. One of them — beer — is stealing market share left and right. The other — wine and spirits — is an anchor on the stock. Nothing in the company’s fiscal 2025 second-quarter results on Thursday changed that narrative. But the next two quarters might. Comparable net sales for the three months ended Aug. 31 rose 3% year over year to $2.92 billion, essentially in line with the $2.9 billion expected, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) of $4.32 topped estimates of $4.08, LSEG data showed. Constellation Brands Why we own it : Constellation Brands’ beer franchise, which includes popular Mexican brands Modelo, Corona and Pacifico, is the growth engine and by far the most attractive part of the business. We continue to urge Constellation to concentrate on beer and divest its struggling wine-and-spirits unit. Competitors : Anheuser-Busch Inbev and Molson Coors Weight in Club portfolio : 2.74% Most recent buy : July 29, 2024 Initiated: May 5, 2022 Bottom line Constellation Brands delivered no real surprises Thursday — but that was to be expected after the Mexican beer importer revised its full-year guidance a month ago due largely to steeper declines in wine and spirits than previously expected. The range for full-year growth expectations for beer was moderated slightly — to 7% at the midpoint from 8%. Investors greeted that revised guidance in early September with a sigh of relief. That’s because third-party data sources were signaling a cruel summer for the beverage category as a whole, which led analysts to lower their estimates before Constellation said anything. Now investors were greeting Thursday’s results with some selling. Shares fell roughly 4% on Thursday, after climbing more than 6% from Aug. 30 — the session before the outlook change — through Wednesday’s close. The S & P 500 advanced just 1% over the same stretch. In its fiscal second quarter, Constellation’s portfolio of imported Mexican beers continued to grow, albeit at slightly slower pace than the market has become to expect. Sales were up 6% from a year ago, compared with year-over-year gains of 8%, 11% and 11.8% in its three prior quarters. We don’t see the near-term moderation as a cause for concern. For starters, Constellation’s customers are facing the same macroeconomic pressures weighing on all consumer-facing companies right now. In fact, Constellation is feeling it in a distinct way due to its sizable exposure to Hispanic consumers at a time when the Hispanic unemployment rate is above the national average . Another reason is that demand trends are improving, CEO Bill Newlands asserted on the post-earnings call — pointing to third-party scanner numbers in recent weeks that are not reflected in Thursday’s reported results. “We don’t see this as any radical change in the long-term perspective on the business. It is purely a near-term issue,” Newlands added, predicting that the Federal Reserve’s recent interest rate cut should help stabilize the employment picture and improve consumer spending. And, the profitability of its beer business — operating margins were an impressive 42.6% in the quarter — puts Constellation in a position of strength. Indeed, Newlands said Constellation is ramping up its marketing spending in the third and fourth quarters to help fuel more demand for its largest beer brands. “You may have noticed against the football schedule that you kind of can’t miss our brands if you happen to watch any football, whether it be college football or National Football League. So we’re going to continue to do that because of the tremendous work that’s been done around cost and operational efficiencies,” Newlands said. STZ YTD mountain Constellation Brands’ year-to-date stock performance. Constellation’s wine-and-spirits division — home to brands such as Kim Crawford and Meiomi wines and Svedka vodka — remains a thorn in the company’s side, with sales and operating income both down double-digit percentages in the June-to-August period. We continue to wish that Constellation would sell this struggling business — but at this point, it doesn’t seem imminent. On the earnings call, Newlands actually talked about some “green shoots” in its larger, higher-end wine brands including Meiomi, driven by strategic pricing and marketing initiatives in certain markets. Constellation is sustaining those efforts in the second half of the year, Newlands said, with the expectation that they will help drive sequential improvements in the segment in the third and fourth quarters. We’ll believe it when we see it, considering the unit’s prolonged struggles. Even if Newlands’ case for improvement comes to fruition, Constellation’s much larger beer unit will continue to be the main growth engine. Still, raising an anchor is always welcome news, and talk of its booming beer business would, at last, no longer need the wine-and-spirits caveat. We’re reiterating our buy-equivalent 1 rating and price target of $300 per share on Constellation’s stock. Looking ahead, its beer business should continue grabbing market share and its hard to imagine the wine-and-spirits unit getting much worse. There’s also an emerging capital-return story, especially with the company bringing its debt down to meet previously stated goals. Constellation has plenty of firepower for buybacks with $2.2 billion left on its current authorization, and its free cash flow — the source of money for repurchases — is on track to get even better once the company finishes building a new brewery to meet demand. Constellation stepped up the pace of buybacks in the second quarter, repurchasing roughly $250 million worth of stock in the period. That’s up from $200 million in the first quarter. Quarterly commentary Sales in Constellation’s wine-and-spirits division fell 12.5% on an annual basis to $388.7 million and missed estimates of $413.6 million, according to the Bloomberg consensus. Operating income of $70.5 million beat estimates by $6.6 million but was down about 13% year over year. Operating margin for the segment came in better than expected at 18.1%. While margins were roughly in line with the year-ago period, they were up on a sequential basis from 15.3% in the first quarter. The company said product mix changes and lower volumes were offset by lower expenses and higher contractual distributor payments. Shipment volumes dropped 9.8%, worse than expected and steeper than the 5.1% drop seen in the first quarter. The business “continues to face challenging market conditions,” the company said in a press release, “primarily in the U.S. wholesale channel across most price segments in the wine category.” Depletions — which measures the number of cases sold to retailers by a distributor — tumbled 17.6% compared with the year-ago period. In search of a bright spot, the company highlighted that its smaller craft spirits portfolio saw depletion growth of 1.3%, driven by strength in the Mi Campo tequila and Nelson’s Green Brier whiskey brands. The beer segment continues to do the heavy lifting — and that might even be understating it. Sales rose 6% year over year to $2.53 billion, effectively matching the Bloomberg estimate of $2.52 billion. Operating income came rose 13% on annual basis to $1.78 billion, above expectations of $1.025 billion. Operating margin of 42.6% was arguably the most impressive line in the report, topping analyst projections of 40.6% and expanding from 40.7% in the first quarter. Cost-saving initiatives and favorable pricing were among the drivers of the strong margin performance, according to Constellation. Shipment volumes grew 4.6%, a touch above the Bloomberg estimate of 4.19%. Depletion growth was 2.4%, including one fewer selling day in the quarter, missing estimates of 4.8%. Still, Constellation saw demand growth for Modelo Especial, which was up 5%, and Pacifico, which jumped 23%, likely a sign that its popularity continues to pick up steam in markets outside the West Coast . Corona Extra depletions were down 3% in the quarter. Its beer business was the No. 1 share gainer in the category during the quarter and in the top three for the entire beverage industry, Constellation said, citing third-party data. Guidance Constellation’s fiscal 2025 guidance is unchanged from the big revision a month ago . Its adjusted EPS range is $13.60 to $13.80, which excludes the previously announced write-off of up to $2.5 billion for its wine-and-spirits business. Sales declines of 4% to 6% are expected in wine and spirits. Meanwhile, the beer unit is projected to see net sales growth of 6% to 8%. Adjusted operating income growth, which also excludes the write-off, is expected to grow between 8% and 9%. Full-year free cash flow is expected in the range of $1.4 billion to $1.5 billion. (Jim Cramer’s Charitable Trust is long STZ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Bottles of Corona, Modelo and Pacifico beer are displayed on the a shelf at a supermarket on April 6, 2017 in San Rafael, California.

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