What to Make of Constellation Brands (STZ) Stock Heading into Q1 Earnings
Constellation Brands Inc STZ, a leading producer and marketer of alcoholic beverage brands, including Corona, Kim Crawford, and Svedka, is expected to release its Q1 fiscal 2020 earnings results before the bell this Friday, June 28. Our Zacks Consensus Estimate calls for quarterly EPS of $2.07.
Recently, analysts have been adjusting their yearly earnings estimates down, taking STZ from a Zacks Rank #2 (Buy) to a Zacks Rank #3 (Hold) in the last 30 days. This is likely due to a softening in the 2020 outlook in the wine and spirits market, with total U.S alcohol volumes down 0.8% last year and beer sales down 4% over the past three years, according to IWSR. However, STZ’s stock price is up 15.4% this year, right on par with the market.
High Hopes
Last August, Constellation announced that it would take a 38% stake in Canopy Growth Corporation CGC, one of the largest cannabis producers in the world. The deal was worth $4 billion and gave Constellation warrants to lift its ownership to over 50%. These warrants must be exercised within the next five to eight years at a price of $58.45 a share.
The firm’s Canopy bet made Constellation the first alcoholic beverage maker to invest in the emerging cannabis market, and gave Canopy the capital to pursue its goals of global expansion. Since then, AB InBev S.A. BUD partnered with Tilray Inc. TLRY to produce CBD infused drinks, and tobacco giant Altria Group Inc. MO invested $1.8 billion in Cronos Group Inc. CRON.
STZ’s stock price took a hit after this announcement, but has since bounced back. This diversification is likely to make investors less nervous about slacking alcohol sales, as the cannabis industry continues to grow at a rapid pace. Cannabis is already legal in 11 states, D.C., and Canada, and a bill in Congress was recently passed by the House to prevent federal authorities from interfering with state legalizations. Interestingly, a collaborative study published by three universities showed that alcohol sales decreased by 15% where medical marijuana is legal.
Canopy already did an impressive $171 million in sales this past year, and is projected to grow 208% to $528 million in sales this year. It is a young company focused on pulling off international growth in a very short time frame, but in spite of this, is projected to increase EPS by 10% this quarter and 49% this fiscal year.
Performance
Constellation has performed well over the last three months, up 9.7% on its peer group and up 6.3% on the market. Over the past year, STZ is down on average from its peer group but has been responding positively to earnings surprises. The stock has jumped after every positive earnings surprise in the last year, as we can see below. And Constellation has pulled off a positive earnings surprise in 23 of the past 26 quarters.
Valuation
STZ is currently trading at a forward P/E ratio of 20.6x, lower than the alcoholic beverages market average of 23.1x. In the past, STZ has also generally traded at a lower forward P/E relative to its industry, except for a few jumps.
It is possible that the market hasn’t fully priced in Canopy Growth’s potential since STZ has still traded at a discount since the acquisition. However, only two months of Canopy’s performance were included in last quarter’s earnings report.
Take Away
Constellation is currently in a tough spot with alcohol sales declining across the country. The company has also seen its earnings estimate revisions turn in the wrong direction. With that said, STZ stock has climbed in the past three months and boasts a strong history of EPS beats.
If Constellation tops EPS estimates on Friday, look for the trend of price jumps after earnings beats to continue. And if Canopy Growth shows strong revenue numbers in this earnings report, investors will likely price the huge potential growth this company has into STZ.
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Constellation Brands Inc (STZ) : Free Stock Analysis Report
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