Constellation Brands (NYSE: STZ) is an American beer manufacturer, wine and other spirits, who has more than 25 brands. In addition to alcohol, the company also invests in the North American medical cannabis sector..
In early January, Constellation Brands released third quarter results., which disappointed investors, — the company's shares on the day of the release of the report fell by more than 3%:
- revenue decreased by 5%, from 2.438 to 2.321 billion dollars, but it was above the market consensus forecast of $2.280 billion;
- net earnings per share amounted to 2,48 $ and did not reach the consensus forecast of analysts, which was equal 2,79 $;
- adjusted net earnings per share year-on-year increased by 1%, with 3,09 to 3,12 $, thanks to the buyback;
- Constellation Brands and Coca-Cola announce partnership, in which they plan to create an alcoholic version of Fresca drinks;
- management announced a quarterly dividend of 0,76 $ per class A share and 0,69 $ per share class B. Class A shares are traded on the St. Petersburg Stock Exchange.
Sales structure of the company
Constellation Brands business consists of two segments: sale of beer and sale of wine and other spirits. Besides, the alcoholic drinks producer still has a large stake in the Canadian firm Canopy Growth, which operates in the medical cannabis sector.
Sale of beer. The largest segment, company earns about 75% income. Constellation Brands is the third largest beer producer in the world, as well as the largest importer of beer in the US, which the enterprise delivers from its Mexican factories. The main beer brands of the company: Corona, Model, Pacifico, Victoria, Two Lane, Funky Buddha.
The segment performed well in the current quarter: revenue increased by 4%, up to $1.752 billion, amid high sales of Corona Extra and Modelo Especial beers, the latter remains brand no. 1 in the elite beer segment in the USA. Operating profit showed a more modest pace, having increased by only 1% due to rising costs.
Sale of wine and other spirits. Small segment of Constellation Brands, engaged in the production and sale of wines, tequila, whiskey, vodka and other alcoholic drinks. Whole company owns 21 the brand, the most famous are Meiomi and Kim Crawford, they are ranked fourth and seventh in the US ranking of the best-selling elite wines.
3Q financial results extremely weak: revenue in the third quarter fell by 25%, up to $0.568 billion, which is explained by the sale in early 2021 of a part of the assets of Constellation Brands to Gallo and Vie-Del companies. If the results do not take into account the brands sold, then the proceeds, vice versa, grew by 3% amid strong performance of Prisoner brands, Kim Crawford и Meiomi. Operating margin also increased slightly 1,4%, to 25,4%, due to cost reduction.
Canopy Growth. Constellation Brands invested in this company twice in 2017 And 2018 years, paid for fate 40% more than $4 billion in medical cannabis producer. To date, the share of the alcohol company in Canopy Growth has decreased to 36,2%, and its market valuation is up to $1.2 billion with a total capitalization of the Canadian company of $3.35 billion.
In November 2021, Canopy Growth released quarterly results, which the market did not like: the company suffered a large loss and declared, what, probably, Fails to meet projected positive Adjusted EBITDA by year-end amid strong competition in Canada and weaker sales in the US.
Profit
The company's net profit in the current quarter of 2021 decreased by 63%, from 1.281 to 0.471 billion dollars, on the back of a one-time income last year, received from the previously reviewed transaction with Gallo and Vie-Del, profit from which was reported by management in the third quarter of 2020, while the closing of the transaction took place later - in early 2021.
Stripping out one-off factors and looking at Constellation Brands' adjusted third-quarter net income, then it fell less catastrophically - by only 3%, from $0.604 to $0.592 billion, due to lower results in the wine and spirits segment after the sale of some brands.
Key financial results of the company, billion dollars
| 3к2020 | 3к2021 | The change | |
|---|---|---|---|
| Revenue | 2,438 | 2,321 | −5% |
| EBITDA | 0,859 | 0,927 | 8% |
| EBITDA margin | 35% | 40% | 5 P. P. |
| Net profit | 1,281 | 0,471 | −63% |
| Adjusted net income | 0,604 | 0,592 | −3% |
| FCF | 1,896 | 1,845 | −3% |
| net debt | 10,831 | 9,972 | −8% |
Management forecasts
Following the publication of financial results for the third quarter, Constellation Brands management updated its full-year forecast. Main points:
- The Board of Directors cut its full-year net earnings per share forecast by 0.1-0.25 $, up to 10.55-10.65 billion dollars.
- The company confirmed its past calculations for operating cash flow and FCF: the first indicator this year will be at the level of 2.4-2.6 billion dollars, the second - at the level of 1.4-1.5 billion dollars.
- In the beer business, Constellation Brands expects sales growth of 10-11% and an increase in operating profit of 4-6%, and in the wine-alcohol direction, the opposite is true: sales will decrease by 21-22%, operating profit will fall by 23-25%. If we consider the results without taking into account the assets sold, then organic revenue growth will be 4-6%.
- Management is counting, that the average number of shares of Constellation Brands outstanding by the end of the year will be at the level of 192 million shares, current value is about 190 million.
Besides, the company has updated its long-term plans to invest in Mexican assets, including the construction of a new brewery in the southeast of the country in the state of Veracruz. Constellation Brands expects to spend about 5-5.5 billion dollars over the next four years, which should lead to a doubling of production. The growth of the company's total capacity by the end of 2025 will increase from 34 million to 60-65 million hectoliters.
What's the bottom line?
Constellation Brands posted mixed financial results in the third quarter: revenue, adjusted net income and FCF fell by 3-5% due to the sale of part of the assets, a EBITDA, vice versa, grew by 8% due to a short-term decrease in the cost of production, associated with the same deal with Gallo and Vie-Del.
Further dynamics of STZ shares will largely depend on success in the Mexican beer capacity expansion program until 2025. Besides, recently the media also reported, that Monster Beverage, an energy drink maker, is considering acquiring Constellation Brands, which is unlikely to be bought without a premium to the market.
