Is Constellation Brands a Buy?
Constellation Brands (NYSE: STZ) the stock has regained all the ground lost since the start of the coronavirus pandemic and is trading just below its 52-week high at the time of writing. With more opportunities to drink at home due to the health crisis, the beer and wine producer has seen strong consumer support for its brands.
Having also tapped into the still booming hard seltzer trend earlier this year, Constellation was able to capitalize on the popularity of its main Corona brand. Corona Hard Seltzer catapulted other major competitors to fourth place in terms of market share.
More growth within reach
Beer remains Constellation Brands’ main driver, accounting for nearly three-quarters of its fiscal second quarter revenue. The Corona and Modelo beer families continue to show strong growth in sellouts as other brewers see the number decline (Sellouts are deliveries to distributors and retailers, serving as an industry proxy for consumer demand ).
For example, where Constellation saw nearly 5% burnout growth last quarter, boston beer recorded another quarter with declining burnouts for its flagship beer Samuel Adams. In fact, the brand has fallen every quarter for more than five consecutive years.
Constellation’s performance is even more remarkable, as it was supported by incredibly strong offsite business which more than offset a 50% drop in onsite sales due to the pandemic.
Quickly bubbling up
Although Mark Anthony Brands’ White Claw remains the top dog in the hard seltzer market with nearly 60% market share, followed in second place by Boston Beer’s Truly brand, it’s an impressive achievement for Constellation d ‘having come so far, so fast as his Corona Hard Seltzer now has a 6% share of the market.
It’s important to note that Constellation doesn’t appear to have lost many, if any, beer sales in the process. There’s not a lot of money to spend on beer, so many brewers who turn to seltzer see beer sales plummet. Nielsen data showed drinkers were consuming more seltzer earlier this year, leading to lower demand for beer and wine.
The fact that Corona was able to develop both categories speaks to the brand strength.
The biggest buzzkill
Investors may also be wondering if Constellation’s $4 billion investment in the Canadian pot producer canopy growth (NASDAQ: CGC) will soon start paying dividends. It’s not likely, but don’t dismiss the opportunity just yet. Constellation did not write neither did the whole deal, although it took a significant charge on the investment.
Canopy’s recent earnings report suggests it’s still it will be long to profitability, but because it has the backing of Constellation, its financial position and ability to stay the course is much better than that of competing cannabis producers.
With a former Constellation executive at the helm, costs are under control and the company is focusing on its most important markets. The launch of CBD and THC-infused beverages north of the border is where Constellation investors should see the best near-term returns.
Is it worth it?
Constellation Brands is a strong beverage alcohol producer with winning brands and a growing business where others in its industry are experiencing declines. Still, the market priced in much of the gains in the stock.
While trading at a seemingly reasonable 20x forward earnings estimates, the stock also enjoys a valuation of nearly five times sales and more than 20x free cash flow. As an industry leader, Constellation deserves a premium over many of its competitors, but these levels also suggest there is a limit to the upside potential versus greater downside risk.
I like the long-term outlook for Constellation Brands as a whole, but there will be times when investors can get a better price for the stock.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.