Key takeaways:
Current Price: $190 Price Target: $233
Position Size: 1.82% 1-Year Performance: +14% (since inception 12/20/2018)
STZ reported its 4Q 2019 earnings results this morning. Beer shipment remains high at +8%, and total beer sales grew +9.3%. During the call, management highlighted the strength Corona and Modelo, in addition to their product innovation capabilities, as driving continued market share gains in North America. It was highlighted that 1Q20 will reflect some inventory destocking, so a slowdown in growth rate should be expected in 1Q20. Beer EBIT margin was above last year at 40.5% vs. 37.9%. Better price/mix and lower marketing spend helped expand margins.
In addition to today’s good results, last night they announced the sale of lower-tier wines (30 brands out of the 64 lower price owned by STZ) to E&J Gallo for $1.7B, allowing STZ to focus on premium, higher growth/higher margins brands. Those brands were $1.1b in sales in FY19 (38% of wine sales). This had been talked about by management but the deal is closing sooner than what we had anticipated. Overall we are pleased with the results and look forward to future announcement around the use of cash from the wine sale.
FY2020 guidance introduced:
EPS $8.50-8.80, which includes the sale fo the 30 wine brands (some of the cash received will go towards lowering debt, reducing interest expenses). However Canopy’s equity loss is not reflected in this guidance
Beer sales growth of 7-9%, beer EBIT growth of 7-9%
Wine & spirits sales down 25-30% (due to sale of 30 brands) but organic sales up low to mid-single digits, operating profit up high-single-digits
FCF $1.1-1.2B
Introduction of a cost reduction plan targeting the $130M stranded cost from the wine business being divested
Some data points from the call:
Modelo Especial is #1 in California –fastest growing brand in on-premise with 40% growth in draft
Strong high-single digit growth opportunities in FY20
Canopy growth –calendar 2019 will benefit from new stores coming on line –vape, beverages and edibles will come on line in fall; patent portfolio is strong
Ballast Point (craft beer) is not meeting expectations (impairment charge)
Investment Thesis:
· Adding STZ helps position our portfolio to be more defensive at this stage of the economic cycle
· STZ is down ~20% YTD, giving us a good entry point
· STZ continues to have HSD top line growth and high margins that should incrementally improve going forward
· STZ comes out of a heavy capex investment cycle to support its growth: FCF margins are set to inflect thanks to lower capex
[tag STZ]
$STZ.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109