Key takeaways:
Current Price: $192 Price Target: $226 (NEW)
Position Size: 2.52% 1-Year Performance: +15.5% (since inception 12/20/2018)
Constellation Brands released their 2Q FY20 earnings results this morning. While their beer performance was stellar as usual (+7.5% depletion), it was overshadowed by their cannabis investment. Canopy Growth proves to be more challenging, with close to $500M in losses this quarter, and STZ recognizing a $839M decrease on its equity fair value. This is not totally surprising as STZ ousted Canopy’s founder and CEO Bruce Linton this summer, being “not pleased” with Canopy’s results, announcing this summer that they needed 3-5 year to turn profitable.
The FY20 guidance of 7-9% beer sales and operating income growth was maintained, while its wine sales decline is now better at -15% to -20% (vs. prior -20% to -25%). The divestment of the lower-priced wines is now expected to close at the end of 3Q FY20, explaining why the adjusted sales and EPS guidance was raised slightly to account for a later divestment date than expected. Gross margins expanded 45bps.
We are excited to hear that Constellation is expanding its Corona line with the launch of a Corona Hard Seltzer next year (a high growth drink category). We are updating our price target to $226 to account for the sale of the lower priced wine & spirit brands (lowering FCF $).
Below is a picture of the new product (not yet released by the company – this was found on a blog…)
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